AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 2013
File No. 033-42484
File No. 811-06400
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 206 /X/
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 207 /X/
THE ADVISORS' INNER CIRCLE FUND
(Exact Name of Registrant as Specified in Charter)
101 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, including Area Code (800) 932-7781
Michael Beattie
c/o SEI Investments
One Freedom Valley Drive
Oaks, Pennsylvania 19456
(Name and Address of Agent for Service)
Copies to:
Timothy W. Levin, Esquire Dianne M. Sulzbach, Esquire Morgan, Lewis & Bockius LLP c/o SEI Investments 1701 Market Street One Freedom Valley Drive Philadelphia, Pennsylvania 19103 Oaks, Pennsylvania 19456 |
It is proposed that this filing become effective (check appropriate box)
THE ADVISORS' INNER CIRCLE FUND
ACADIAN EMERGING MARKETS DEBT FUND
TICKER SYMBOL: AEMDX
ACADIAN EMERGING MARKETS PORTFOLIO
TICKER SYMBOL: AEMGX
INSTITUTIONAL CLASS SHARES PROSPECTUS
MARCH 1, 2013
INVESTMENT ADVISER:
ACADIAN ASSET MANAGEMENT LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
ACADIAN EMERGING MARKETS DEBT FUND ................................ 1
INVESTMENT OBJECTIVE ......................................... 1
FUND FEES AND EXPENSES ....................................... 1
PRINCIPAL INVESTMENT STRATEGY ................................ 2
PRINCIPAL RISKS .............................................. 3
PERFORMANCE INFORMATION ...................................... 6
INVESTMENT ADVISER ........................................... 7
PORTFOLIO MANAGERS ........................................... 7
ACADIAN EMERGING MARKETS PORTFOLIO ................................ 8
INVESTMENT OBJECTIVE ......................................... 8
FUND FEES AND EXPENSES ....................................... 8
PRINCIPAL INVESTMENT STRATEGY ................................ 8
PRINCIPAL RISKS .............................................. 10
PERFORMANCE INFORMATION ...................................... 11
INVESTMENT ADVISER ........................................... 12
PORTFOLIO MANAGERS ........................................... 12
SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND
SHARES, TAXES AND FINANCIAL INTERMEDIARY
COMPENSATION ................................................. 13
INVESTING WITH THE FUNDS .......................................... 14
BUYING SHARES ................................................ 14
REDEEMING SHARES ............................................. 15
EXCHANGING SHARES ............................................ 17
TRANSACTION POLICIES ......................................... 17
ACCOUNT POLICIES ............................................. 20
ADDITIONAL INFORMATION ABOUT THE FUNDS ............................ 24
MORE INFORMATION ABOUT FUND INVESTMENTS AND RISKS ............ 24
INVESTMENT MANAGEMENT ........................................ 27
ADVISER'S PRIOR PERFORMANCE .................................. 28
SHAREHOLDER SERVICING ARRANGEMENTS ........................... 30
PAYMENTS TO FINANCIAL INTERMEDIARIES ......................... 31
FINANCIAL HIGHLIGHTS .............................................. 32
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ..................... BACK COVER
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ACADIAN EMERGING MARKETS DEBT FUND
INVESTMENT OBJECTIVE
The Acadian Emerging Markets Debt Fund (the "Fund") seeks to generate a high total return through a combination of capital appreciation and income, consistent with prudent investment risk.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Class Shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.65% -------------------------------------------------------------------------------- Other Expenses 1.29% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses 0.04% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.98% -------------------------------------------------------------------------------- Less Fee Waivers (0.99)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee Waivers(1) 0.99% -------------------------------------------------------------------------------- |
(1) Acadian Asset Management LLC ("Acadian" or the "Adviser") has contractually agreed to waive fees and expenses in order to keep Total Annual Fund Operating Expenses After Fee Waivers (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses) from exceeding 0.95% of the Fund's Institutional Class Shares' average daily net assets until March 1, 2014. Thereafter, the Adviser will consider the continuance of this Agreement on an annual basis. The Agreement may be terminated by the Board, for any reason at any time.
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 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 (including one year of capped expenses) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$101 $525 $976 $2,226
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal year ended October 31, 2012, the Fund's portfolio turnover rate was 151% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
In seeking to achieve its objective, the Fund, under normal circumstances, invests at least 80% of its net assets, plus any borrowings for investment purposes, at the time of initial purchase, in debt securities of emerging market issuers. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. As an alternative to investing directly in particular debt securities for purposes of the 80% test, the Fund may invest in credit linked notes that have economic characteristics that are similar to and whose value is linked to debt securities of emerging market issuers.
The Fund mainly invests in sovereign debt, but may also invest in corporate debt, and debt securities issued by supranational organizations. Sovereign debt is issued or guaranteed by foreign governments or their agencies and instrumentalities, and includes debt issued by private entities that is guaranteed by foreign governments or their agencies and instrumentalities. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations.
The Fund may invest in emerging market countries that have sovereign ratings that are below investment grade or are unrated, and the corporate or other privately issued debt securities in which the Fund invests may be rated below investment grade (commonly known as "high-yield" or "junk" bonds). There is no limit to the percentage of Fund assets that may be invested in high-yield bonds. The debt securities in which the Fund invests may be denominated in the local currency of the issuer or in the currency of a developed country (such as the U.S. dollar).
The Fund may also invest without limit in derivatives, such as options, futures and options on futures (including those related to securities, foreign currencies and indexes), forward contracts and swaps (including credit default swaps and interest rate swaps). The Fund may use these instruments to gain exposure to emerging market issuers, to hedge positions within the Fund's portfolio or to otherwise enhance the Fund's returns. For example, the Fund may seek to increase total return by investing in forward contracts on currencies that the Adviser believes may appreciate (or decline) in value relative to another currency. The Adviser may make such currency investments without regard to currencies in which the Fund's bond and other investments are denominated. At times, a significant portion of the Fund's returns (both positive and negative) may be attributable to investments in such forward currency contracts.
Acadian, the Fund's adviser, considers emerging market issuers to include issuers that:
o Have their principal securities trading market in an emerging country (defined below);
o Alone or on a consolidated basis derive 50% or more of annual revenue from goods produced, sales made or services performed in emerging countries; or
o Are organized under the laws of, and have a principal office in, an emerging country.
An "emerging market country" is any country that the Adviser believes the World Bank and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are over 150 countries that the international financial community generally considers to be emerging or developing countries, approximately 50 of which currently have stock markets. Emerging or developing countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe. The Fund will focus its investments on those emerging market countries that the Adviser believes have developing economies and where the markets are becoming more sophisticated, including some or all of the following:
Argentina Egypt Kenya Peru Thailand Botswana Hungary Korea Philippines Turkey Brazil India Malaysia Poland Venezuela Chile Indonesia Mexico Russia China Israel Morocco South Africa Columbia Jamaica Nigeria Sri Lanka Czech Republic Jordan Pakistan Taiwan |
As markets in other countries develop, the Adviser expects to expand and further diversify the emerging countries in which the Fund invests.
In selecting investments for the Fund, the Adviser seeks to create a portfolio that reflects diversified exposure to countries with improving inflation, growth, debt and currency dynamics. Investment decisions are made based on a matrix of variables that include: country selection (to diversify among economic cycles and currencies); security selection (seeking the best opportunities to enter a market based on liquidity and duration); vigilant monitoring (constant research to understand political and economic variables that will affect the credit) and risk management (continual risk assessment and balancing to ensure optimal risk/return characteristics of the portfolio).
The Adviser's portfolio construction process is dynamic, and buy/sell decisions are made as the expected return and risk of individual securities and markets change over time. In general, securities are sold as the expected return is realized, or as expectations for return are revised in response to changing fundamentals or market conditions. In situations where securities prices are declining, positions may be liquidated to limit losses as long as doing so does not incur material transaction costs or impair overall portfolio positioning.
The Fund is non-diversified and may hold a relatively small number of issues in its portfolio. Due to its investment strategies, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities than a fund with a buy and hold strategy.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Investing in securities of foreign issuers and governments poses additional risks since political and economic events unique to a country or region will affect foreign securities markets and their issuers. Political events (civil unrest, national elections, changes in political conditions and foreign relations, imposition of exchange controls and repatriation restrictions), social and economic events (labor strikes,
rising inflation) and natural disasters occurring in a country where the Fund invests could cause the Fund's investments in that country to experience gains or losses. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in securities of foreign issuers are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country.
Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. Differences in tax and accounting standards and difficulties in obtaining information about foreign governments or foreign companies may impair investment decisions. In addition, emerging markets securities may be issued by companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, emerging markets governments may have limited ability to raise taxes or authorize appropriations for debt repayment. In addition, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
Because non-U.S. securities are usually denominated in currencies other than the U.S. dollar, the value of the Fund's portfolio may be influenced by currency exchange rates and exchange control regulations. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
Sovereign debt instruments are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entity's debt position in relation to the economy or the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies.
As with most funds that invest in debt securities, changes in interest rates are one of the most important factors that could affect the value of your investment. Rising interest rates tend to cause the prices of debt securities (especially those with longer maturities) and the Fund's share price to fall.
The concept of duration is useful in assessing the sensitivity of a fixed income fund to interest rate movements, which are usually the main source of risk for most fixed-income funds. Duration measures price volatility by estimating the change in price of a debt security for a 1% change in its yield. For example, a duration of five years means the price of a debt security will change about 5% for every 1% change in its yield. Thus, the higher the duration, the more volatile the security.
Debt securities have a stated maturity date when the issuer must repay the principal amount of the bond. Some fixed income securities, known as callable bonds, may repay the principal earlier than the stated maturity date. Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate.
Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security
held by the mutual fund, with the maturity of each security weighted by the percentage of its assets of the mutual fund it represents. The Fund is expected to have a medium to long term weighted average maturity.
The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults or becomes unable to honor its financial obligations, the security may lose most or all of its value. The issuer of an investment-grade security is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances may weaken the capacity of the issuer to pay interest and repay principal.
High yield, or "junk," bonds are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business conditions of the corporation issuing these securities influences their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause the Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Loan participations are interests in loans to corporations or governments that are administered by the lending bank or agent for a syndicate of lending banks and then sold by the lending bank, financial institution or syndicate member ("intermediary bank"). In a loan participation, the borrower will be deemed to be the issuer of the participation interest, except to the extent that the Fund derives its rights from the intermediary bank. Because the intermediary bank does not guarantee a loan participation in any way, a loan participation is subject to the credit risks generally associated with the underlying borrower. In addition, in the event the underlying borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of such borrower. Under the terms of a loan participation, the Fund may be regarded as a creditor of the intermediary bank (rather than of the underlying borrower). Therefore, the Fund may also be subject to the risk that the intermediary bank may become insolvent.
The Fund may invest in derivatives. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its investment objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
The lack of a liquid secondary market for a derivative may prevent the Fund from closing its derivative positions and could adversely impact its ability to achieve its investment objective or to realize profits or limit losses.
Because derivative instruments may be purchased by the Fund for a fraction of the market value of the investments underlying such instruments, a relatively small price movement in the underlying investment may result in an immediate and substantial gain or loss to the Fund. Derivatives are often more volatile than other investments and the Fund may lose more in a derivative than it originally invested in it.
Additionally, derivatives are subject to counterparty risk, meaning that the party that issues the derivative may experience a significant credit event and may be unwilling or unable to make timely settlement payments or otherwise honor its obligations.
A credit linked note is a type of structured note whose value is linked to an underlying reference asset. Credit linked notes typically provide periodic payments of interest as well as payment of principal upon maturity, the value of which is tied to the underlying reference asset. An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. A forward currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price, thereby fixing the exchange rate for a specified time in the future. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. An investment rate swap involves the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. A credit default swap enables the Fund to buy or sell protection against a defined credit event of an issuer or a basket of securities. Generally, the seller of credit protection against an issuer or basket of securities receives a periodic payment to compensate against potential default events. In contrast, the buyer of a credit default swap would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value or receive a cash payment in the event of a default or other credit event by the reference issuer, such as a U.S. or foreign corporation, with respect to its debt obligations.
The value of currency may fluctuate in response to changing market, economic, political, regulatory and other conditions in foreign markets between the date the forward currency contract is entered into and the date it is sold or matures. Therefore, investments in forward currency contracts are subject to the risk that, if anticipated currency movements are not accurately predicted, the Fund may experience losses on such contracts and may have to pay additional transaction costs. In addition, forward currency contracts are subject to the risk that the counterparty to such a contract will default on its obligations, which could result in loss to the Fund.
The Fund may realize gains from the sale or other disposition of foreign currencies and other income (including but not limited to gains from options, futures or forward contracts) derived from investing in stock, securities, or foreign currencies. The Adviser may make such currency investments without regard to currencies in which the Fund's bond and other investments are denominated. The Secretary of the Treasury is authorized to issue regulations that under certain circumstances conclude that the income from these transactions might be treated as nonqualifying income for purposes of certain qualification tests required to be met by the Fund in order to be treated as a regulated investment company. As of the date of this Prospectus, no regulations have been issued pursuant to this authorization. It is possible, however, that such regulations may be issued in the future.
Because the Fund is not diversified, it may invest a greater percentage of its assets in a particular issuer than a diversified fund, which may cause the value of its shares to be more sensitive to changes in the market value of a single issuer than a diversified mutual fund.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's
average annual total returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.acadian-asset.com or by calling 1-866-AAM-6161.
2011 (2.09)%
2012 22.29%
BEST QUARTER WORST QUARTER
9.98% (10.26)%
(03/31/2012) (09/30/2011)
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
ACADIAN EMERGING MARKETS DEBT FUND 1 YEAR SINCE INCEPTION (12/17/2010) ------------------------------------------------------------------------------------------------- FUND RETURN BEFORE TAXES 22.29% 9.83% FUND RETURN AFTER TAXES ON DISTRIBUTIONS 18.89% 7.21% FUND RETURN AFTER TAXES ON DISTRIBUTIONS AND 14.45% 6.82% SALE OF FUND SHARES JP MORGAN GBI-EM GLOBAL DIVERSIFIED (REFLECTS 16.76% 8.13% NO DEDUCTION FOR FEES, EXPENSES, OR TAXES) |
INVESTMENT ADVISER
Acadian Asset Management LLC
PORTFOLIO MANAGERS
L. Bryan Carter, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
Vasiliki Everett, Associate Portfolio Manager, has been associated with the Fund since its inception.
FOR IMPORTANT INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, FINANCIAL INTERMEDIARY COMPENSATION AND TAXES, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 13 OF THE PROSPECTUS.
ACADIAN EMERGING MARKETS PORTFOLIO
INVESTMENT OBJECTIVE
The Acadian Emerging Markets Portfolio (the "Fund") seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 1.00% -------------------------------------------------------------------------------- Other Expenses 0.31% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.31% -------------------------------------------------------------------------------- |
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$133 $415 $718 $1,579
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal year ended October 31, 2012, the Fund's portfolio turnover rate was 44% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
The Fund will invest primarily in common stocks but also may invest in other types of equity securities, including preferred stock. Under normal circumstances, the Fund invests at least 80% of its net assets,
plus any borrowings for investment purposes, at the time of initial purchase, in equity securities of issuers that:
o Have their principal securities trading market in an emerging country;
o Alone or on a consolidated basis derive 50% or more of annual revenue from goods produced, sales made or services performed in emerging countries; or
o Are organized under the laws of, and have a principal office in, an emerging country.
This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders.
An "emerging market country" is any country that Acadian Asset Management LLC ("Acadian" or the "Adviser") believes the World Bank and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are over 150 countries that the international financial community generally considers to be emerging or developing countries, approximately 50 of which currently have stock markets. Emerging or developing countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe. The Fund will focus its investments on those emerging market countries that the Adviser believes have developing economies and where the markets are becoming more sophisticated, including some or all of the following:
Argentina Egypt Korea Philippines Turkey Botswana Hungary Malaysia Poland Venezuela Brazil India Mexico Russia Chile Indonesia Morocco South Africa China Jamaica Nigeria Sri Lanka Columbia Jordan Pakistan Taiwan Czech Republic Kenya Peru Thailand |
As markets in other countries develop, the Adviser expects to expand and further diversify the emerging countries in which the Fund invests. The Fund may also invest in securities of issuers located in industrialized countries.
Foreign securities include securities of companies located outside the United States, American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), exchange traded funds that invest in foreign securities and other similar global instruments. ADRs are certificates evidencing ownership of shares of a foreign issuer that are issued by depositary banks and generally traded on an established market, including those in the United States. GDRs are similar to ADRs, except that European banks or trust companies typically issue them.
The Fund is non-diversified and may hold a relatively small number of issues in its portfolio. In selecting investments for the Fund, Acadian pursues an active, disciplined investment approach that forecasts markets and securities using a range of quantitative factors related to valuation, earnings, quality, price patterns, economic data and risk. Buy and sell decisions are made objectively and driven by changes in expected returns on investments. In making buy and sell decisions, the Adviser analyzes the risk and expected return characteristics of the portfolio's current holdings as compared to the entire investment universe. Less attractive securities are discarded from the portfolio while more attractive securities are added, provided that the cost of the purchase and sale of such securities do not exceed the expected value added to the portfolio of such investment decisions. Due to its investment strategies, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities than a fund with a buy and hold strategy.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund. This risk is greater for small- and medium-sized companies, which tend to be more vulnerable to adverse developments than larger companies.
The Fund may use hedging techniques to reduce the risks of its investments in equity securities. However, hedging will not necessarily fully protect the Fund against all anticipated risks. Moreover, hedging transactions involve costs and risks of their own. If the Fund employs a hedge and the market rises, the Fund may lose money or forego the opportunity to capitalize on market increases. As a result, hedging may not improve the Fund's performance either on an absolute or risk-adjusted basis.
Investing in foreign companies, whether through investments made in foreign markets or made through the purchase of ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. Political events (civil unrest, national elections, changes in political conditions and foreign relations, imposition of exchange controls and repatriation restrictions), social and economic events (labor strikes, rising inflation) and natural disasters occurring in a country where the Fund invests could cause the Fund's investments in that country to experience gains or losses. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. Differences in tax and accounting standards and difficulties in obtaining information about foreign governments or foreign companies may impair investment decisions. In addition, emerging markets securities may be issued by companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, emerging market governments may have limited ability to raise taxes or authorize appropriations for debt repayment. In addition, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
Because non-U.S. securities are usually denominated in currencies other than the dollar, the value of the Fund's portfolio may be influenced by currency exchange rates and exchange control regulations. The
currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
Because the Fund is not diversified, it may invest a greater percentage of its assets in a particular issuer than a diversified fund, which may cause the value of its shares to be more sensitive to changes in the market value of a single issuer than a diversified mutual fund.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at WWW.ACADIAN-ASSET.COM or by calling 1-866-AAM-6161.
2003 70.77%
2004 33.52%
2005 37.82%
2006 32.67%
2007 46.01%
2008 (58.64)%
2009 77.11%
2010 22.65%
2011 (19.61)%
2012 22.76%
BEST QUARTER WORST QUARTER
35.67% (33.59)%
(06/30/2009) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
Returns after taxes on distributions and sale of Fund shares may be higher than before-tax returns when a net capital loss occurs upon the redemption of Fund shares.
ACADIAN EMERGING MARKETS PORTFOLIO 1 YEAR 5 YEARS 10 YEARS ----------------------------------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 22.76% (2.38)% 18.36% ----------------------------------------------------------------------------------------------------------- FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 22.83% (2.97)% 17.04% ----------------------------------------------------------------------------------------------------------- FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND 15.56% (2.01)% 16.69% SHARES ----------------------------------------------------------------------------------------------------------- MSCI EMERGING MARKETS INDEX (REFLECTS NO DEDUCTION FOR FEES, 18.63% (0.61)% 16.88% EXPENSES, OR TAXES) ----------------------------------------------------------------------------------------------------------- |
INVESTMENT ADVISER
Acadian Asset Management LLC
PORTFOLIO MANAGERS
John Chisholm, CFA, Chief Investment Officer and Executive Vice President, has managed the Fund since 1994.
Ronald D. Frashure, CFA, Chairman, has managed the Fund since 1994.
Brian Wolahan, CFA, Director of Portfolio Management, has managed the Fund since 1994.
Asha Mehta, CFA, Vice President and Portfolio Manager, has managed the Fund since 2009.
FOR IMPORTANT INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, FINANCIAL INTERMEDIARY COMPENSATION AND TAXES, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 13 OF THE PROSPECTUS.
SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Funds for the first time, you must invest at least $2,500. Subsequent investments must be at least $1,000.
If you own shares directly, you may sell your shares on any day that the New York Stock Exchange ("NYSE") is open for business (a "Business Day") via Automated Clearing House (subject to certain account minimums) or by contacting the Funds directly by mail at: Acadian Funds, P.O. Box 219009, Kansas City, Missouri 64121-9009 (Express Mail Address: Acadian Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or by telephone at 1-866-AAM-6161.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Funds.
TAX INFORMATION
The Funds intend to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Funds through a broker-dealer or other financial intermediary (such as a bank), each 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 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.
INVESTING WITH THE FUNDS
BUYING SHARES
Institutional Class Shares are for individual and institutional investors. All investments must be made by check, wire or ACH (Automated Clearing House) Transfer. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Funds do not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
Each Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Funds are not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Funds' policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. Please contact the Funds for more information.
BY MAIL
You can open an account with a Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Funds a check and, if possible, the "Invest by Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund name. Make your check payable to "Acadian Funds."
REGULAR MAIL ADDRESS
Acadian Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Acadian Funds
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-866-AAM-6161 (1-866-226-6161) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA #: 101000695
Acadian Funds
DDA Acct. #: 9871063178
Ref: account number/account name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to a Fund. Purchases can be made monthly, quarterly, semi-annually, or annually in amounts of at least $1,000 to meet the minimum investment amount. To cancel or change a plan, write to the Funds at: Acadian Funds, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address: Acadian Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of each Fund, an investor may purchase shares of a Fund with liquid securities and other assets that are eligible for purchase by a Fund (consistent with a Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with a Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by a Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. Each Fund reserves the right to amend or terminate this practice at any time.
MINIMUM PURCHASES
To purchase shares of a Fund for the first time, you must invest at least $2,500. Subsequent investments must be at least $1,000. Each Fund reserves the right to waive the minimum initial investment and subsequent investments in its sole discretion.
FUND CODES
The Funds' reference information, which is listed below, will be helpful to you when you contact the Funds to purchase or exchange Institutional Class Shares, check daily net asset value per share ("NAV") or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE -------------------------------------------------------------------------------- Acadian Emerging Markets Debt Fund AEMDX 00769G709 1259 -------------------------------------------------------------------------------- Acadian Emerging Markets Portfolio AEMGX 00758M162 1260 -------------------------------------------------------------------------------- |
REDEEMING SHARES
PAYMENT OF REDEMPTION PROCEEDS
Redemption proceeds can be mailed to your account address, sent to your bank by ACH transfer or wired to your bank account (provided that your bank information is already on file). The Funds will pay for all shares redeemed within seven days after it receives a redemption request in proper form, meaning that it is complete, contains all necessary information, and has all supporting documentation (such as proper signature guarantees, IRA rollover forms, etc.).
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of
record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, a Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Funds participate in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-866-226-6161 for more information.
If you redeem shares that were purchased by check or through ACH, you will not receive your redemption proceeds until the check has cleared or the ACH transaction has been completed, which may take up to 15 days from the purchase date.
BY MAIL
You may contact the Funds directly by mail at: Acadian Funds, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address: Acadian Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Send a letter to the Funds signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered share owner(s) must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
Certain shareholders may need to include additional documents or provide a signature guarantee to redeem shares.
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire or ACH redemption privilege) by completing the appropriate sections of the account application.
Call 1-866-AAM-6161 to redeem your shares. Based on your instructions, the Funds will mail your proceeds to you or send them to your bank by either Fed wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution. To participate in this service, you must complete the appropriate sections of the account application and mail it to the Funds.
REDEMPTIONS IN-KIND
Under certain conditions and at the Funds' discretion, you may pay for shares of the Funds with securities instead of cash. In addition, the Funds may pay all or part of your redemption proceeds (in excess of $250,000) with securities instead of cash. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
EXCHANGING SHARES
At no charge, you may exchange shares of one Acadian Fund for shares of another Acadian Fund by writing to or calling the Funds. You may only exchange shares between accounts with identical registrations (I.E., the same names and addresses). If shares of an Acadian Fund have been held for less than 90 days, the Fund will deduct a redemption fee of 2.00% on exchanged shares.
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Funds may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Funds. For more information about the Funds' policy on excessive trading, see "Excessive Trading Policies and Procedures."
TRANSACTION POLICIES
CALCULATING YOUR SHARE PRICE
You may buy or sell shares of a Fund on any Business Day at a price equal to a Fund's NAV next computed after it, or an authorized institution, receives and accepts your order. A Fund calculates NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m. Eastern Time). To receive the current Business Day's NAV, a Fund or an authorized institution must receive your order in good form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.) before the close of trading on the NYSE that day. Otherwise, you will receive the NAV that is calculated at the close of trading on the following Business Day. If the NYSE closes early -- such as on days in advance of certain generally observed holidays -- a Fund will calculate NAV as of the earlier closing time. Shares will not be priced on days the NYSE is closed for trading, including nationally observed holidays.
NAV for one Fund share is the value of that share's portion of all of the net assets of a Fund. In calculating NAV, a Fund generally values its investment portfolio at market price. If market prices are not readily available or a Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, a Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board of Trustees (the "Board"). Pursuant to the policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through a Fund's Fair Value Pricing Committee, members of which are appointed by the Board. A Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that a Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
With respect to non-U.S. securities held by each Fund, a Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International
securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by a Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time a Fund prices its shares, the value a Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, a Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information as related to the securities.
When valuing fixed income securities with remaining maturities of more than 60 days, a Fund uses the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security, securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, a Fund uses the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Funds through their transfer agent, you may also buy or sell shares of the Funds through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Funds prior to the time the Funds calculate their NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Funds on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Funds after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Funds with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Funds with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Funds. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, each Fund charges a 2.00% redemption fee on redemptions of shares that have been held for
less than 90 days. The redemption fee is deducted from a Fund's sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of a Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with a Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. A Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, each Fund recognizes that, due to operational requirements, the intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Funds'.
A Fund reserves the right to reduce all or a portion of the redemption fee in
its discretion when it believes such reduction is in the best interests of a
Fund, including with respect to certain categories of redemptions that a Fund
reasonably believes may not raise frequent trading or market timing concerns.
These categories include, but are not limited to, the following: (i)
participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic redemptions; and (v) retirement
loans and withdrawals.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Funds have certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Funds are not responsible for any losses or costs incurred by following telephone instructions the Funds reasonably believes to be genuine. If you or your financial institution transact with the Funds over the telephone, you will generally bear the risk of any loss.
RIGHTS RESERVED BY THE FUNDS
PURCHASES
At any time and without notice, the Funds may:
o Stop offering shares;
o Reject any purchase order; or
o Bar an investor engaged in a pattern of excessive trading from buying shares. Excessive trading can hurt performance by disrupting management and increasing expenses. The Funds will consider various factors in determining whether an investor has engaged in excessive trading. These factors include, but are not limited to, the investor's historic trading patterns, the number of transactions, the size of the transactions, the time between transactions and the percentage of the investor's account involved in each transaction. For more information about the Funds' policies on excessive trading, see "Excessive Trading Policies and Procedures."
REDEMPTIONS
At any time, and without notice, each Fund may change or eliminate any of the redemption methods described above, except redemption by mail. Each Fund may suspend your right to redeem if:
o Trading on the NYSE is restricted or halted; or
o The U. S. Securities and Exchange Commission ("SEC") allows a Fund to delay redemptions.
EXCHANGES
The Funds may:
o Modify or cancel the exchange program at any time on 60 days' written notice to shareholders;]
o Reject any request for an exchange; or
o Limit or cancel a shareholder's exchange privilege, especially when an investor is engaged in a pattern of excessive trading.
For information regarding the federal income tax consequences of transactions in shares of the Funds, including information about cost basis reporting, see "Taxes on Distributions."
ACCOUNT POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Funds are intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of a Fund may present risks to a Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of a Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring a Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because each Fund invests in foreign securities traded primarily on markets that close prior to the time the Funds determines their NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than a fund investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by a Fund takes place after the close of the primary foreign market, but before the time that a Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of a Fund's shares by virtue of their Fund share transaction, if those prices reflect the fair value of the foreign securities. Although the Funds' have procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage. For more information about how the Funds use fair value pricing, see "Calculating Your Share Price."
The Funds' service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Funds' policies and procedures described in this prospectus and approved by the Funds' Board. For purposes of applying these policies, the Funds' service providers may consider the trading history of accounts under common ownership or control. The Funds' policies and procedures include:
o Shareholders are restricted from making more than five "round trips," including exchanges, into or out of a Fund per calendar year. If a shareholder exceeds this amount, a Fund and/or its service providers may, at their discretion, reject any additional purchase or exchange orders. The Funds define a "round trip" as a purchase into a Fund by a shareholder, followed by a subsequent redemption out of that Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund. An exchange will be considered a "round trip" if a shareholder exchanges shares of one Acadian Fund for another Acadian Fund, and then exchanges back into the original Fund.
o Each Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 90 days (subject to certain exceptions as discussed in "Redemption Fee").
o Each Fund reserves the right to reject any purchase or exchange request by any investor or group of investors for any reason without prior notice, including, in particular, if a Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to a Fund.
A Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Funds' long-term shareholders. The Funds do not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in a Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Funds for their customers through which transactions are placed. The Funds have entered into "information sharing agreements" with these financial intermediaries, which permit the Funds to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Funds. If the Funds or their service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Funds, the Funds or their service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Funds or their service providers determine that the trading activity of any customer may be detrimental to the Funds, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Funds by that customer. If the Funds are not satisfied that the intermediary has taken appropriate action, the Funds may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Funds' shares is requested by the Funds and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Funds have an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Funds, to restrict or prohibit the indirect intermediary from purchasing shares of the Funds on behalf of other persons.
The Funds and their service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Funds. However,
there can be no assurance that the monitoring of omnibus account level trading will enable the Funds to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Funds will ask your name, address, date of birth, and other information that will allow the Funds to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Funds are required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Funds are required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information is unable to be obtained within a reasonable timeframe established in the sole discretion of the Funds, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the application, your investment will be received and your order will be processed at the NAV next-determined.
The Funds reserve the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of a Fund. Further, the Funds reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification are part of the Funds' overall
obligation to deter money laundering under federal law. The Funds have adopted
an Anti-Money Laundering Compliance Program designed to prevent the Funds from
being used for money laundering or the financing of terrorist activities. In
this regard, the Funds reserve the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of a Fund or in cases when a Fund is requested or compelled to do so
by governmental or law enforcement authority. If your account is closed at the
request of governmental or law enforcement authority, you may not receive
proceeds of the redemption if a Fund is required to withhold such proceeds.
SMALL ACCOUNTS
The Funds may redeem your shares without your permission if the value of your account falls below $1,000 for the Acadian Emerging Markets Debt Fund and $1,250 for the Acadian Emerging Markets Portfolio. This provision does not apply:
o To retirement accounts and certain other accounts; or
o When the value of your account falls because of market fluctuations and not your redemptions.
The Funds will provide you at least 30 days' written notice to allow you time to add to your account and avoid the sale of your shares.
DIVIDENDS AND DISTRIBUTIONS
Normally, the Acadian Emerging Markets Debt Fund distributes its net investment income monthly and makes distributions of its net realized capital gains, if any, at least once a year. Normally, the Acadian Emerging Markets Portfolio distributes its net investment income and its net capital gains, if any, at least once a year. The Funds will automatically reinvest dividends and distributions in additional shares of the Funds, unless you elect on your account application to receive them in cash.
FEDERAL TAXES
The following is a summary of the federal income tax consequences of investing in the Funds. This summary does not apply to shares held in an individual retirement account or other tax-qualified plan, which are not subject to current tax. Transactions relating to shares held in such accounts may, however, be taxable at some time in the future. You should always consult your tax advisor for specific guidance regarding the federal, state and local tax effects of your investment in the Funds.
TAXES ON DISTRIBUTIONS
The Funds will distribute substantially all of their net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Funds, may be subject to federal, state, and local taxation, depending upon your tax situation. Income distributions, including distributions of net short-term capital gains but excluding distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Long-term capital gains distributions and distributions that are designated by the Funds as qualified dividend income are generally taxable at the rates applicable to long-term capital gains and set at a maximum tax rate for individuals at 20% (lower rates apply to individuals in lower tax brackets). Once a year the Funds will send you a statement showing the types and total amount of distributions you received during the previous year.
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Funds are also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Funds will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Funds will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
You should note that if you purchase shares just before a distribution, the purchase price would reflect the amount of the upcoming distribution. In this case, you would be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of your investment. This is known as "buying a dividend" and should be avoided by taxable investors. Call 1-866-AAM-6161 to find out when the Funds expect to make a distribution to shareholders.
Each sale of shares of the Funds may be a taxable event. A sale may result in a capital gain or loss to you. The gain or loss generally will be treated as short term if you held the shares 12 months or less, long term if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, a 3.8% Medicare contribution tax will apply on "net investment income," including interest, dividends, and capital gains earned by U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly).
Because the Funds invest in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. The Funds may elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
More information about taxes is in the Statement of Additional Information ("SAI").
ADDITIONAL INFORMATION ABOUT THE FUND
MORE INFORMATION ABOUT FUND INVESTMENTS AND RISKS
The investment objective of the Acadian Emerging Markets Debt Fund is to seek to generate a high total return through a combination of capital appreciation and income, consistent with prudent investment risk. The investment objective of the Acadian Emerging Markets Portfolio is to seek long-term capital appreciation by investing primarily in common stocks of emerging country issuers. Each Fund may change its investment objective without shareholder approval.
In addition to its principal investment strategies, the Funds may also employ investment practices that this prospectus does not describe, such as participating in repurchase agreements, when-issued and forward commitment transactions, lending of securities, borrowing and other techniques. For more information concerning these and any of the Funds' other investment practices and their risks, please read the SAI.
DERIVATIVES
Each Fund may invest in derivatives, a category of investments that includes forward foreign currency exchange contracts, futures, options and swaps to protect its investments against changes resulting from market conditions (a practice called "hedging"), to reduce transaction costs or to manage cash flows. Forward foreign currency exchange contracts, futures and options are called derivatives because their value is based on an underlying asset or economic factor. Derivatives are often more volatile than other investments and may magnify a Fund's gains or losses. There are various factors that affect a Fund's ability to achieve its objectives with derivatives. Successful use of a derivative depends on the degree to which prices of the underlying assets correlate with price movements in the derivatives a Fund buys or
sells. A Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
DEBT SECURITIES
The Acadian Emerging Markets Portfolio may, and the Acadian Emerging Markets Debt Fund will, invest in debt securities of emerging market issuers. The Acadian Emerging Markets Portfolio may make such investments when the Adviser believes that such debt securities offer opportunities for long-term capital appreciation. In making such investment decisions, the Adviser generally considers the relative potential for capital appreciation of equity securities, interest rate levels, economic trends, currency trends and prospects, and, specifically, the prospects for appreciation of selected debt issues.
The market value of debt securities changes in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. During periods of falling interest rates, certain debt obligations with high interest rates may be prepaid (or "called") by the issuer prior to maturity. In addition to these risks, fixed income securities may be subject to credit risk, which is the possibility that an issuer will be unable or unwilling to make timely payments of either principal or interest.
EQUITY SECURITIES
The Acadian Emerging Markets Debt Fund may, and the Acadian Emerging Markets Portfolio will, invest a portion of its assets in equity securities. Equity securities include publicly and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices. Equity securities also include American Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs"), which are traded on U.S. exchanges and represent an ownership in a foreign security. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of the equity securities in which a mutual fund invests will cause the fund's NAV to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN SECURITIES
Investments in securities of foreign companies (including direct investments as well as investments through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign companies or governments generally are not subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic U.S. companies or governments. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities. Investment in emerging markets subjects the Funds to a greater risk of loss than investments in a developed market. This is due to, among other things, greater market volatility, lower trading volume, political and economic instability, high levels of inflation, deflation or currency devaluation, greater risk of market shut down, and more governmental limitations on foreign investment policy than those typically found in a developed market. 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 in the Funds' investments in emerging market countries.
HIGH YIELD SECURITIES
The Acadian Emerging Markets Portfolio may invest up to 10% of its total assets (measured at the time of the investment) in debt securities that are rated below investment-grade, otherwise known as "junk bonds." There is no limit to the amount of assets the Acadian Emerging Markets Debt Fund may invest in junk bonds. Junk bonds involve greater risks of default or downgrade and are more volatile than investment grade securities. Junk bonds involve greater risk of price declines than investment grade securities due to actual or perceived changes in an issuer's creditworthiness. In addition, issuers of junk bonds may be more susceptible than other issuers to economic downturns. Junk bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the security. The volatility of junk bonds, particularly those issued by foreign governments, is even greater since the prospects for repayment of principal and interest of many of these securities is speculative. Some may even be in default. As an incentive to invest in these risky securities, they tend to offer higher returns.
SHORT-TERM INVESTING
The investments and strategies described in this prospectus are those that the Funds use under normal circumstances. During unusual economic, market, political or other circumstances, the Funds may invest up to 100% of their assets in short-term, high quality debt instruments, such as U.S. government securities. These instruments would not ordinarily be consistent with the Funds' principal investment strategies, and may prevent the Funds from achieving their investment objectives. The Funds will use temporary strategies if the Adviser believes that pursuing the Funds' investment objectives will subject them to a significant risk of loss. The Funds have a policy requiring them to invest at least 80% of their net assets, plus any borrowings for investment purposes, at the time of initial purchase, in particular types of securities as described in the Funds' principal investment strategies and will not change this policy without 60 days' prior written notice to shareholders. In addition to the temporary defensive measures discussed above, the Funds may also temporarily deviate from this 80% policy in other limited, appropriate circumstances, such as if the Funds experience unusually large cash inflows or redemptions. When the Adviser pursues a temporary defensive strategy, the Funds may not profit from favorable developments that it would have otherwise profited from if it were pursuing its normal strategies.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Funds' policies and procedures with respect to the circumstances under which the Funds disclose their portfolio securities is available in the SAI.
INVESTMENT MANAGEMENT
INVESTMENT ADVISER
Acadian Asset Management LLC is an SEC-registered investment adviser and a Delaware limited liability company located at 260 Franklin Street, Boston, Massachusetts 02110. Acadian serves as the Funds' investment adviser. As of December 31, 2012, the Adviser had approximately $51.9 billion in assets under management. The Adviser, an affiliate of Old Mutual (US) Holdings Inc., has provided investment management services since 1986. Old Mutual (US) Holdings Inc. is a wholly-owned subsidiary of Old Mutual plc, a financial services group based in the United Kingdom. The Adviser manages and supervises the investment of the Funds' assets on a discretionary basis, subject to the oversight of the Board. For its services, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.65% and 1.00% based on the average daily net assets of the Acadian Emerging Markets Debt Fund and the Acadian Emerging Markets Portfolio, respectively. The Adviser has contractually agreed to waive fees and expenses to the extent necessary to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.95% of the Acadian Emerging Market Debt Fund's average daily net assets until March 1, 2014. Thereafter, the Adviser will consider the continuance of this agreement on an annual basis. With respect to the Acadian Emerging Markets Portfolio, the Adviser has voluntarily agreed to reduce fees and reimburse expenses to the extent necessary to keep total annual fund operating expenses from exceeding 2.50% of the Acadian Emerging Markets Portfolio's average daily net assets. The Adviser may discontinue all or part of its expense reductions or reimbursements at any time.
For the fiscal year ended October 31, 2012, the Adviser received advisory fees (after fee reductions) as a percentage of average daily net assets of each Fund as follows:
ACADIAN EMERGING MARKETS DEBT FUND None ACADIAN EMERGING MARKETS EQUITY 1.00% PORTFOLIO |
A discussion regarding the basis for the Board's approval of the Funds' investment advisory agreement is available in the Funds' annual report dated October 31, 2012, which covers the fiscal year ended October 31, 2012.
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management of the Funds. The SAI provides additional information about the portfolio manager's compensation, other accounts managed, and ownership of Fund shares.
ACADIAN EMERGING MARKETS DEBT FUND
L. Bryan Carter, CFA, Vice President and Portfolio Manager, joined Acadian in April 2007 to launch Acadian's Emerging Markets Debt strategy. He currently holds the position of lead Portfolio Manager for the Emerging Markets Debt strategy. Prior to Acadian, Bryan worked for four years as an Economist at T. Rowe Price Associates and at the U.S. Treasury Department in Washington. He is a CFA charterholder and a member of the Boston Security Analysts Society. Mr. Carter holds a B.S. from Georgetown University and a Masters from Harvard University.
Vasiliki Everett, Vice President, Associate Portfolio Manager, and Senior Trader, joined Acadian's Emerging Market Debt team in June 2007 in the combined role of Analyst/Trader. Her prior professional experience includes 14 years as a Research and Portfolio Associate in the Emerging Markets Debt Group at Putnam and two years at IBES. Ms. Everett holds a B.A. in Economics from the University of Rochester. She also holds certificates in management and international relations from the University of Rochester.
ACADIAN EMERGING MARKETS PORTFOLIO
John Chisholm, CFA, Chief Investment Officer and Executive Vice President,
joined Acadian in July 1987 and is responsible for the oversight of Acadian's
investment process and investment team. He continues to actively manage
Acadian portfolios and direct research to enhance the investment approach, as
he has since 1987. Earlier in his career, Mr. Chisholm served as systems
engineer at Draper Laboratories and as an analyst for the International Asset
Management Department at the State Street Bank and Trust Company (now SSgA).
Mr. Chisholm holds a B.S. in Engineering and an M.S. in Management, both from
MIT.
Ronald D. Frashure, CFA, Chairman, joined Acadian in March 1988. In addition to his role as Chairman, he works closely with clients on asset allocation and investment policy issues. Earlier in his career, he spent seventeen years serving as senior equity portfolio manager and director of asset allocation at the Putnam Companies. Mr. Frashure holds a B.S. in Industrial Management from MIT and an M.B.A. in Finance from Harvard University (Baker Scholar, with High Distinction).
Brian Wolahan, CFA, Director of Portfolio Management, joined Acadian in March 1990. Brian joined Acadian in March 1990. In addition to his role as Senior Portfolio Manager, he has oversight of portfolio management policy. Previously he was co-Director of Research, responsible for developing and applying investment techniques to evaluate markets and securities. Before joining Acadian, he worked in the Systems Planning Group at Bank of New England and as a Senior Systems Analyst at Mars Incorporated. He is a CFA charterholder and a member of the Boston Security Analysts Society. Mr. Wolahan holds a B.S. in Accounting from Lehigh University and an M.S. in Management from MIT.
Asha Mehta, CFA, Vice President and Portfolio Manager, joined Acadian in April 2007. She focuses on the Frontier Market Strategy, directs our Responsible Investment initiative, and also researches innovative factors. Prior to Acadian, she was an Investment Banker at Goldman Sachs, managed international marketing strategy at Johnson & Johnson, and worked in microfinance in India. Ms. Mehta holds a B.S. in Biological Sciences and an A.B. in Anthropology from Stanford University and an M.B.A. (with Honors) from The Wharton School at the University of Pennsylvania.
ADVISER'S PRIOR PERFORMANCE -- ACADIAN EMERGING MARKETS DEBT FUND
The following tables give the historical performance of all actual, fee-paying and non-fee-paying separate accounts, referred to as a "Composite," managed by the Adviser that have investment objectives, policies and strategies substantially similar to those of the Emerging Markets Debt Fund. The Composite does not reflect all of the firm's assets under management. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE EMERGING MARKETS DEBT FUND. Performance is historical and does not represent the future performance of the Emerging Markets Debt Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs from that of registered mutual funds such as the Emerging Markets Debt Fund.
The performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund. The accounts that are included in the Composite are not subject to the same type of expenses to which the Emerging Markets Debt Fund is subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the accounts in the Composite were subject to the same federal securities tax laws as the Emerging Markets Debt Fund. In addition, the accounts are not subject to the same adverse effects of cash inflows and outflows of investor money that a public mutual fund such as the Emerging Markets Debt Fund may be subject to, and accordingly the performance of the accounts may be higher than for a public mutual fund managed under the same investment strategy. The Emerging Markets Debt Fund's fees and expenses are generally expected to be higher than those of the accounts included in the Composite. If the Emerging Markets Debt Fund's fees and expenses had been imposed on accounts included in the Composite, the performance shown below would have been lower. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular account. "Net of fees" performance is net of Adviser management fees and trading costs.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Emerging Markets Debt Fund. The performance data shown below should not be considered a substitute for the Emerging Markets Debt Fund's own performance information. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
THE ADVISER'S EMERGING MARKETS LOCAL DEBT COMPOSITE PERFORMANCE
(September 1, 2007 to December 31, 2012)
------------------------------------------------------------------------------------------------------------------------------------
Three-Year ex-Post Standard
Deviation of Absolute Returns
JPM GBI-EM Total Firm
Composite Composite Global Dispersion of Number of Assets in Assets under
Return (%) Return (%) Diversified Returns Within Portfolios in Composite Management
Gross-of-Fees Net-of-Fees Return (%) Composite (%) Composite JPM GBI-EM Composite ($MMs) ($MMs)
------------------------------------------------------------------------------------------------------------------------------------
2007* 12.3 12.1 9.5 n/a n/a n/a 1 11 83,661
2008 -11.8 -12.4 -5.2 n/a n/a n/a 1 23 42,549
2009 30.7 29.9 22.0 n/a n/a n/a 1 13 49,314
2010 20.1 19.4 15.7 n/a 20.1 15.6 1 20 49,032
2011 -1.6 -2.1 -1.8 n/a 16.4 13.2 2 41 42,200
2012 22.9 22.2 16.8 0.3 15.3 12.4 3 119 51,903
------------------------------------------------------------------------------------------------------------------------------------
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* Performance Inception: September 1, 2007. This composite was created on October 1, 2007. Performance information for 2007 is for the period September 1, 2007 to December 31, 2007. All figures stated in USD.
Acadian Asset Management claims compliance with the Global Investment Performance Standards (GIPS[R]) and has prepared and presented this Composite presentation in compliance with the GIPS standards. Acadian Asset Management has been independently verified for the periods January 1, 1994 through March 31, 2012. A copy of the verification report is available, free of charge, upon request by emailing pag@acadian-asset.com. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. Reference to the benchmark is for comparative purposes only and is not intended to indicate that the composite will contain the same investments as the benchmark. Investors have the opportunity for losses as well as profits. Past performance is no guarantee of future results. Acadian Asset Management is an investment adviser specializing in global equity management. Acadian Asset Management is defined to include assets managed by Acadian Asset Management LLC, an investment adviser registered with and regulated by the United States Securities and Exchange Commission, as well as assets managed by its two wholly-owned affiliates, Acadian Asset Management Singapore Pte Ltd, authorized by the Monetary Authority of
Singapore, and Acadian Asset Management (UK) Limited, authorized and regulated by the Financial Services Authority of the United Kingdom.
METHODOLOGY: Returns are net of estimated foreign withholding taxes on dividends, interest, and capital gains. As of January 1, 2010, Acadian's methodology was augmented to produce a more accurate gross return figure by eliminating modest cash flows, such as securities lending income and custodial fees, which are regarded as independent of the investment management process; the reinvestment of all income and trading expenses continue to be included. Gross returns will be reduced by investment advisory fees and other expenses. Monthly composite results are asset-weighted by beginning-of-month asset values of member portfolios which are geometrically linked to arrive at the annual composite return. Net-of-fee performance is calculated using the highest management fee as described in Part 2A of the firm's Form ADV for the investment process utilized to manage this strategy; such form is available upon request. Fees additionally include incentive fees which, when applicable, are booked on December 31 of the year in which they are earned. The standard fee schedule for accounts managed with this strategy is 0.60% on the first $50 million and 0.50% thereafter. Management fees may vary according to the range of services provided, investment performance, and the amount of assets under management. Constituent portfolios are included from the first full month after inception to the present or the last full month prior to cessation of the client relationship with the firm. For example, an account that opened January 15, 2008 will be included beginning February 1, 2008. An account that terminated February 12, 2008 will be included through January 31, 2008. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.
DISPERSION: Acadian's broad definitions are mainly the product of a highly customized process that may result in modest differences with regards to portfolio characteristics among constituents. All accounts managed with directly comparable investment objectives are included, though it's possible for members to utilize slightly different benchmarks in optimization and reporting. Although at times dispersion among constituents may be high, the long-term forecast for each portfolio is consistent with the overall composite. The 'Dispersion' statistic presented above is an annual, asset-weighted standard deviation calculation performed only on those portfolios who have been members for the entire calendar year. Dispersion information is not shown because it is not statistically meaningful when an insufficient number of portfolios are in the composite for the entire year. The 'Three Year ex-Post Standard Deviation' is a measure of volatility based on monthly returns. Since thirty-six months are required to calculate the 'Three Year ex-Post Standard Deviation' statistic, these figures are not shown for years prior to 2010.
COMPOSITE DESCRIPTION: This composite invests in emerging fixed income markets worldwide, with limited developed markets exposure. The strategy invests primarily in local currency, sovereign-risk instruments. A complete list of the firm's composites and their descriptions is available upon request. The strategy has been managed with a team-based approach since its inception. Effective February 2012, Bryan Carter replaced John Peta as the lead portfolio manager of this team; John Peta is no longer associated with this team.
BENCHMARK DESCRIPTION: The benchmark for the composite is JP Morgan GBI-EM Global Diversified. The JP Morgan GBI-EM Global Diversified tracks the performance of readily investible local currency emerging market debt issues.
SHAREHOLDER SERVICING ARRANGEMENTS
The Funds may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan
administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Funds generally pay financial intermediaries a fee that is based on the assets of the Funds that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Funds, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Funds do not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Funds, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Funds. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (E.G., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Funds available to their customers or registered representatives, including providing the Funds with "shelf space," placing it on a preferred or recommended fund list, or promoting the Funds in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Funds' SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the NAV or price of the Funds' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the Funds. The information is intended to help you understand each Fund's financial performance for the period of the Funds' operations. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Funds, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm whose report, along with the Funds' financial statements, are included in the Funds' Annual Reports. You can obtain the Annual Report, which contains more performance information, at no charge by calling 1-866-AAM-6161. For the fiscal year ending October 31, 2013, Deloitte & Touche LLP serves as the independent registered public accounting firm for each Fund.
--------------------------------------------------------------------------------
PERIOD ENDED OCTOBER 31,
--------------------------------------------------------------------------------
ACADIAN EMERGING MARKETS DEBT FUND 2012 2011(*)
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.39 $10.00
----- -----
Income from Operations:
Net Investment Income(1) 0.68 0.55
Net Realized and Unrealized Gain (Loss) 0.42 (0.18)
---- ----
Total From Operations 1.10 0.37
---- ----
Redemption Fees 0.01 0.02
Dividends and Distributions from:
Net Investment Income (1.05) --
---- ----
Net Realized Gains (0.02) --
---- ----
Total Dividends and Distributions (1.07) --
---- ----
Net Asset Value, End of Year/Period $10.43 $10.39
===== =====
Total Return(o) 11.91% 3.90%(***)
===== ====
Ratios and Supplemental Data
Net Assets, End of Year/Period (Thousands) $26,214 $17,862
Ratio of Expenses to Average Net Assets(2) 0.95% 0.95%(**)
Ratio of Expenses to Net Assets (excluding waivers, 1.94% 2.14%(**)
expense reimbursements and fees paid indirectly)
Ratio of Net Investment Income to Average Net 6.78% 6.05%(**)
Assets
Portfolio Turnover Rate 151% 148%(***)
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* Commenced operations on December 17, 2010.
** Annualized.
*** Not annualized.
+ Total return is for the period indicated and has not been annualized. Total return would have been lower had certain expenses not been waived and assumed by the Adviser during the period. The return shown does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
(1) Per share data calculated using average outstanding shares.
(2) The Ratio of Expenses to Average Net Assets excludes the effect of fees paid indirectly. If these expense offsets were included, the ratio would have been the same as the ratio reported.
Amounts designated as "--" are either $0 or have been rounded to $0.
----------------------------------------------------------------------------------------------------------
ACADIAN EMERGING MARKETS PORTFOLIO
----------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 2012 2011 2010 2009 2008
----------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $17.56 $19.45 $15.16 $13.07 $44.11
----- ----- ----- ----- -----
Income from Operations:
Net Investment Income(1) 0.36 0.35 0.24 0.22 0.53
Net Realized and Unrealized Gain 0.43 (2.06) 4.18 5.40 (22.44)
---- ---- ---- ---- -----
(Loss)
Total from Operations 0.79 (1.71) 4.42 5.62 (21.91)
Redemption Fees 0.00(2) 0.00(2) 0.00(2) 0.00(2) 0.00(2)
---- ---- ---- ---- ----
Dividends and Distributions from:
Net Investment Income (0.33) (0.18) (0.13) (0.54) (0.48)
---- ---- ---- ---- ----
Net Realized Gains -- -- -- (2.99) (8.65)
---- ---- ---- ---- ----
Total Dividends and Distributions (0.33) (0.18) (0.13) (3.53) (9.13)
---- ---- ---- ---- ----
Net Asset Value, End of Year $18.02 $17.56 $19.45 $15.16 $13.07
===== ===== ===== ===== =====
Total Return(3) 4.74% (8.89)% 29.34% 58.69% (61.74)%
==== ==== ===== ===== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $820,947 $922,389 $861,978 $553,532 $390,413
Ratio of Expenses to Average Net 1.31% 1.29% 1.36% 1.49% 1.38%
Assets(4)
Ratio of Net Investment Income to 2.04% 1.78% 1.41% 1.83% 1.87%
Average Net Assets
Portfolio Turnover Rate 44% 49% 74% 115% 102%
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(1) Per share amounts for the period are based on average outstanding shares.
(2) Amount was less than $0.01 per share.
(3) Returns shown do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares.
(4) The Ratio of Expenses to Average Net Assets for years ended October 31, 2012, October 31, 2011, October 31, 2010, October 31, 2009 and October 31, 2008 excludes the effect of fees paid indirectly. If these expense offsets were included, the ratios would have been 1.31%, 1.29%, 1.36%, 1.48% and 1.38%, respectively.
Amounts designated as "--" are either $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
ACADIAN FUNDS
Investors who would like more information about the Funds should read the Funds' Annual and Semi-Annual Reports and the Funds' SAI. The Annual and Semi-Annual Reports of the Funds provide additional information about their investments. In the Annual Report, you will also find a discussion of the market conditions and investment strategies that significantly affected the performance of the Funds during the last fiscal year. The SAI contains additional detailed information about The Advisor's Inner Circle Fund and the Funds and is incorporated by reference into (is legally part of) this prospectus.
Investors can receive free copies of the SAI, shareholder reports and other information about the Funds at www.acadian-asset.com. Investors can also receive these documents, as well as make shareholder inquiries, by writing to or calling:
Acadian Funds P.O. Box 219009 Kansas City, MO 64121 866-AAM-6161
You can review and copy information about the Funds (including the SAI and the Annual and Semi-Annual Reports) at the U.S. Securities and Exchange Commission's Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the U.S. Securities and Exchange Commission at 202-551-8090. Reports and other information about the Funds are available on the EDGAR Database on the U.S. Securities and Exchange Commission's Internet site at: http://www.sec.gov. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the U.S. Securities and Exchange Commission's Public Reference Section, Washington, D.C. 20549-1520.
THE TRUST'S INVESTMENT COMPANY ACT OF 1940 FILE NUMBER IS 811-06400.
ACA-PS-001-1200
AIG MONEY MARKET FUND
A PORTFOLIO OF THE ADVISORS' INNER CIRCLE FUND
CLASS A SHARES
PROSPECTUS
MARCH 1, 2013
INVESTMENT ADVISER:
AIG ASSET MANAGEMENT (U.S.), LLC
These securities have not been approved or disapproved by the U.S. Securities and Exchange Commission nor has the Commission passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
FUND SUMMARY ......................................................1
INVESTMENT OBJECTIVE .........................................1
FUND FEES AND EXPENSES .......................................1
PRINCIPAL INVESTMENT STRATEGY ................................1
PRINCIPAL RISKS ..............................................2
PERFORMANCE INFORMATION ......................................2
INVESTMENT ADVISER ...........................................3
PURCHASE AND SALE OF FUND SHARES .............................3
TAX INFORMATION ..............................................3
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES .............................................3
MORE INFORMATION ABOUT RISK .......................................4
THE FUND'S OTHER INVESTMENTS ......................................4
INFORMATION ABOUT PORTFOLIO HOLDINGS ..............................4
INVESTMENT ADVISER ................................................4
PURCHASING AND SELLING FUND SHARES ................................5
OTHER POLICIES ....................................................8
SHAREHOLDER SERVICING ARRANGEMENTS ................................9
PAYMENTS TO FINANCIAL INTERMEDIARIES ..............................9
DIVIDENDS AND DISTRIBUTIONS .......................................10
TAXES .............................................................10
FINANCIAL HIGHLIGHTS ..............................................12
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND .....................Back Cover
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AIG MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to preserve principal value and maintain a high degree of liquidity while providing current income. The Fund also seeks to maintain a stable share price of $1.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Class A Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
CLASS A SHARES
Management Fees ........................................... 0.25%
Other Expenses ............................................ 0.06%
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Total Annual Fund Operating Expenses ...................... 0.31%
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EXAMPLE
This Example is intended to help you compare the cost of investing in Class A Shares of 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 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. Although your actual costs might be higher or lower, based on these assumptions, your costs would be:
PRINCIPAL INVESTMENT STRATEGY
The Fund invests in a broad range of high quality, short-term U.S. dollar denominated money market instruments, such as obligations of the U.S. Treasury, agencies and instrumentalities of the U.S. government, domestic and foreign banks, domestic and foreign corporate issuers, supranational entities, and foreign governments, as well as in repurchase agreements. The Fund's portfolio is comprised only of short-term debt securities that are rated in the highest category by nationally recognized statistical rating organizations or securities that AIG Asset Management (U.S.), LLC, the Fund's investment adviser (the "Adviser") determines are of equal quality. The Fund may concentrate its investments (invest more than 25% of its assets) in obligations issued by domestic branches of U.S. banks or U.S. branches of foreign banks that are subject to a similar level of regulation. The Fund will maintain an average weighted maturity of 60 days or less and a weighted average life to maturity of 120 days or less, and will only acquire securities that have a remaining maturity of 397 days or less.
PRINCIPAL RISKS
An investment in the Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to keep a constant price per share of $1.00, it is possible to lose money by investing in the Fund.
The Fund's investments are subject to fluctuations in the current interest rates for short-term obligations. Accordingly, an investment in the Fund is subject to income risk, which is the possibility that the Fund's yield will decline due to falling interest rates.
An investment in the Fund is also subject, to a limited extent, to credit risk, which is the possibility that the issuer of a security owned by the Fund will be unable to repay interest and principal in a timely manner. The Adviser attempts to lessen this risk through a conservative investment policy for the Fund, which includes diversification (spreading Fund investments across a broad number of issuers), and investing in obligations of high credit quality issuers.
The Fund's investments in securities issued by non-U.S. companies and/or non-U.S. governments and their agencies, may be adversely affected by the lack of timely or reliable financial information, political, social and/or economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a measure of money market fund performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-800-249-7445.
2003 1.03% 2004 1.29% 2005 3.08% 2006 4.94% 2007 5.06% 2008 2.02% 2009 0.25% 2010 0.20% 2011 0.07% 2012 0.10% |
Call 1-800-249-7445 for the Fund's most current 7-day yield.
BEST QUARTER WORST QUARTER
------------ -------------
1.30% 0.01%
(12/31/2006) (12/31/2011)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
CLASS A SHARES 1 YEAR 5 YEARS 10 YEARS -------------------------------------------------------------------------------- AIG Money Market Fund 0.10% 0.52% 1.79% Lipper Institutional Money Markets 0.06% 0.61% 1.75% Fund Average |
INVESTMENT ADVISER
AIG Asset Management (U.S.), LLC
PURCHASE AND SALE OF FUND SHARES
The minimum investment in Class A Shares is generally $10,000,000. There is no minimum for subsequent investments. An investor may also purchase Class A Shares in an amount below the minimum if the investor:
o makes an initial investment of $5,000,000 and intends to increase his or her account balance to $10,000,000 within 90 days;
o invests assets managed by a registered investment adviser that is owned by AIG;
o is AIG (or any company where AIG owns at least 19% of the stock);
o is an AIG senior executive officer or their family members; or
o is one of certain employee benefit plans sponsored by AIG.
The Fund may accept investments of smaller amounts in its sole discretion.
You may redeem your shares on any day the New York Stock Exchange or the Federal Reserve are open for business by contacting the Fund by mail or telephone at 1-800-249-7445.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
It is a fundamental policy of the Fund to maintain a stock share price of $1. However, investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal or that it will be able to maintain a constant price of $1 on a continuous basis. The Adviser's judgments about the markets, the economy, interest rates, or companies may not anticipate actual market or interest rate movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with other investments.
THE FUND'S OTHER INVESTMENTS
In addition to the principal investments and strategies described in this prospectus, the Fund may also invest in other securities, use other strategies and engage in other investment practices within its stated investment objectives. These investments and strategies, as well as those described in the prospectus, are described in detail in the Statement of Additional Information ("SAI") (for information on how to obtain a copy of the Fund's SAI, see the back cover of this prospectus).
INFORMATION ABOUT PORTFOLIO HOLDINGS
The Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://aicfundholdings.com/aig. This information will generally remain available until it is replaced by new portfolio holdings information as described above. In addition, upon request the Fund will provide its shareholders with a complete list of its portfolio holdings on a daily basis. To request this information, please call the Adviser at 1-212-770-7000. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund. Please consult the Fund's SAI for a full description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
INVESTMENT ADVISER
AIG Asset Management (U.S.), LLC serves as the Adviser to the Fund. The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board of Trustees of the Trust (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
The Adviser's principal place of business is 180 Maiden Lane, New York, NY 10038. The Adviser was established in 2009 and is an indirect wholly owned subsidiary of American International Group, Inc. ("AIG") and a part of AIG Investments & Financial Services. AIG Asset Management comprises a global team of investment professionals that provides investment advisory and asset management services to AIG and its businesses, including AIG Life and Retirement and AIG Property Casualty. Headquartered in New York with several locations around the world, the Adviser directly manages $XX billion of AIG firm-wide assets and indirectly manages $XX billion through the use of AIG affiliated entities and unaffiliated investment advisors as of December 31, 2012.
For its investment advisory services, the Adviser is entitled to an annual fee of 0.25% of the average daily net assets of the Fund. Effective August 3, 2012, the Adviser has voluntarily agreed to waive 0.22% of its management fee. For the period from December 8, 2011 through August 2, 2012, the Adviser had voluntarily agreed to reduce 0.25% of its investment advisory fees. For the period from November 1, 2011 through December 7, 2011, the Adviser had voluntarily agreed to reduce 0.215% of its investment advisory fees. In addition, the Adviser has voluntarily agreed to further reduce fees in order to ensure that total annual operating expenses do not exceed 0.40% of the Fund's average daily net assets. The Adviser intends to continue its fee reductions until further notice, but may discontinue them at any time. During its most recent fiscal year, the Fund paid 0.01% of its average daily net assets in advisory fees (after fee reductions) to the Adviser. A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement is available in the Fund's Annual Report to Shareholders dated October 31, 2012, which covers the period from November 1, 2011 to October 31, 2012.
PURCHASING FUND SHARES
To purchase shares directly from the Fund through its transfer agent, complete and send in the application. If you need an application or have questions, please call 1-800-249-7445. Shares of the Fund may be purchased by check, wire transfer or through certain authorized dealers or other financial institutions authorized to sell Fund shares, including AIG Global Capital Markets Securities, LLC. For first time purchases, an application form must be completed and submitted to the Fund to establish an account.
WHEN CAN YOU PURCHASE SHARES?
SHARES MAY BE PURCHASED ONLY ON DAYS THAT THE NYSE AND THE FEDERAL RESERVE ARE OPEN FOR BUSINESS (A "BUSINESS DAY").
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OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
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MINIMUM INVESTMENT $10,000,000 None
------------------------------------------------------------------------------------------------
BY MAIL Complete and sign the Mail check with an Invest-By-
application form. Mail form detached from account
REGULAR MAIL ADDRESS statement.
Check should be payable to: Check should be payable to:
Mail to: AIG Money Market Fund - Class AIG Money Market Fund - Class
AIG Money Market Fund A. A.
P.O. Box 219009 Reference the account name and Reference the account name and
Kansas City, Missouri number. number.
64121-9009 All purchases must be in U.S. All purchases must be in U.S.
dollars, and checks must be dollars, and checks must be
EXPRESS MAIL ADDRESS drawn on U.S. banks. drawn on U.S. banks.
AIG Money Market Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, Missouri 64105
------------------------------------------------------------------------------------------------
BY WIRE Please call client services at Please call client services at
1-800-249-7445 to arrange the 1-800-249-7445 to arrange the
Wire to wire transfer. wire transfer.
UMB Bank, N.A. The shareholder's name and The shareholder's name and
ABA# 1010-00695 account number must be account number must be
For a/c no. 9870600404 specified in the wire. specified in the wire.
Credit AIG Money Market Fund
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For a purchase order to be eligible to receive dividends on the day of purchase, the order must be received before 1:00 p.m., Eastern Time and federal funds (readily available funds) must be received before 3:00 p.m., Eastern Time.
Checks received by the Fund will be credited to the investor's account upon conversion of the proceeds in federal funds (readily available funds). The Fund does not accept third-party checks, traveler's checks, credit cards, credit card checks, cash, money orders or cashier's checks.
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
The Fund reserves the right to reject an account application or a specific purchase order if it is not in the best interest of the Fund or its shareholders, and may accept, at its discretion, amounts smaller than the stated minimum investment amount.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
HOW THE FUND CALCULATES NAV
The Fund calculates its Net Asset Value ("NAV") per share once each Business Day at 2:00 p.m., Eastern Time. The Fund generally calculates NAV using the amortized cost method of valuation, to account for any premiums or discounts above or below the face value of any securities that it buys.
NET ASSET VALUE
NAV FOR ONE FUND SHARE IS THE VALUE OF THAT SHARE'S PORTION OF ALL OF THE NET ASSETS IN THE FUND.
TELEPHONE TRANSACTIONS
PURCHASING AND SELLING FUND SHARES OVER THE TELEPHONE IS EXTREMELY CONVENIENT, BUT NOT WITHOUT RISK. ALTHOUGH THE FUND HAS ESTABLISHED CERTAIN SAFEGUARDS AND PROCEDURES TO CONFIRM THE IDENTITY OF CALLERS AND THE AUTHENTICITY OF INSTRUCTIONS, THE FUND AND ITS AGENTS ARE NOT RESPONSIBLE FOR ANY LOSSES OR COSTS INCURRED BY FOLLOWING TELEPHONE INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE. IF YOU OR YOUR FINANCIAL INSTITUTION TRANSACT WITH THE FUND OVER THE TELEPHONE, YOU WILL GENERALLY BEAR THE RISK OF ANY LOSS.
SELLING FUND SHARES
HOW TO SELL YOUR FUND SHARES
Fund shares may be sold (redeemed) on any Business Day by contacting the Fund by mail or telephone at 1-800-249-7445.
Redemption orders received prior to 1:00 p.m., Eastern Time on any Business Day will be effective that same day. Shares redeemed will not receive the dividends declared on that day. Redemption proceeds can be wire transferred to the shareholder's bank account or sent by check. There is a charge for wire transfers, currently $10.00, which may be reduced by the Fund. Payments by check of redemption proceeds will be made as promptly as possible, and no later than seven days after the redemption order is received.
For shares recently purchased by check, redemption proceeds may not be available until the check has cleared, which may take up to 15 days from the date of purchase.
The price per share will be the NAV next determined after receipt of the redemption request.
REDEMPTIONS IN KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise or for the protection of the Fund's remaining shareholders, the Fund may pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY SALES OF SHARES
If an investor's account balance drops below $10,000,000 because of redemptions, he or she may be required to sell shares. At least 30 days' written notice will be given to allow time to add to the investor's account and avoid the involuntary redemptions of shares.
SUSPENSION OF RIGHT TO SELL SHARES
The Fund may suspend your right to sell your shares during times when trading on the New York Stock Exchange ("NYSE") is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is a money market fund and seeks to provide a high degree of liquidity, current income and a stable net asset value of $1.00 per share. The Fund is designed to serve as a short-term cash equivalent investment for shareholders and, therefore, expects shareholders to engage in frequent purchases and redemptions. Because of the inherently liquid nature of the Fund's investments and money market instruments in general, and the Fund's intended purpose to serve as a short-term investment vehicle for shareholders, the Adviser has informed the Board that it believes that it would not be in shareholders' best interests to place any limitations on the frequency of shareholder purchases and redemptions into and out of the Fund. As a result, the Board has not adopted a Fund policy and procedures with respect to frequent purchases and redemptions of Fund shares.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, or for institutional investors, certain corporate information, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within the timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the application, your investment will be received and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted an
Anti-Money Laundering Compliance Program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities. In
this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of the Fund or in cases when the Fund is requested or compelled to do
so by governmental or law enforcement authority. If your account is closed at
the request of governmental or law enforcement authority, you may not receive
proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, at their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the NAV or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends of substantially all of its net investment income (not including capital gains) daily and distributes this income each month. The Fund makes distributions of capital gains, if any, at least annually. Shareholders on the Fund's record date will be entitled to receive the distribution.
Dividends and distributions are paid in the form of additional Fund shares unless an election is made to receive payment in cash. To elect cash payment, a shareholder must notify the Fund in writing prior to the date of the distribution. The election will be effective for dividends and distributions paid after receipt of the written notice. The election can be canceled by simply sending written notice to the Fund.
THE "RECORD DATE"
IF YOU OWN FUND SHARES ON THE FUND'S RECORD DATE, YOU WILL BE ENTITLED TO RECEIVE THE DISTRIBUTION.
TAXES
INVESTORS SHOULD CONSULT A TAX ADVISOR REGARDING SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions investors receive may be subject to federal, state and local taxation, depending upon an investor's tax situation. The Fund's net investment income and net short-term capital gains are distributed as dividends and are taxable at ordinary income rates. Long-term capital gains distributions are generally taxable at the rates applicable to long-term capital gains, regardless of how long you have owned your shares. Distributions investors receive from the Fund may be taxable whether or not an investor reinvests them or takes them in cash.
Each sale of Fund shares may be a taxable event. A sale may result in a capital gain or loss to you. Although the stable share price is not guaranteed, because the Fund expects to maintain a $1.00 NAV, you should not expect to realize any gain or loss on the sale of your Fund shares. The gain or loss generally will be treated as short-term if you held the shares for 12 months or less, long-term if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FUND DISTRIBUTIONS
DISTRIBUTIONS YOU RECEIVE FROM THE FUND MAY BE TAXABLE WHETHER OR NOT YOU REINVEST THEM.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Class A Shares of the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of all dividends and distributions.
The information provided below for the fiscal year ended October 31, 2012 has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm. The financial statements and the unqualified opinion of PricewaterhouseCoopers LLP are included in the Annual Report of the Fund, which is available upon request by calling the Fund at 1-800-249-7445.
FINANCIAL HIGHLIGHTS
STUDY THESE TABLES TO SEE HOW THE FUND PERFORMED DURING THE PAST FIVE FISCAL YEARS.
AIG MONEY MARKET FUND - CLASS A SHARES
------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
------------------------------------------------------------------------
2012 2011 2010 2009 2008
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Net Asset Value, Beginning of Year ... $1.00 $1.00 $1.00 $1.00 $1.00
Net Investment Income ................ --(1) --(1) --(1) --(1) 0.03
Net Realized Gain on Investments ..... -- -- --(1) -- --
Total from Operations ................ --(1) --(1) --(1) --(1) 0.03
Dividends from Net Investment
Income ............................... --(1) --(1) --(1) --(1) (0.03)
Total Dividends ...................... --(1) --(1) --(1) --(1) (0.03)
Net Asset Value, End of Year ......... $1.00 $1.00 $1.00 $1.00 $1.00
TOTAL RETURN(2) ...................... 0.09% 0.10% 0.19% 0.30% 2.70%
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Net Assets, End of Year (000) ........ $2,559,393 $2,864,736 $7,873,986 $3,947,503 $4,580,528
Ratio of Expenses to Average Net
Assets ............................... 0.07% 0.08% 0.08% 0.09% 0.20%
Ratio of Expenses to Average Net ..... 0.31% 0.30% 0.29% 0.30% 0.30%
Assets (Excluding Waivers)
Ratio of Net Investment Income to .... 0.10% 0.10% 0.19% 0.30% 2.33%
Average Net Assets
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(1) Amounts represent less than $0.01 per share.
(2) Total return would have been lower had certain fees not been waived by the Adviser and the Administrator.
Amounts designated as "___" are $0 or have been rounded to $0.
Note (unaudited): The 7-day current and effective annualized yield for Class A,
as of October 31, 2012, is 0.13%. Most current yield information may be
obtained by calling 1-800-845-3885 or 1-800-249-7445.
The performance in the above table does not reflect the deduction of taxes on Fund distributions that the shareholder may be required to pay based on his/her tax bracket.
THE ADVISORS' INNER CIRCLE FUND
AIG MONEY MARKET FUND
INVESTMENT ADVISER
AIG Asset Management (U.S.), LLC
180 Maiden Lane
New York, New York 10038
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
PARTICIPATING DEALER
AIG Global Capital Markets Securities, LLC
50 Danbury Road
Wilton, Connecticut 06897
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The Fund's SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the AIG Money Market Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list the Fund's holdings and contain information from the Adviser about strategies and recent market conditions and trends. These reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-800-249-7445
BY MAIL: Write to:
AIG Money Market Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: The Fund does not have a website, but you can obtain the SAI,
Annual or Semi-Annual Report by mail or telephone.
|
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 1-202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov.
THE TRUST'S INVESTMENT COMPANY ACT REGISTRATION NUMBER IS 811-06400.
TRUST: PROSPECTUS THE ADVISORS' INNER CIRCLE FUND AIG MONEY MARKET FUND PORTFOLIO: CLASS A AIG MONEY MARKET FUND [AIG LOGO] ADVISER: ADVISED BY AIG ASSET MANAGEMENT (U.S.), LLC AIG ASSET MANAGEMENT (U.S.), LLC DISTRIBUTOR: SEI INVESTMENTS DISTRIBUTION CO. PARTICIPATING DEALER: AIG GLOBAL CAPITAL MARKETS SECURITIES, LLC ADMINISTRATOR: SEI INVESTMENTS GLOBAL FUNDS SERVICES LEGAL COUNSEL: MORGAN, LEWIS & BOCKIUS LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: |
PRICEWATERHOUSECOOPERS LLP
MARCH 1, 2013
For Fund Information call:
1-800-249-7445
AIG-PS-001-1900
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
ALPHAONE MICRO CAP EQUITY FUND
INVESTOR CLASS SHARES (AOMAX)
I CLASS SHARES (AOMCX)
INVESTOR CLASS AND I CLASS SHARES
INVESTMENT ADVISER:
ALPHAONE INVESTMENT SERVICES, LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN
EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE
FUND, PLEASE SEE:
PAGE
ALPHAONE MICRO CAP EQUITY FUND
INVESTMENT OBJECTIVE .................................................. 1
FUND FEES AND EXPENSES ................................................ 1
PRINCIPAL INVESTMENT STRATEGIES ....................................... 2
PRINCIPAL RISKS ....................................................... 3
PERFORMANCE INFORMATION ............................................... 4
INVESTMENT ADVISER .................................................... 4
PORTFOLIO MANAGERS .................................................... 5
PURCHASE AND SALE OF FUND SHARES ...................................... 5
TAX INFORMATION ....................................................... 5
PAYMENTS TO BROKER-DEALERS AND OTHER
FINANCIAL INTERMEDIARIES COMPENSATION ............................... 5
MORE INFORMATION ABOUT RISK ................................................ 6
MORE INFORMATION ABOUT THE FUND'S INVESTMENTS .............................. 6
INFORMATION ABOUT PORTFOLIO HOLDINGS ....................................... 7
INVESTMENT ADVISER ......................................................... 7
PORTFOLIO MANAGERS ......................................................... 7
RELATED PERFORMANCE DATA OF THE ADVISER .................................... 8
PURCHASING, SELLING AND EXCHANGING FUND SHARES ............................. 11
DISTRIBUTION OF FUND SHARES ................................................ 17
SHAREHOLDER SERVICING ARRANGEMENTS ......................................... 17
PAYMENTS TO FINANCIAL INTERMEDIARIES ....................................... 18
OTHER POLICIES ............................................................. 18
DIVIDENDS AND DISTRIBUTIONS ................................................ 21
TAXES ...................................................................... 22
FINANCIAL HIGHLIGHTS ....................................................... 23
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................... Back Cover
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ALPHAONE MICRO CAP EQUITY FUND
INVESTMENT OBJECTIVE
The investment objective of the AlphaOne Micro Cap Equity Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Redemption Fee (as a percentage of amount redeemed, if shares redeemed have been held for less than 90 days) 2.00%
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INVESTOR CLASS
I CLASS SHARES SHARES
-------------- -------------
Management Fees 1.00% 1.00%
12b-1 Fees None 0.25%
Other Expenses
Shareholder Servicing Fees None None
Other Operating Expenses 0.81% 4.71%
------- ------
Total Other Expenses 0.81% 4.71%
Acquired Fund Fees and Expenses 0.04% 0.04%
------- ------
Total Annual Fund Operating Expenses(1) 1.85% 6.00%
Less Fee Reductions and/or Expense Reimbursements (0.31)% (4.21)%
------- ------
Total Annual Fund Operating Expenses after Fee 1.54% 1.79%
Reductions and/or Expense Reimbursements(1,2)
|
(1) The Total Annual Fund Operating Expenses in this fee table, both before and after fee reductions and/or expense reimbursements, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) AlphaOne Investment Services, LLC (the "Adviser") has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep Total Annual Fund Operating Expenses after Fee Reductions and/or Expense Reimbursements (excluding 12b-1 Fees, Shareholder Servicing Fees, interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.50% of the Fund's average daily net assets until March 1, 2014. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three- year period during which this agreement was in place. This agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on March 1, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
I Class Shares $149 $544 $964 $2,137
Investor Class Shares $174 $1,401 $2,604 $5,507
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the most recent fiscal year, the Fund's portfolio turnover was 52% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
In pursuing the Fund's objective, AlphaOne Investment Services, LLC (the "Adviser") strives to build a portfolio with a risk profile less than that of the Russell 2000 Index that is comprised of both "value" and "growth" stocks. Value stocks are those the Adviser may deem to be priced cheaply relative to certain financial measures of worth. Growth stocks are those the Adviser may believe have above average prospects for economic growth. Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of micro-capitalization companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. For purposes of this 80% test, equity securities include securities convertible into equity securities. The Fund considers micro- capitalization companies to be companies with market capitalizations equal to or less than one half of the weighted average market capitalization of the Russell 2000 Index at its annual rebalance. As of its most recent rebalance, June 30, 2012, one half of the weighted average market capitalization of the Russell 2000 Index was equal to $600 million.
In selecting securities for the Fund's portfolio, the Adviser begins with an initial investment universe generated from a broad number of sources including but not limited to industry referrals, previous knowledge of the company and rigorous due diligence such as company visits. The Adviser then evaluates each identified stock for desirable growth and value characteristics such as: high return on equity and assets; free cash flow; revenues and earnings per share growth; high interest coverage; and low price-earnings and price-to-book ratios. This evaluation results in a focused list of stocks that the Adviser then subjects to a deeper fundamental analysis focusing on both specific company and stock characteristics. In particular, the Adviser seeks companies displaying sustainable competitive advantage; strong management; long product cycles; and pricing flexibility. In addition, the Adviser also performs due diligence on individual companies, which may include meeting directly with company management teams, talking with competitors
and suppliers, and utilizing sell side research as a gauge of internal research findings. With respect to specific stock characteristics, the Adviser seeks high sustained return on investment; above average earnings per share growth; and attractive valuation. The resulting portfolio is expected to include 40-70 positions. After constructing the Fund's portfolio, the Adviser will seek to mitigate risk through asset diversification and limits on individual position sizes, as well as the monitoring of absolute and relative sector weights.
In general, the Adviser will sell a security when it reaches a predetermined price target. In addition, the Adviser has other sell disciplines in place, such as a fundamental change in a company's business, a change in the company's management or a failure by management to execute the business plan. A sale may also occur if the Adviser identifies a more attractive investment opportunity or if a position size grows to more than 5% of the Fund's portfolio.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
MICRO-CAPITALIZATION COMPANY RISK -- Micro-capitalization companies may be newly formed or in the early stages of development with limited product lines, markets or financial resources. Therefore, micro-capitalization companies may be less financially secure than large-, mid- and small-capitalization companies and may be more vulnerable to key personnel losses due to reliance on a smaller number of management personnel. In addition, there may be less public information available about these companies. Micro-cap stock prices may be more volatile than large-, mid- and small-capitalization companies and such stocks may be more thinly traded and thus difficult for the Fund to buy and sell in the market.
GROWTH STYLE RISK -- The price of equity securities rises and falls in response to many factors, including the historical and prospective earnings of the issuer of the stock, the value of its assets, general economic conditions, interest rates, investor perceptions, and market liquidity. The Fund may invest in securities of companies that the Adviser believes have superior prospects for robust and sustainable growth of revenues and earnings. These may be companies with new, limited or cyclical product lines, markets or financial resources, and the management of such companies may be dependent upon one or a few key people. The stocks of such companies can therefore be subject to more abrupt or erratic market movements than stocks of larger, more established companies or the stock market in general.
VALUE STYLE RISK --Value investing focuses on companies with stocks that appear undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or prospects for exceeding earnings expectations or
market conditions is wrong, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund by showing how the Fund's average annual returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-855-4-ALPHAONE.
TOTAL RETURNS BY CALENDAR YEAR
2012 13.01%
BEST QUARTER WORST QUARTER
------------ -------------
8.11% (0.82)%
(03/31/2012) (06/30/2012)
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown only for I Class Shares. After-tax returns for Investor Class Shares will vary.
--------------------------------------------------------------------------------
SINCE INCEPTION
ALPHAONE MICRO CAP EQUITY FUND 1 YEAR (03/31/11)
--------------------------------------------------------------------------------
FUND RETURNS BEFORE TAXES
--------------------------------------------------------------------------------
I CLASS SHARES 13.01% 2.45%
--------------------------------------------------------------------------------
INVESTOR CLASS SHARES 12.77% 2.19%
--------------------------------------------------------------------------------
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS
--------------------------------------------------------------------------------
I CLASS SHARES 12.14% 1.53%
--------------------------------------------------------------------------------
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND
SALE OF FUND SHARES
--------------------------------------------------------------------------------
I CLASS SHARES 9.57% 1.80%
--------------------------------------------------------------------------------
RUSSELL 2000 INDEX (REFLECTS NO DEDUCTION FOR 16.35% 1.87%
FEES, EXPENSES, OR TAXES)
--------------------------------------------------------------------------------
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INVESTMENT ADVISER
AlphaOne Investment Services, LLC
PORTFOLIO MANAGERS
Dan Goldfarb, CFA, Senior Portfolio Manager, has managed the Fund since its inception.
Steven Dray, CFA, Portfolio Manager, has managed the Fund since its inception.
Chris Crooks, CFA, Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Investor Class or I Class Shares of the Fund for the first time, you must invest at least $2,500 or $250,000, respectively. Subsequent investments of Investor Class or I Class Shares of the Fund must be made in amounts of at least $100 or $10,000, respectively.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at: AlphaOne Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: AlphaOne Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or by telephone at 1-855-4-ALPHAONE.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with other investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which it trades. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
EQUITY RISK -- Equity securities in which the Fund invests include publicly and privately issued equity securities, common and preferred stocks, warrants, shares of ADRs and rights to subscribe to common stock and convertible securities. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stockholders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
MORE INFORMATION ABOUT THE FUND'S INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in cash, money market instruments or other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will do so only if the Adviser believes that the risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategies and risks, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, the 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 the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that the Fund will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
INVESTMENT ADVISER
AlphaOne Investment Services, LLC, a Delaware limited liability company formed in 2008, serves as the investment adviser to the Fund. The Adviser is a wholly owned subsidiary of AlphaOne Capital Partners, which in turn, is a wholly owned subsidiary of AlphaOne Holding, LLC, a private company owned by Paul J. Hondros. The Adviser's principal place of business is located at One Tower Bridge, 100 Front Street, Suite 1250, West Conshohocken, PA 19428. As of December 31, 2012, the Adviser had approximately $458 million in assets under management.
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board of Trustees of the Trust (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
For its services to the Fund, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.00% based on the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep the Fund's net operating expenses (excluding 12b-1 Fees, Shareholder Servicing Fees, interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.50% of the Fund's average daily net assets until March 1, 2014. In addition, the Adviser has voluntarily agreed to further reduce its fees and/or reimburse expenses in order to keep the Fund net operating expenses (excluding excluded expenses) from exceeding 1.42% of the Fund's average daily net assets. The Adviser intends to continue this voluntary expense limitation until further notice, but may discontinue all or part of it at any time. If at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Fund's total annual Fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. If total annual Fund operating expenses are greater than the voluntary cap but less than the contractual cap, the Adviser will not be permitted to recover the difference between the total annual Fund operating expenses and the contractual cap. For the fiscal year ended October 31, 2012, the Fund paid 0.58% of its average daily net assets in advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals each of whom is jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Daniel Goldfarb has been with the Adviser since 2009 when his investment team transitioned to the Adviser from OFI Institutional Asset Management. He serves as Head of the Fundamental
Small/Micro Cap team and is responsible for managing the Adviser's Micro Cap Core, Small Cap Growth, and Small Cap Core strategies. He has also served as an equity analyst for these strategies since their inception in 2000. He is jointly and primarily responsible for the day-to-day management of the Fund. Mr. Goldfarb served as a managing director/portfolio manager with the OFI Institutional/Babson Capital organization since 1995. Previously, Mr. Goldfarb held positions at Drexel Burnham Lambert, Smith Barney, and Wilmington Trust. Mr. Goldfarb has covered financial institutions during his entire career as well as several other industries including telecom, electric utilities, and REITs. He holds a B.A. from Hobart College and an M.B.A. from Vanderbilt University. Mr. Goldfarb is a CFA charterholder and Treasurer of the Bank Analyst Association of Boston.
Steven Dray has been with the Adviser since 2009. He is a portfolio manager for the Fundamental Small/Micro Cap team and is responsible for managing the Adviser's Micro Cap Core, Small Cap Growth, and Small Cap Core strategies. Mr. Dray also serves as an equity analyst for these strategies. He is jointly and primarily responsible for the day-to-day management of the Fund. Prior to joining the Adviser in 2009, he worked in the OFI Institutional/Babson Capital organization since 2001, serving as a managing director/portfolio manager. Previously, Mr. Dray spent five years at Strong Capital Management as an associate portfolio manager/analyst and also was an Engineer at Lockheed Martin Aeronautics Company. He holds a B.S. in Electrical Engineering from Tufts University and an M.B.A. from Indiana University. Mr. Dray is a CFA charterholder and member of the Boston Security Analysts Society.
Chris Crooks has been with the Adviser since 2009. He is a portfolio manager for the Fundamental Small Cap Core/Growth team and is responsible for managing the Adviser's Micro Cap Core and Small Cap Core strategies. Mr. Crooks also serves as an equity analyst for the Micro Cap Core, Small Cap Core, and Small Cap Growth strategies. He is jointly and primarily responsible for the day-to-day management of the Fund. Prior to joining the Adviser, Mr. Crooks worked in the OFI Institutional/Babson Capital organization since 2003. Previously, Mr. Crooks was a managing director/analyst at Commerce Capital Markets responsible for covering the specialty chemicals and materials sectors. He also was a senior research analyst at Janney Montgomery Scott, LLC. He holds a B.S. in Chemical Engineering from Drexel University and an M.B.A. from Villanova University. Mr. Crooks is a CFA charterholder and is a member of the American Chemical Society.
RELATED PERFORMANCE DATA OF THE ADVISER
The following table gives the related performance of all actual, fee-paying separate accounts, referred to as the "Composite," managed by the Adviser that have investment objectives, policies, strategies and risks substantially similar to those of the Fund. The Composite does not reflect all of the Adviser's assets under management. A complete list of the firm's composite descriptions is available upon request. The data illustrates the past performance of the Adviser in managing substantially similar accounts. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. Performance is related and does not represent the future performance of the Fund or of the Adviser.
The Adviser claims compliance with the Global Investment Performance Standards (GIPS(R)) and has prepared and presented this report in compliance with the GIPS standards. The Adviser has been independently verified for the periods January 1, 2000 to December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed
to calculate and present performance in compliance with the GIPS standards. The Composite has been examined for the periods January 1, 2000 to December 31, 2011. The verification and performance examination reports are available upon request.
Performance results are presented both net of fees and gross of fees. "Net of fees" performance results are net of all fees, expenses and, if applicable, sales loads or placements fees. Because of variation in fee levels, "net of fees" Composite returns may not be reflective of performance in any one particular portfolio. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The performance of the Composite (net of fees) reflects the Adviser's applicable portfolio fees and expenses; however, the Fund's fees and expenses are generally expected to be higher than those of the Composite. If the Fund's fees and expenses had been imposed on the Composite, the performance shown below would have been lower. The Composite is not subject to the same type of expenses to which the Fund is subject and is not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the Composite was subject to the same federal securities and tax laws as the Fund.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Fund. The performance data shown below should not be considered a substitute for the Fund's own performance information. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
PERFORMANCE INFORMATION FOR THE ADVISER'S MICRO CAP CORE COMPOSITE(1,2)
(JANUARY 1, 2000 THROUGH DECEMBER 31, 2012)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE ADVISER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AND DOES NOT REPRESENT THE PERFORMANCE OF THE ALPHAONE MICRO CAP EQUITY FUND.
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ANNUAL ANNUAL RUSSELL TOTAL ASSETS(6) PERCENTAGE OF
TOTAL TOTAL 2000 NUMBER AT END OF FIRM ASSETS
YEAR RETURN (NET RETURN INDEX(4) OF DISPERSION(5) PERIOD
OF FEES)(3) (GROSS OF PORTFOLIOS ($ THOUSANDS)
FEES)(3)
---------------------------------------------------------------------------------------------------------
2012 14.01% 15.10% 16.35% 8 0.0% $186,032 40.62%
---------------------------------------------------------------------------------------------------------
2011 1.92% 2.91% -4.18% 10 0.1% $155,463 41.90%
---------------------------------------------------------------------------------------------------------
2010 29.99% 28.78% 26.85% 9 0.3% $184,575 49.60%
---------------------------------------------------------------------------------------------------------
2009 15.52% 16.67% 27.17% 17 0.8% $199,893 0.75%
---------------------------------------------------------------------------------------------------------
2008 -23.93% -23.15% -33.79% 20 0.6% $281,344 0.64%
---------------------------------------------------------------------------------------------------------
2007 3.13% 4.16% -1.57% 14 0.5% $274,233 0.49%
---------------------------------------------------------------------------------------------------------
2006 15.93% 17.08% 18.37% 17 0.6% $286,015 0.58%
---------------------------------------------------------------------------------------------------------
2005 10.69% 11.79% 4.55% 24 0.3% $380,000 0.29%
---------------------------------------------------------------------------------------------------------
2004 19.33% 20.51% 18.33% 25 0.6% $423,000 0.55%
---------------------------------------------------------------------------------------------------------
2003 43.28% 44.71% 47.25% 22 1.0% $352,000 0.98%
---------------------------------------------------------------------------------------------------------
2002 -7.18% -6.24% -20.48% 21 1.0% $261,000 1.01%
---------------------------------------------------------------------------------------------------------
2001 30.20% 31.48% 2.49% 12 1.4% $213,000 1.38%
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(1) The Composite: Portfolios included in the Composite seek to provide long-term growth of capital by investing in a diversified portfolio of equity securities of micro-capitalization ("micro cap") companies. The objective is to outperform the Russell 2000 Index ("Russell 2000" or "the Index") over a full market cycle, with attention to the risk relative to the benchmark. The Adviser defines micro-cap as, at time of initial purchase, one-half of the average dollar-weighted market capitalization of the Russell 2000 as determined on the re-constitution date of the Index (annually July 1). Prior to June 2000, the purchase maximum limit was set at a constant $250 million and not adjusted annually. Value is added by seeking attractively valued companies through solid fundamental research and a bottom-up stock picking approach.
The Composite includes fully discretionary portfolios and, prior to June 30, 1998, included a non-fee paying portfolio. The minimum portfolio value requirement for inclusion in the Composite initially was set at $3 million; however, the minimum value was removed in July 2008. The Composite was created in June 1998. The name of the Composite was changed from the Small Company Opportunities Composite in June 2003.
Performance results include all portfolios under the Adviser's management that meet the Composite definition. A portfolio is included in the Composite when it is deemed that the investments made by the Adviser fully reflect the intended investment strategy. Inclusion will occur by the later of (i) when a portfolio meets the minimum portfolio value for the Composite, if such minimum portfolio value was applicable at the time of inclusion, or (ii) the fifth monthly performance measurement period after the assets come under management. Closed portfolios are included through the last full month under management.
(2) Management has used a time-weighted, monthly linked rate of return formula with daily adjustments for cash flows, described below. The monthly rate of return for an eligible account is the percentage change in the market value of the account during the month, taking into account the effect of any cash additions or withdrawals that occur during the month. Such cash additions or withdrawals are accounted for using the modified Dietz method. The modified Dietz method weights each cash flow by the amount of time it is held in the portfolio. Management defines a significant cash flow as an account with monthly cash contributions or withdrawals in excess of 10% of the account value. If management determines that a significant cash flow disrupts the implementation of the investment style and strategy for the respective account, the account is temporarily removed from the Composite at the beginning of the month in which the significant cash flow occurs. The account is returned to the respective Composite the following month.
Additional information regarding the treatment of significant cash flows and the calculation of returns is available upon request.
Monthly Composite returns are calculated by asset weighting each account's monthly return based on the beginning-of-month market values. Each quarterly Composite rate of return is determined by compounding the asset-weighted monthly rates of return. The annual returns are computed by compounding the quarterly rates of return.
Performance results are net of execution costs, exclude the effect of all income taxes, and assume the reinvestment of all interest, dividends, and capital gains. Performance presented is based on returns in U.S. dollars. Investments are valued using an independent pricing source. Interest income is recorded as earned. Dividend income is recorded on the ex-dividend date.
Gross performance results do not reflect the deduction of management and custody fees, which will reduce the rates of return. The Adviser charges an annual investment advisory fee based on the account's average net asset value for the period. Fees are negotiable depending on the size of the account, but are generally in the range of 0.50% to 1.00% per annum. Standard management fee per annum for a separately managed account within this Composite is 1%. Management fees are billed quarterly in arrears and do not include custody fees.
(3) The Composite gross-of-fees returns shown include the reinvestment of income and the impact of transaction costs, but do not include the deduction of investment advisory fees or any other account expenses, such as custodial fees. Composite net-of-fee returns reflect the deduction of the maximum investment advisory fee as determined by the fee schedule. Composite net of fees returns are net of all fees, expenses and, if applicable, sales loads or placements fees. While actual portfolios incur transaction expenses, pay investment advisory fees, and may incur other account expenses, the benchmark index is shown without the impact of such charges. Annual fees for the Fundamental Micro Cap Core product are 1.00% of the market value of the assets under management. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size.
(4) The Russell 2000 is a market cap-weighted index that measures the performance of the 2,000 smallest stocks in the Russell 3000 index, an index that represents approximately 98% of the investable U.S. equity market. The Russell indices have been reconstituted annually since 1989.
(5) Composite dispersion measures the consistency of a firm's composite performance results with respect to the individual account returns within the composite for the full year. The dispersion of annual returns is measured by the standard deviation across asset-weighted portfolio returns represented within the Composite for a full year. For periods where less than five accounts were included in the Composite, standard deviation is not disclosed, as it is not considered meaningful.
(6) Total Assets are defined as assets of all investment advisory accounts of the Adviser.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase, sell (sometimes called "redeem") and exchange I Class and Investor Class Shares of the Fund.
I Class Shares are principally designed for purchase by institutional and individual investors who can meet a higher investment minimum. Investor Class Shares are principally designed for purchase by individual investors via various distribution channels with lower initial entry levels. Investor Class Shares have a lower investment minimum than I Class Shares and higher annual operating expenses than I Class Shares because they incur a Rule 12b-1 fee.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-855-4-ALPHAONE.
All initial investments must be made by check or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "AlphaOne Funds."
REGULAR MAIL ADDRESS
AlphaOne Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
AlphaOne Funds
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-855-4-ALPHAONE for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA#: 101000695
AlphaOne Funds
DDA# 9870523965
Ref: Fund name/account name/account number
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR "ACH") (INVESTOR CLASS SHARES ONLY)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually and annually in amounts of at least $100. To cancel or change a plan, write to the Fund at: AlphaOne Funds, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address: AlphaOne Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64015). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. The price per share will be the net asset value ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund (or an authorized institution) must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays --the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
MINIMUM PURCHASES
You can open an account with Investor Class or I Class Shares of the Fund with a minimum initial investment of $2,500 or $250,000, respectively. Subsequent investments of Investor Class or I Class Shares of the Fund must be made in amounts of at least $100 or $10,000, respectively. The Fund reserves the right to waive or reduce the minimum initial or subsequent investment amount in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase Investor Class and I Class Shares, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE -------------------------------------------------------------------------------- AlphaOne Micro Cap Equity Fund Investor Class AOMAX 00769G865 8610 I Class AOMCX 00769G857 8611 |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-855-4-ALPHAONE.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-855-4-ALPHAONE for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
AlphaOne Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
AlphaOne Funds
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY TELEPHONE
To redeem shares by telephone, you must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-855-4-ALPHAONE to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank via wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH) (INVESTOR CLASS SHARES ONLY)
If your account balance is at least $2,500, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Fund.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the effective date of your order. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in-kind). The Fund may also redeem in-kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $1,250 and $125,000 for Investor Class and I Class Shares, respectively, because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares. The Fund reserves the right to waive the minimum account value requirement in its sole discretion.
HOW TO EXCHANGE FUND SHARES
At no charge, you may exchange Investor Class or I Class Shares of one AlphaOne Fund for Investor Class or I Class Shares, respectively, of another AlphaOne Fund by writing to or calling the Fund. You may only exchange shares between accounts with identical registrations (i.e., the same names and addresses).
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Fund may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Fund. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
DISTRIBUTION OF FUND SHARES
The Fund has adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, for Investor Class Shares that allows the Fund to pay distribution and service fees for the sale and distribution of its shares, and for services provided to shareholders. Because these fees are paid out of the Fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The maximum annual distribution fee for Investor Class Shares of the Fund is 0.25%.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or its respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your
financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any Rule 12b-1 fees and/or shareholder servicing payments that are reflected in the fees and expenses listed in the fee table section of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" under the heading "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourage shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
In addition, because the Fund may invest in micro-cap securities, which often trade in lower volumes and may be less liquid, the Fund may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market prices of these types of securities.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than one (1) "round trip," including an exchange, into or out of the Fund within any 90-day period. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase or exchange orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 90 days (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase or exchange request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain
transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 2.00% redemption fee on redemptions of shares that have been held for less than 90 days. The fee is deducted from the sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly from the Fund or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that due to operational and systems limitations, intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's. Therefore, to the extent that financial intermediaries are unable to collect the redemption fee, the Fund may not be able to defray the expenses associated with those short-term trades made by that financial intermediary's customers.
The Fund reserves the right to waive its redemption fee at its discretion when
it believes such waiver is in the best interests of the Fund, including with
respect to certain categories of redemptions that the Fund reasonably believes
may not raise frequent trading or market timing concerns or where the financial
intermediary's processing systems are unable to properly apply the redemption
fee. These categories currently include, but are not limited to, the following:
(i) participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic withdrawals; and (v) retirement
loans and withdrawals.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if they are unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution. Dividends and distributions will automatically be reinvested in additional shares of the Fund, unless you elect to have the distributions paid in cash. To elect to receive your distribution in cash, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions made available by the Fund in cash after the Fund receives your notice. To cancel your election, simply send written notice to the Fund. Distributions from the Fund will be taxable to shareholders whether received in cash or reinvested in additional shares. Shareholders who reinvest distributions in the Fund will be required to pay taxes on such distributions from other resources.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally are treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the new cost basis reporting law applies
to them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The information is intended to help you understand the Fund's financial performance for the period of the Fund's operations. Some of this information reflects financial information for a single Fund share. The total return in the table represents the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm for the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling 1-855-4-ALPHAONE.
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ALPHAONE MICRO CAP EQUITY FUND
---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
---------------------------------------------------------------------------------------------------------
NET ASSET NET NET REALIZED TOTAL FROM DISTRIBUTIONS NET TOTAL
VALUE, INVESTMENT AND INVESTMENT FROM ASSET RETURN(3)
BEGINNING LOSS(2) UNREALIZED OPERATIONS REALIZED VALUE,
OF YEAR LOSSES ON GAINS END OF
INVESTMENTS YEAR
---------------------------------------------------------------------------------------------------------
I CLASS SHARES(1)
---------------------------------------------------------------------------------------------------------
2012 $9.06 $(0.04) $1.07 $1.03 $(0.22) $9.87 11.74%
---------------------------------------------------------------------------------------------------------
2011 $10.00 $(0.04) $(0.90) $(0.94) $ -- $9.06 (9.40)%
---------------------------------------------------------------------------------------------------------
INVESTOR CLASS SHARES(1)
---------------------------------------------------------------------------------------------------------
2012 $9.05 $(0.06) $1.05 $0.99 $(0.22) $9.82 11.30%
---------------------------------------------------------------------------------------------------------
2011 $10.00 $(0.05) $(0.90) $(0.95) $ -- $9.05 (9.50)%
---------------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
ALPHAONE MICRO CAP EQUITY FUND
--------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
NET RATIO OF RATIO OF RATIO OF PORTFOLIO
ASSETS, EXPENSES EXPENSES TO NET TURNOVER
END OF TO AVERAGE NET INVESTMENT RATE
YEAR AVERAGE ASSETS LOSS TO
(000) NET ASSETS (EXCLUDING AVERAGE
WAIVERS AND NET ASSETS
REIMBURSED
FEES)
--------------------------------------------------------------------------------
I CLASS SHARES(1)
--------------------------------------------------------------------------------
2012 $75,367 1.42% 1.81% (0.39)% 52%
--------------------------------------------------------------------------------
2011 $725 1.49%(4) 41.19%(4) (0.75)%(4) 37%(5)
--------------------------------------------------------------------------------
INVESTOR CLASS SHARES(1)
--------------------------------------------------------------------------------
2012 $223 1.67% 5.96% (0.64)% 52%
--------------------------------------------------------------------------------
2011 $101 1.74%(4) 41.59%(4) (1.00)%(4) 37%(5)
--------------------------------------------------------------------------------
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(1) Commenced operations on March 31, 2011.
(2) Calculation performed using average shares for the period.
(3) Total return is for the period indicated and has not been annualized.
Total return would have been lower had certain expenses not been waived or
assumed by the Adviser during the period. Returns shown do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or
the redemption of Fund shares.
(4) Annualized.
(5) Not Annualized.
Amounts designated as "___" are $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
ALPHAONE MICRO CAP EQUITY FUND
INVESTMENT ADVISER
AlphaOne Investment Services, LLC
One Tower Bridge
100 Front Street
Suite 1250
West Conshohocken, PA 19428
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-855-4-ALPHAONE
BY MAIL: Write to us at:
AlphaOne Funds
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.alphaonecapital.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
ACP-PS-001-0300
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
ALPHAONE U.S. EQUITY LONG SHORT FUND
INVESTOR CLASS SHARES (AORAX)
I CLASS SHARES (AORCX)
R CLASS SHARES (AORRX)
INVESTOR CLASS, I CLASS AND R CLASS SHARES
INVESTMENT ADVISER:
ALPHAONE INVESTMENT SERVICES, LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN
EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE
FUND, PLEASE SEE:
PAGE
ALPHAONE U.S. EQUITY LONG SHORT FUND
INVESTMENT OBJECTIVE .................................................. 1
FUND FEES AND EXPENSES ................................................ 1
PRINCIPAL INVESTMENT STRATEGIES ....................................... 2
PRINCIPAL RISKS ....................................................... 4
PERFORMANCE INFORMATION ............................................... 7
INVESTMENT ADVISER .................................................... 8
PORTFOLIO MANAGERS .................................................... 8
PURCHASE AND SALE OF FUND SHARES ...................................... 8
TAX INFORMATION ....................................................... 9
PAYMENTS TO BROKER-DEALERS AND OTHER
FINANCIAL INTERMEDIARIES COMPENSATION ............................... 9
MORE INFORMATION ABOUT RISK ................................................ 10
MORE INFORMATION ABOUT THE FUND'S INVESTMENTS .............................. 11
INFORMATION ABOUT PORTFOLIO HOLDINGS ....................................... 11
INVESTMENT ADVISER ......................................................... 11
PORTFOLIO MANAGERS ......................................................... 12
PURCHASING, SELLING AND EXCHANGING FUND SHARES ............................. 12
DISTRIBUTION OF FUND SHARES ................................................ 19
SHAREHOLDER SERVICING ARRANGEMENTS ......................................... 19
PAYMENTS TO FINANCIAL INTERMEDIARIES ....................................... 19
OTHER POLICIES ............................................................. 20
DIVIDENDS AND DISTRIBUTIONS ................................................ 23
TAXES ...................................................................... 23
FINANCIAL HIGHLIGHTS ....................................................... 25
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................... Back Cover
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ALPHAONE U.S. EQUITY LONG SHORT FUND
INVESTMENT OBJECTIVE
The investment objective of the AlphaOne U.S. Equity Long Short Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Redemption Fee (as a percentage of amount redeemed, if shares redeemed have been held for less than 90 days) 2.00%
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INVESTOR CLASS R CLASS
I CLASS SHARES SHARES SHARES
-------------- -------------- -------
Management Fees 1.25% 1.25% 1.25%
12b-1 Fees None 0.25% 0.25%
Other Expenses
Dividend and Interest Expense on Securities Sold Short 0.84% 0.84% 0.84%
Shareholder Servicing Fees None None 0.25%
Other Operating Expenses 5.29% 3.59% 5.40%
-----
Total Other Expenses 6.13% 4.43% 6.49%
Acquired Fund Fees and Expenses 0.13% 0.13% 0.13%
-----
Total Annual Fund Operating Expenses(1) 7.51% 6.06% 8.12%
Less Fee Reductions and/or Expense Reimbursements (4.54)% (2.84)% (4.65%)
-----
Total Annual Fund Operating Expenses after Fee 2.97% 3.22% 3.41%
Reductions and/or Expense Reimbursements(1,2)
|
(1) The Total Annual Fund Operating Expenses in this fee table, both before and after fee reductions and/or expense reimbursements, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) AlphaOne Investment Services, LLC (the "Adviser") has contractually agreed
to reduce fees and reimburse expenses to the extent necessary to keep Total
Annual Fund Operating Expenses after Fee Reductions and/or Expense
Reimbursements (excluding 12b-1 Fees, Shareholder Servicing Fees, interest,
dividend and interest expense on securities sold short, taxes, brokerage
commissions, Acquired Fund Fees and Expenses, and extraordinary expenses
(collectively, "excluded expenses")) from exceeding 2.00% of the Fund's
average daily net assets until March 1, 2014. In addition, if at any point
Total Annual Fund Operating Expenses (not including excluded expenses) are
below the expense cap, the Adviser may retain the difference between the
Total Annual Fund Operating Expenses (not including excluded expenses) and
the expense cap to recover all or a portion of its prior fee reductions or
expense reimbursements made during the preceding three-year period during
which this agreement was in place. This agreement may be terminated: (i) by
the Board, for any reason at any time, or (ii) by the Adviser, upon ninety
(90) days' prior written notice to the Trust, effective as of the close of
business on March 1, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
I Class Shares $300 $1,794 $3,214 $6,465
Investor Class Shares $325 $1,545 $2,740 $5,618
R Class Shares $350 $1,946 $3,444 $6,800
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the most recent fiscal year, the Fund's portfolio turnover was 1,183% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
AlphaOne Investment Services, LLC (the "Adviser"), the Fund's adviser, seeks to achieve long-term capital appreciation for the Fund by investing long and short in publicly-traded equity securities and listed options based on a fundamental research process and a hedged portfolio discipline. In selecting securities for the Fund, the Adviser seeks to create a portfolio that generates positive absolute returns with low correlation and low volatility when compared to the broad equity market.
The Fund buys long and sells short positions in common stocks, American Depository Receipts (ADRs), exchange traded funds (ETFs), and listed options contracts on common equity securities, ADRs, indices and ETFs. The Fund may invest in equity securities of firms of any market capitalization and across multiple industry sectors. To hedge the Fund's exposure to certain sectors, the Fund may invest in ETFs designed to provide investment results that match a positive or negative multiple of the performance of an underlying index.
With a long position, the Fund purchases a security outright; with a short position, the Fund sells a security that it has borrowed. When the Fund sells a security short, it borrows the security from a third party and sells it at the then current market price. The Fund is then obligated to buy the security at a later date so that it can return the security to the lender. Short positions are used to hedge long positions and to seek positive returns in instances where the Adviser believes a security's price will decline. The Fund will either realize a profit or incur a loss from a short position, depending on whether the value of the underlying stock decreases or increases, respectively, between the time it is sold and when the Fund replaces the borrowed security.
The Fund's maximum gross equity market exposure (long market value + short market value) is 200%. The Fund may reinvest the proceeds of its short sales by taking additional long positions, thus allowing the Fund to maintain long positions in excess of 100% of its net assets.
The Fund's expected net equity market exposure (long market value -- short market value) is variable within a targeted range of -10% to +30%.
The Adviser employs a systematic fundamental research process to select securities for long and short positions in the Fund. This research process includes quantitative evaluation, proprietary firm-level modeling, and primary fundamental research which may include meetings with firm management, due diligence visits to factories and key physical assets, reference checks, and interviews with a firm's customers, competitors and suppliers, where appropriate. On behalf of the Fund, the Adviser buys and/or covers short positions in securities that are identified as undervalued and sells and/or takes short positions in securities that are identified as overvalued.
The Adviser's research focuses on elements of fundamental change in firms and industry sectors, including changes in: management, strategy, regulation, business mix (through acquisition and divestitures, new introductions), product cycles (and obsolescence), capital structure, balance sheet, access to credit, competitive dynamics (including changes in pricing and new competitors), input costs, and other fundamental factors. The Adviser attempts to forecast how these types of fundamental dynamics may drive revisions to expectations for a firm's growth rates, earnings and cash flow, and possible revaluation of the equity security. The Adviser develops and maintains proprietary models to (i) test the sensitivity of earnings forecasts to changes in assumptions around growth rates, expenditures, margins and other fundamental factors and (ii) compare versus consensus expectations. The Adviser considers valuations relative to a firm's historical and forecasted earnings, cash flows, assets and other metrics as well as relative to a firm's own valuation history and mean and extreme valuations of comparable firms. Modeling and valuation analysis are critical steps for the Adviser in characterizing a candidate position as overvalued or undervalued and developing an expected target price for active and candidate positions in the Fund. The Adviser seeks to anticipate event paths for potential revaluation and trades actively to increase/decrease long and short position sizing accordingly. The Adviser will sell (close) a long position or buy (cover) a short position for the Fund as expectancy of the investment idea diminishes due to a favorable revaluation of the security and/or if new fundamental developments change the expectancy of the investment idea in a negative direction.
When considering new investment ideas for the Fund and overall portfolio risk exposures, the Adviser evaluates the suitability of multiple position structures and hedges. The Adviser's goal in constructing the portfolio is to balance long and short position exposures to maintain low net directional exposure to the equity market overall and to factors such as economic sector, security liquidity, and geographic risks in particular.
Listed options are employed strategically to pursue certain asymmetric risk/reward returns (also known as speculation) and to hedge other exposures in the portfolio. The Adviser will not write uncovered or "naked options" which would expose the Fund to undefined loss scenarios.
The Fund may be largely or completely un-invested for short periods of time. The Adviser believes the option to reduce capital at risk is a critical tool in protecting investor capital in certain market environments. Even for short periods of time in typical market environments, the Adviser favors protecting capital rather than risking exposure in marginal or low-conviction opportunities.
Under normal circumstances, the Fund invests 80% of its assets, plus any borrowings for investment purposes, in U.S. equity securities. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. For purposes of the Fund's 80% investment policy in U.S. equity securities, the Adviser considers (i) a U.S. company to be a company (a) that has been organized under the laws of, or has a principal place of business in, the United States, (b) that derives at least 50% of its revenues or profits from goods produced or sold, investments made, or services performed in the United States, or (c) whose principal trading market for its securities is in the United States; and (ii) equity securities to include financial instruments with economic characteristics that are driven by the performance of an equity security, including listed options. In addition, the Fund may invest up to 20% of its assets in securities of foreign companies, including direct investments and through ADRs.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid- capitalization stocks may be more volatile than those of larger companies. These securities may be traded over the counter or listed on an exchange.
INVESTMENTS IN ETFS RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based, and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
LEVERAGED ETF RISK -- Leveraged ETFs contain all of the risks that non-leveraged ETFs present. Additionally, to the extent the Fund invests in ETFs that achieve leveraged exposure to their underlying indexes through the use of derivative instruments, the Fund will indirectly be subject to leveraging risk. The more these ETFs invest in derivative instruments that give rise to leverage, the more this leverage will magnify any losses on those investments. Leverage will cause the value of an ETF's shares and, to the extent the Fund invests in such ETFs, the Fund's shares, to be more volatile than if the ETF did not use leverage. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of an ETF's portfolio securities or other investments. A leveraged ETF will engage in transactions and purchase instruments that give rise to forms of leverage. Such transactions and instruments may include, among others, the use of reverse repurchase agreements and other borrowings, the investment of collateral from loans of portfolio securities, the use of when issued, delayed-delivery or forward commitment transactions or short sales. The use of leverage may also cause a leveraged ETF to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations or to meet segregation requirements. Certain types of leveraging transactions, such as short sales that are not "against the box," could theoretically be subject to unlimited losses in cases where a leveraged ETF, for any reason, is unable to close out the transaction. In addition, to the extent a leveraged ETF borrows money, interest costs on such borrowed money may not be recovered by any appreciation of the securities purchased with the borrowed funds and could exceed the ETF's investment income, resulting in greater losses. The value of a leveraged ETF's shares will tend to increase or decrease more than the value of any increase or decrease in its underlying index due to the fact that the ETF's investment strategies involve consistently applied leverage. Such ETFs often "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. This effect may be enhanced during the periods of increased market volatility. Consequently, leveraged ETFs may not be suitable as long-term investments.
INVERSE ETF RISK -- Inverse ETFs contain all of the risks that regular ETFs present. Additionally, to the extent the Fund invests in ETFs that seek to provide investment results that match a negative multiple of the performance of an underlying index, the Fund will indirectly be subject to the risk that the performance of such ETF will fall as the performance of that ETF's benchmark rises -- a result that is the opposite from traditional mutual funds.
LEVERAGED INVERSE ETF RISK -- Leveraged inverse ETFs contain all of the risks that regular ETFs present. Additionally, these unique ETFs also pose all of the risks associated with other leveraged ETFs as well as other inverse ETFs. These investment vehicles are extremely volatile and can expose the Fund to theoretically unlimited losses.
SHORT SALES RISK -- Short sales are transactions in which the Fund sells a security it does not own. The Fund must borrow the security to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be higher or lower than the price at which the security was sold by the Fund. If the underlying security goes down in price between the time the Fund sells the security and buys it back, the Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, the Fund will realize a loss on the transaction. Because the market price of the security sold short could increase without limit, the Fund could be subject to a theoretically unlimited loss. The risk of such price increases is the principal risk of engaging in short sales.
In addition, the Fund's investment performance may suffer if the Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required the Fund to deliver the securities the Fund borrowed at the commencement of the short sale and the Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. Moreover, the Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Fund's open short positions. These expenses negatively impact the performance of the Fund. For example, when the Fund short sells an equity security that pays a dividend, it is obligated to pay the dividend on the security it has sold. However, a dividend paid on a security sold short generally reduces the market value of the shorted security and thus, increases the Fund's unrealized gain or reduces the Fund's unrealized loss on its short sale transaction. To the extent the dividend that the Fund is obligated to pay is greater than the return earned by the Fund on investments, the performance of the Fund will be negatively impacted. Furthermore, the Fund may be required to pay a premium or interest to the lender of the security. The foregoing types of short sale expenses are sometimes referred to as the "negative cost of carry," and will tend to cause the Fund to lose money on a short sale even in instances where the price of the underlying security sold short does not change over the duration of the short sale. The Fund is also required to segregate other assets on its books to cover its obligation to return the security to the lender which means that those other assets may not be available to meet the Fund's needs for immediate cash or other liquidity.
DERIVATIVES RISK -- The Fund may invest in derivatives. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold. When used for speculation purposes, derivative instruments are subject to the risk that the underlying asset may not perform as expected. The lack of a liquid secondary market for a derivative may prevent the Fund from closing its derivative positions and could adversely impact its ability to achieve its objective and to realize profits or limit losses. Since derivatives may be purchased for a fraction of their value, a relatively small price movement in a derivative may result in an immediate and substantial loss or gain to the Fund. Derivatives are often more volatile than other investments and the Fund may lose more in a derivative than it originally invested in it. There can be no assurance that the Adviser's use of derivatives will be successful in achieving their intended goals.
Additionally, derivative instruments, particularly market access products, are subject to counterparty risk, meaning that the party that issues the derivative may experience a significant credit event and may be unwilling or unable to make timely settlement payments or otherwise honor its obligations.
The Fund may purchase or sell options, which involve the payment or receipt of a premium by the investor and the corresponding right or obligation, as the case may be, to either purchase or sell the underlying security for a specific price at a certain time or during a certain period. Purchasing options involves the risk that the underlying instrument will not change price in the manner expected, so that the investor loses its premium. Selling options involves potentially greater risk because the investor is exposed to the extent of the actual price movement in the underlying security rather than only the premium payment received (which could result in a potentially unlimited loss). Over-the-counter options also involve counterparty risk.
HEDGING RISK -- The Fund may use derivative instruments for hedging purposes. Hedging through the use of these instruments does not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. While entering into these instruments tends to reduce the risk of loss due to a decline in the value of the hedged asset, such instruments also limit any potential gain that may result from the increase in value of the asset. To the extent that the Fund engages in hedging strategies, there can be no assurance that such strategy will be effective or that there will be a hedge in place at any given time.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies generally are denominated in a foreign currency. Changes in the value of a currency compared to the U.S. dollar may affect (positively or negatively) the value of the Fund's investments. These currency movements may occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with directly investing in foreign securities.
EMERGING MARKET SECURITIES RISK -- In addition to the general risks of investing in non-U.S. securities, investments in emerging markets securities are considered speculative and subject to heightened risks. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, emerging markets securities may be subject to smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund by showing how the Fund's average annual returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-855-4-ALPHAONE.
TOTAL RETURNS BY CALENDAR YEAR
2012 (16.54)%
BEST QUARTER WORST QUARTER
------------ -------------
2.41% (7.83)%
(09/30/2012) (06/30/2012)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown only for I Class Shares. After-tax returns for Investor Class and R Class Shares will vary.
Returns after taxes on distributions and sale of Fund shares may be higher than before-tax returns when a net capital loss occurs upon the redemption of Fund shares.
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SINCE INCEPTION
ALPHAONE U.S. EQUITY LONG SHORT FUND 1 YEAR (03/31/11)
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FUND RETURNS BEFORE TAXES
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I Class Shares (16.54)% (7.42)%
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Investor Class Shares (16.77)% (7.66)%
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R Class Shares (17.00% (7.91)%
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FUND RETURNS AFTER TAXES ON DISTRIBUTIONS
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I Class Shares (16.54)% (7.96)%
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FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF
FUND SHARES
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I Class Shares (10.75)% (6.55)%
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S&P 500 INDEX (REFLECTS NO DEDUCTION FOR FEES, 16.00% 6.60%
EXPENSES, OR TAXES)
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|
INVESTMENT ADVISER
AlphaOne Investment Services, LLC
PORTFOLIO MANAGERS
Karl Richter, Portfolio Manager, has managed the Fund since its inception.
Michael Gleason, Portfolio Manager, has managed the Fund since November 2012.
PURCHASE AND SALE OF FUND SHARES
To purchase Investor Class, I Class or R Class Shares of the Fund for the first time, you must invest at least $2,500, $250,000 or $2,500, respectively. Subsequent investments of Investor Class, I Class or R Class Shares of the Fund must be made in amounts of at least $100, $10,000 or $100, respectively.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at: AlphaOne Funds,
P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: AlphaOne Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or by telephone at 1-855-4-ALPHAONE.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with other investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which it trades. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
EQUITY RISK -- Equity securities in which the Fund invests include publicly and privately issued equity securities, common and preferred stocks, warrants, shares of ADRs and rights to subscribe to common stock and convertible securities. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stockholders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN SECURITY RISK -- The Fund's investments in securities of foreign companies (including direct investments as well as investments through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT THE FUND'S INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in cash, money market instruments or other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will do so only if the Adviser believes that the risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategies and risks, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, the 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 the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that the Fund will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
INVESTMENT ADVISER
AlphaOne Investment Services, LLC, a Delaware limited liability company formed in 2008, serves as the investment adviser to the Fund. The Adviser is a wholly owned subsidiary of AlphaOne Capital Partners, which in turn, is a wholly owned subsidiary of AlphaOne Holding, LLC, a private company owned by Paul J. Hondros. The Adviser's principal place of business is located at One Tower Bridge, 100 Front Street, Suite 1250, West Conshohocken, PA 19428. As of December 31, 2012, the Adviser had approximately $458 million in assets under management.
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board of Trustees of the Trust (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
For its services to the Fund, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.25% based on the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep the Fund's net operating expenses (excluding 12b-1 Fees, Shareholder Servicing Fees, interest, dividend and interest expense on securities sold short, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 2.00% of the Fund's average daily net assets until March 1, 2014. In addition, if at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Fund's total annual Fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. For the fiscal year ended October 31, 2012, the Fund did not pay advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
INVESTMENT TEAM
The Fund is managed by a team of investment professionals. The following portfolio managers are jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Karl Richter has been with the Adviser since March 2009 and has more than 14 years of professional investment experience, including more than 12 years in fundamental long/short equity investment strategies. He is part of the founding investment team at the Adviser and serves as a Senior Portfolio Manager. Prior to joining the Adviser, Mr. Richter was a portfolio manager and research analyst at Susquehanna International Group and SAC Capital Advisors. He was also previously an equity research analyst at Lehman Brothers and Robertson Stephens. Mr. Richter earned a B.S. in Mechanical Engineering from the Massachusetts Institute of Technology.
Michael Gleason has been with the Adviser since September 2011 and has more than 17 years of professional investment experience, including more than 12 years in portfolio management roles. He serves as Senior Portfolio Manager for AlphaOne Capital Partners. Prior to joining the Adviser, Mr. Gleason was a partner and the Global Head of Quantitative Strategies at Gartmore Global Partners. He also previously served as a research analyst at Putnam Investment and State Street Global Advisors. Mr. Gleason earned his B.S. in Management Science from Bridgewater State University and an M.S. in Finance from Northeastern University.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase, sell (sometimes called "redeem") and exchange Investor Class, I Class and R Class Shares of the Fund.
I Class Shares are principally designed for purchase by institutional and individual investors who can meet a higher investment minimum. Investor Class and R Class Shares are principally designed for purchase by individual and retail investors via various distribution channels with lower initial entry levels. Investor Class Shares have a lower investment minimum than I Class Shares and higher annual operating expenses than I Class Shares because they incur a Rule 12b-1 fee.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-855-4-ALPHAONE.
All initial investments must be made by check or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "AlphaOne Funds."
REGULAR MAIL ADDRESS
AlphaOne Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
AlphaOne Funds
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-855-4-ALPHAONE for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA#: 101000695
AlphaOne Funds
DDA# 9870523965
Ref: Fund name/account name/account number
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR "ACH") (INVESTOR CLASS AND and R CLASS SHARES ONLY)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually and annually in amounts of at least $100. To cancel or change a plan, write to the Fund at: AlphaOne Funds, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address: AlphaOne Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64015). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. The price per share will be the net asset value ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund (or an authorized institution) must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays --the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available. The respective prospectuses for the open-end investment companies in which the Fund invests explain the circumstances in which those investment companies will use fair value pricing and the effect of fair value pricing.
Redeemable securities issued by open-end investment companies are valued at the investment company's applicable net asset value.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
MINIMUM PURCHASES
You can open an account with Investor Class, I Class or R Class Shares of the Fund with a minimum initial investment of $2,500, $250,000 or $2,500, respectively. Subsequent investments of Investor Class, I Class or R Class Shares of the Fund must be made in amounts of at least $100, $10,000 or $100, respectively. The Fund reserves the right to waive or reduce the minimum initial or subsequent investment amount in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase Investor Class, I Class and R Class Shares check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE --------- ------------- --------- --------- AlphaOne U.S. Equity Long Short Fund Investor Class AORAX 00769G832 8616 I Class AORCX 00769G824 8617 R Class AORRX 00769G816 8618 |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-855-4-ALPHAONE.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-855-4-ALPHAONE for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
AlphaOne Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
AlphaOne Funds
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY TELEPHONE
To redeem shares by telephone, you must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-855-4-ALPHAONE to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank via wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH) (INVESTOR CLASS AND R CLASS SHARES ONLY)
If your account balance is at least $2,500, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Fund.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the effective date of your order. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in-kind). The Fund may also redeem in-kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $1,250, $125,000 or $1,250 for Investor Class, I Class and R Class Shares, respectively, because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares. The Fund reserves the right to waive the minimum account value requirement in its sole discretion.
HOW TO EXCHANGE FUND SHARES
At no charge, you may exchange Investor Class, I Class or R Class Shares of one AlphaOne Fund for Investor Class, I Class or R Class Shares, respectively, of another AlphaOne Fund by writing to or calling the Fund. You may only exchange shares between accounts with identical registrations (i.e., the same names and addresses).
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Fund may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Fund. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
DISTRIBUTION OF FUND SHARES
The Fund has adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, for Investor Class and R Class Shares that allows the Fund to pay distribution and service fees for the sale and distribution of its shares, and for services provided to shareholders. Because these fees are paid out of the Fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The maximum annual distribution fee for Investor Class Shares of the Fund is 0.25% .
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or its respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Fund has adopted a shareholder servicing plan for R Class Shares that provides that the Fund may pay financial intermediaries for shareholder services in an amount not to exceed 0.25% based on the average daily net assets of the Fund's R Class Shares. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to the Fund's shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any Rule 12b-1 fees and/or shareholder servicing payments that are reflected in the fees and expenses listed in the fee table section of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" under the heading "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourage shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
In addition, because the Fund may invest in small- and mid-cap securities, which often trade in lower volumes and may be less liquid, the Fund may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market prices of these types of securities.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than one (1) "round trip," including an exchange, into or out of the Fund within any 90-day period. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase or exchange orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 90 days (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase or exchange request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 2.00% redemption fee on redemptions of shares that have been held for less than 90 days. The fee is deducted from the sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly from the Fund or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that due to operational and systems limitations,
intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's. Therefore, to the extent that financial intermediaries are unable to collect the redemption fee, the Fund may not be able to defray the expenses associated with those short-term trades made by that financial intermediary's customers.
The Fund reserves the right to waive its redemption fee at its discretion when
it believes such waiver is in the best interests of the Fund, including with
respect to certain categories of redemptions that the Fund reasonably believes
may not raise frequent trading or market timing concerns or where the financial
intermediary's processing systems are unable to properly apply the redemption
fee. These categories currently include, but are not limited to, the following:
(i) participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic withdrawals; and (v) retirement
loans and withdrawals.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if they are unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution. Dividends and distributions will automatically be reinvested in additional shares of the Fund, unless you elect to have the distributions paid in cash. To elect to receive your distribution in cash, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions made available by the Fund in cash after the Fund receives your notice. To cancel your election, simply send written notice to the Fund. Distributions from the Fund will be taxable to shareholders whether received in cash or reinvested in additional shares. Shareholders who reinvest distributions in the Fund will be required to pay taxes on such distributions from other resources.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are now subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the new cost basis reporting law applies
to them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The information is intended to help you understand the Fund's financial performance for the period of the Fund's operations. Some of this information reflects financial information for a single Fund share. The total return in the table represents the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm for the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling 1-855-4-ALPHAONE.
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ALPHAONE U.S. EQUITY LONG/SHORT FUND
------------------------------------------------------------------------------------------------------------------------
INCOME AND INVESTMENT
OPERATIONS
------------------------------------------------------------------------------------------------------------------------
NET ASSET NET NET REALIZED TOTAL FROM DISTRIBUTIONS REDEMPTION NET TOTAL NET
VALUE, INVESTMENT AND INVESTMENT FROM FEES(7) ASSET RETURN(3) ASSETS,
BEGINNING LOSS(2) UNREALIZED OPERATIONS REALIZED VALUE, END OF
OF PERIOD GAIN (LOSS) ON GAINS END OF PERIOD
INVESTMENTS PERIOD (000)
------------------------------------------------------------------------------------------------------------------------
I CLASS SHARES(1)
------------------------------------------------------------------------------------------------------------------------
2012 $10.53 $(0.17) $(1.49) $(1.66) $(0.31) $ --(6) $8.56 (16.23)% $927
------------------------------------------------------------------------------------------------------------------------
2011 $10.00 $(0.20) $0.73 $0.53 $ -- $ -- $10.53 5.30% $1,467
------------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS SHARES(1)
------------------------------------------------------------------------------------------------------------------------
2012 $10.52 $(0.19) $(1.49) $(1.68) $(0.31) $ --(6) $8.53 (16.44)% $9,463
------------------------------------------------------------------------------------------------------------------------
2011 $10.00 $(0.22) $0.74 $0.52 $ -- $ -- $10.52 5.20% $368
------------------------------------------------------------------------------------------------------------------------
R CLASS SHARES(1)
------------------------------------------------------------------------------------------------------------------------
2012 $10.50 $(0.21) $(1.49) $(1.70) $(0.31) $ -- $8.49 (16.67)% $88
------------------------------------------------------------------------------------------------------------------------
2011 $10.00 $(0.23) $0.73 $0.50 $ -- $ -- $10.50 5.00% $116
------------------------------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
ALPHAONE U.S. EQUITY LONG/SHORT FUND
--------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
RATIO OF RATIO OF RATIO OF PORTFOLIO
EXPENSES EXPENSES TO NET TURNOVER
TO AVERAGE AVERAGE NET INVESTMENT RATE
NET ASSETS ASSETS LOSS TO
(INCLUDING (EXCLUDING AVERAGE
WAIVERS WAIVERS AND NET ASSETS(4)
AND REIMBURSED REIMBURSED
FEES AND PRIME FEES AND
BROKER FEES AND INCLUDING
AND DIVIDEND PRIME BROKER
EXPENSE)(8) FEES AND
DIVIDEND EXPENSE)
--------------------------------------------------------------------------------
I CLASS SHARES(1)
--------------------------------------------------------------------------------
2012 2.84% 7.38% (1.77)% 1,183%
--------------------------------------------------------------------------------
2011 3.73%(4) 40.90%(4) (3.33)%(4) 597%(5)
--------------------------------------------------------------------------------
INVESTOR CLASS SHARES(1)
--------------------------------------------------------------------------------
2012 3.09% 5.93% (2.05)% 1,183%
--------------------------------------------------------------------------------
2011 3.99%(4) 40.65%(4) (3.72)%(4) 597%(5)
--------------------------------------------------------------------------------
R CLASS SHARES(1)
--------------------------------------------------------------------------------
2012 3.34% 7.98% (2.19)% 1,183%
--------------------------------------------------------------------------------
2011 4.23%(4) 41.53%(4) (3.81)%(4) 597%(5)
--------------------------------------------------------------------------------
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(1) Commenced operations on March 31, 2011.
(2) Calculation performed using average shares for the period.
(3) Total return is for the period indicated and has not been annualized. Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
(4) Annualized.
(5) Not annualized.
(6) Amounts designated as "--" are either $0 or have been rounded to $0.
(7) See Note 2 in the "Notes to Financial Statements" in the 2012 Annual Report.
(8) Excluding dividend expense and prime broker fees on securities sold short, the ratio of expenses to average net assets would have been 2.00%, 2.25% and 2.50% for I Class Shares, Investor Class Shares and R Class Shares, respectively, for both the year ended October 31, 2012 and the period ended October 31, 2011.
THE ADVISORS' INNER CIRCLE FUND
ALPHAONE U.S. EQUITY LONG SHORT FUND
INVESTMENT ADVISER
AlphaOne Investment Services, LLC
One Tower Bridge
100 Front Street
Suite 1250
West Conshohocken, PA 19428
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the AlphaOne U.S. Equity Long Short Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-855-4-ALPHAONE
BY MAIL: Write to us at:
AlphaOne Funds
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.alphaonecapital.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
ACP-PS-002-0400
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
CBRE CLARION LONG/SHORT FUND
INSTITUTIONAL CLASS SHARES (CLSIX)
INSTITUTIONAL CLASS SHARES
INVESTMENT ADVISER:
CBRE CLARION SECURITIES LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
CBRE CLARION LONG/SHORT FUND
INVESTMENT OBJECTIVE ........................................1
FUND FEES AND EXPENSES ......................................1
PRINCIPAL INVESTMENT STRATEGIES .............................2
PRINCIPAL RISKS .............................................3
PERFORMANCE INFORMATION .....................................7
INVESTMENT ADVISER ..........................................8
PORTFOLIO MANAGERS ..........................................8
PURCHASE AND SALE OF FUND SHARES ............................8
TAX INFORMATION .............................................9
PAYMENTS TO BROKER-DEALERS AND OTHER
FINANCIAL INTERMEDIARIES COMPENSATION .......................9
MORE INFORMATION ABOUT RISK ......................................10
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE
AND INVESTMENTS ..................................................11
INFORMATION ABOUT PORTFOLIO HOLDINGS .............................11
INVESTMENT ADVISER ...............................................11
PORTFOLIO MANAGERS ...............................................12
PURCHASING SELLING AND EXCHANGING FUND SHARES ....................12
SHAREHOLDER SERVICING ARRANGEMENTS ...............................19
PAYMENTS TO FINANCIAL INTERMEDIARIES .............................20
OTHER POLICIES ...................................................20
DIVIDENDS AND DISTRIBUTIONS ......................................24
TAXES ............................................................24
FINANCIAL HIGHLIGHTS .............................................26
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................Back Cover
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CBRE CLARION LONG/SHORT FUND
INVESTMENT OBJECTIVE
The investment objective of the CBRE Clarion Long/Short Fund (the "Fund") is to provide total return, consisting of capital appreciation and current income, while attempting to preserve capital and mitigate risk by employing hedging strategies, primarily short selling.
FUND FEES AND EXPENSES
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Redemption Fee (as a percentage of amount redeemed, if shares redeemed have been held for less than 60 days) 2.00%
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INSTITUTIONAL
CLASS SHARES
Management Fees 1.25%
Other Expenses
Dividend, Interest and Stock Loan Expense on Securities Sold Short 3.34%
Other Operating Expenses 0.40%
Total Other Expenses 3.74%
Acquired Fund Fees and Expenses 0.02%
Total Annual Fund Operating Expenses(1) 5.01%
Less Fee Reductions and/or Expense Reimbursements(2) (0.01)%
Total Annual Fund Operating Expenses after Fee Reductions 5.00%
and/or Expense Reimbursements(1,2)
|
(1) The Total Annual Fund Operating Expenses in this fee table, both before and after fee reductions and/or expense reimbursements, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) CBRE Clarion Securities LLC (the "Adviser") has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep Total Annual Fund Operating Expenses after Fee Reductions and/or Expense Reimbursements (excluding interest, dividend, interest and stock loan expense on securities sold short, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.64% of the Fund's Institutional Class Shares' average daily net assets until February 28, 2014 (the "contractual expense limit"). In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the contractual expense limit, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the contractual expense limit to recover all or a portion of its fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. This agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$500 $1,502 $2,504 $5,007
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from December 30, 2011 to October 31, 2012, the Fund's portfolio turnover rate was 90% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objective by taking long and short positions in equity securities of companies that are principally engaged in the real estate industry ("real estate companies"). CBRE Clarion Securities LLC (the "Adviser"), the Fund's adviser, defines a real estate company as a company that derives its intrinsic value from owning, operating, leasing, developing, managing, brokering and/or selling commercial or residential real estate, land or infrastructure. Real estate companies include, for example, real estate investment trusts ("REITs"). To take a long position, the Fund purchases a security outright; with a short position, the Fund sells a security that it has borrowed. When the Fund sells a security short, it borrows the security from a third party and sells it at the then current market price. The Fund is then obligated to buy the security on a later date so that it can return the security to the lender. Short positions may be used either to hedge long positions or to seek positive returns in instances where the Adviser believes a security's price will decline. The Fund will either realize a profit or incur a loss from a short position, depending on whether the value of the underlying stock decreases or increases, respectively, between the time it is sold and the time when the Fund replaces the borrowed security. The Fund may reinvest the proceeds of its short sales by taking additional long positions, thus allowing the Fund to maintain long positions in excess of 100% of its net assets. The Adviser varies the Fund's long and short exposures over time, based on its assessment of market conditions and other factors, but expects the Fund to maintain net-long exposure over multi-year periods.
While the Fund expects to invest primarily in common stock, it may also invest in other equity securities including preferred stocks, shares of exchange-traded funds, convertible securities, and rights or warrants to buy common stocks. The Fund may also create short positions in ETFs. In addition, the Fund may invest in exchange-traded options (i) as tools in the management of portfolio assets, (ii) to hedge various investments for risk management and/or (iii) for income enhancement, which is also known as speculation.
The Fund may invest in securities of companies of any market capitalization and, as a general matter, the Fund expects its investments to be primarily in equity securities issued by U.S. companies. However, the Fund may invest up to 50% of its assets in securities of non-U.S. issuers, including emerging market issuers, denominated in U.S. dollars, non-U.S. currencies or multinational currency units. The Fund is non-diversified, meaning that it may invest a large percentage of its assets in a single issuer or a relatively small number of issuers.
The Adviser utilizes a multi-step investment process for constructing the Fund's investment portfolio that combines top-down region and sector allocation with bottom-up individual stock selection. The Adviser first selects property sectors and geographic regions in which to invest, and determines the degree of representation of such sectors and regions, through a systematic evaluation of listed and direct real estate market trends and conditions. The Adviser then uses an in-house valuation process to identify investments that it believes demonstrate superior current income and growth potential relative to their peers. The Adviser's in-house valuation process examines several factors, including the value and quality of a company's properties, its capital structure, its strategy and the ability of its management team. Short positions are an important part of the Fund's investment strategy. Short selling is expected to contribute to performance as well as to help preserve capital during declines in the real estate securities market. Companies that are valued poorly using the Adviser's in-house process are considered for short positions, although the Adviser also considers a company's size relative to its property sector or geographic region, as well as its liquidity. The Fund may buy and sell investments frequently, which could result in a high portfolio turnover rate.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices will fall over short or extended periods of time. This is true despite the Fund's strategy to employ short positions as a means to help preserve capital and mitigate risk. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund. This risk is greater for small- and medium-sized companies, which tend to be more vulnerable to adverse developments than larger companies.
SHORT SALES RISK -- Short sales are transactions in which the Fund sells a security it does not own. The Fund must borrow the security to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be higher or lower than the price at which the security was sold by the Fund. If the underlying security goes down in price between the time the Fund sells the security and buys it back, the Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, the Fund will realize a loss on the transaction. Because the market price of the security sold short could increase without limit, the
Fund could be subject to a theoretically unlimited loss. The risk of such price increases is the principal risk of engaging in short sales.
In addition, the Fund's investment performance may suffer if the Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required the Fund to deliver the securities the Fund borrowed at the commencement of the short sale and the Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. Moreover, the Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Fund's open short positions. These expenses negatively impact the performance of the Fund. For example, when the Fund short sells an equity security that pays a dividend, it is obligated to pay the dividend on the security it has sold. However, a dividend paid on a security sold short generally reduces the market value of the shorted security and thus increases the Fund's unrealized gain or reduces the Fund's unrealized loss on its short sale transaction. To the extent the dividend that the Fund is obligated to pay is greater than the return earned by the Fund on investments, the performance of the Fund will be negatively impacted. Furthermore, the Fund may be required to pay a premium or interest to the lender of the security. The foregoing types of short sale expenses are sometimes referred to as the "negative cost of carry," and will tend to cause the Fund to lose money on a short sale even in instances where the price of the underlying security sold short does not change over the duration of the short sale. The "negative cost of carry" will increase in periods when the Fund engages in more short sales, such as when the Adviser believes the market is likely to decline. The Fund is also required to segregate other assets on its books to cover its obligation to return the security to the lender which means that those other assets may not be available to meet the Fund's needs for immediate cash or other liquidity.
REAL ESTATE SECTOR AND REIT RISK -- The Fund will concentrate its investments in the real estate sector. Investing in real estate securities (which include REITs) may subject the Fund to risks associated with the direct ownership of real estate, such as casualty or condemnation losses; fluctuations in rental income, declines in real estate values and other risks related to local or general economic conditions; increases in operating costs and property taxes, potential environmental liabilities, changes in zoning laws and regulatory limitations on rent. Changes in interest rates may also affect the value of the Fund's investment in real estate securities. REITs are pooled investment vehicles that own, and usually operate, income-producing real estate. REITs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's shareholders will indirectly bear a proportionate share of the REITs' operating expenses, in addition to paying Fund expenses. REIT operating expenses are not reflected in the fee table and example above. In addition, REITs are subject to the possibility of failing to qualify for tax-free pass-through of income under the Internal Revenue Code and maintaining exemption from the registration requirements of the Investment Company Act of 1940, as amended.
INVESTMENTS IN ETFS RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. and non-U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a
discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
INVERSE ETF RISK -- Inverse ETFs contain all of the risks that regular ETFs present. Additionally, to the extent the Fund invests in ETFs that seek to provide investment results that match a negative multiple of the performance of an underlying index, the Fund will indirectly be subject to the risk that the performance of such ETF will fall as the performance of that ETF's benchmark rises -- a result that is the opposite from traditional mutual funds.
INITIAL PUBLIC OFFERINGS ("IPO") RISK -- The Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on a fund with a small asset base. The impact of IPOs on the Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to the Fund for investing. Because IPO shares frequently are volatile in price, the Fund may hold IPO shares for a very short period of time. This may increase the turnover of the Fund's portfolio and may lead to increased expenses for the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
FOREIGN COMPANY RISK -- When the Fund invests in foreign securities, it will be subject to risks not typically associated with domestic securities. Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it difficult for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers.
FOREIGN CURRENCY RISK -- Fund investments in foreign currencies and securities denominated in foreign currencies are subject to currency risk. As a result, the value of securities denominated in
foreign currencies can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Additionally, the value of a Fund's assets measured in U.S. dollars may be affected by exchange control regulations. The Fund will generally incur transaction costs in connection with conversions between various currencies which will negatively impact performance.
DERIVATIVES RISK -- The Fund may invest in derivatives. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold. The lack of a liquid secondary market for a derivative may prevent the Fund from closing its derivative positions and could adversely impact its ability to achieve its objective and to realize profits or limit losses. Since derivatives may be purchased for a fraction of their value, a relatively small price movement in a derivative may result in an immediate and substantial loss or gain to the Fund. Derivatives are often more volatile than other investments and the Fund may lose more in a derivative than it originally invested in it. There can be no assurance that the Adviser's use of derivatives will be successful in achieving their intended goals.
The Fund may purchase or sell options, which involve the payment or receipt of a premium by the investor and the corresponding right or obligation, as the case may be, to either purchase or sell the underlying security for a specific price at a certain time or during a certain period. Purchasing options involves the risk that the underlying instrument will not change price in the manner expected, so that the investor loses its premium. Selling put options involves potentially greater risk because the investor is exposed to the extent of the actual price movement in the underlying security rather than only the premium payment received (which could result in a potentially unlimited loss).
HEDGING RISK -- The Fund may use derivative instruments for hedging purposes. Hedging through the use of these instruments does not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. While entering into these instruments tends to reduce the risk of loss due to a decline in the value of the hedged asset, such instruments also limit any potential gain that may result from the increase in value of the asset. To the extent that the Fund engages in hedging strategies, there can be no assurance that such strategy will be effective or that there will be a hedge in place at any given time.
PORTFOLIO TURNOVER RISK. The Fund may buy and sell investments frequently. Such a strategy often involves higher expenses, including brokerage commissions, and may increase the amount of capital gains (in particular, short term gains) realized by the Fund. Shareholders may pay tax on such capital gains.
NON-DIVERSIFICATION RISK -- The Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the Fund may be more susceptible to a single adverse economic or political occurrence affecting one or more of these issuers, and may experience increased volatility due to its investments in those securities.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual total returns for 1, 5 and 10 years compare with those of a broad measure of market performance. In addition, the information shows how the Fund's average annual total returns compare with the returns of (i) an index designed to represent the performance of the long/short hedge fund market and (ii) an index designed to represent the performance of the U.S. equity REIT market. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
The Fund acquired substantially all of the assets of another fund after the close of business on December 30, 2011. The performance shown in the bar chart and performance table includes the performance of that predecessor fund for periods prior to December 30, 2011. The predecessor fund was managed by the Adviser using investment policies, objectives, guidelines and restrictions that were in all material respects equivalent to the management of the Fund. However, the predecessor fund was not a registered mutual fund and so it was not subject to the same investment and tax restrictions as the Fund. If it had been, the predecessor fund's performance may have been lower. The performance information in the bar chart and table for periods prior to December 30, 2011 reflects all fees and expenses, including a performance fee, incurred by the predecessor fund. The performance information for periods prior to December 30, 2011 has not been adjusted to reflect Fund expenses. If the performance information for periods prior to December 30, 2011 had been adjusted to reflect Fund expenses, the performance may have been higher or lower for a given period depending on the expenses incurred by the predecessor fund for that period. The predecessor fund's expenses varied from year to year, primarily depending on whether a performance fee was incurred. Updated performance information is available by calling 1-855-520-4CCS (4227) or on the Fund's website at www.cbreclarion.com.
2003 24.51%
2004 19.98%
2005 10.14%
2006 14.41%
2007 (0.99)%
2008 (2.86)%
2009 13.59%
2010 6.93%
2011 6.35%
2012 1.01%
BEST QUARTER WORST QUARTER
13.87% (5.01)%
(9/30/2009) (06/30/2010)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
Historical after-tax returns are not presented for certain periods because prior to its reorganization into the Fund, the predecessor fund was not required to distribute income to investors annualy. 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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
----------------------------------------------------------------------------------------------------------------- CBRE CLARION LONG/SHORT FUND 1 YEAR 5 YEAR 10 YEAR SINCE INCEPTION INSTITUTIONAL CLASS (11/20/2000) ----------------------------------------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 1.01% 4.83% 8.97% 9.68% ----------------------------------------------------------------------------------------------------------------- FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 0.98% N/A N/A N/A ----------------------------------------------------------------------------------------------------------------- FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 0.70% N/A N/A N/A AND SALE OF FUND SHARES ----------------------------------------------------------------------------------------------------------------- S&P 500 INDEX (REFLECTS NO DEDUCTION FOR FEES, 16.00% 1.66% 2.10% 2.64% EXPENSES OR TAXES) ----------------------------------------------------------------------------------------------------------------- DOW JONES/CREDIT SUISSE LONG/SHORT EQUITY 8.21% 0.99% 6.96% 5.56% INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES OR TAXES) ----------------------------------------------------------------------------------------------------------------- MSCI US REIT INDEX (REFLECTS NO DEDUCTION 17.77% 5.58% 11.58% 11.55% FOR FEES, EXPENSES OR TAXES) ----------------------------------------------------------------------------------------------------------------- |
INVESTMENT ADVISER
CBRE Clarion Securities LLC
PORTFOLIO MANAGERS
The Fund is managed by the Adviser's Co-Chief Investment Officers, T. Ritson Ferguson, Steven D. Burton and Joseph P. Smith.
Mr. Ferguson is a co-founder of the Adviser and has been employed by the firm since 1992. He is also the Adviser's Chief Executive Officer and a Co-Chief Investment Officer. He has managed the Fund since its inception, and also managed the predecessor fund since its inception.
Mr. Burton joined the Adviser in 1995 and is one of the firm's Managing Directors and Co-Chief Investment Officers. He has managed the Fund since its inception, and also managed the predecessor fund since its inception.
Mr. Smith joined the Adviser in 1997 and is likewise one of the firm's Managing Directors and Co-Chief Investment Officers. He has managed the Fund since its inception, and also managed the predecessor fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Institutional Class Shares of the Fund for the first time, you must invest at least $1,000,000 (including for individual retirement accounts ("IRAs"). There is no minimum subsequent investment to purchase additional Institutional Class Shares of the Fund.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at: CBRE Clarion Long/Short Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (express mail address: CBRE
Clarion Long/Short Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or by telephone at 1-855-520-4CCS (4227).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with other investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which it trades. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings. The Fund is non-diversified, meaning that it may invest a large percentage of its assets in a single issuer or a relatively small number of issuers.
EQUITY RISK -- Equity securities in which the Fund invests include common stock, preferred stock, convertible debt, warrants and rights and shares of ETFs that attempt to track the price movement of equity securities indexes. Some equity securities in which the Fund invests may not be listed on an exchange, although the issuer will generally be listed. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stockholders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy all of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN SECURITY RISK -- Investments in securities of foreign companies (including direct investments as well as investments through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE AND INVESTMENTS
The investment objective of the Fund is to provide total return, consisting of capital appreciation and current income, while attempting to preserve capital and mitigate risk by employing hedging strategies, primarily short selling. The investment objective of the Fund may be changed without shareholder approval upon 60 days' prior notice to shareholders.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in cash, money market instruments or other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will do so only if the Adviser believes that the risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategy and risks, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, the 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 the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that the Fund will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
INVESTMENT ADVISER
CBRE Clarion Securities LLC, a Delaware limited liability company formed in 2009, serves as the investment adviser to the Fund. The Adviser and its predecessors have been engaged in the investment management business since 1992. The Adviser's principal place of business is located at 201 King of Prussia Road, Suite 600, Radnor, PA 19087. As of December 31, 2012, the Adviser had approximately $24 billion in assets under management.
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board of Trustees of the Trust (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
For its services to the Fund, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.25% based on the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep the Fund's net operating expenses (excluding interest, dividend, interest and stock loan expense on securities sold short, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.64% of the Fund's Institutional Class Shares' average daily net assets until February 28, 2014 (the "contractual expense limit"). If at any point total annual Fund operating expenses (not including excluded
expenses) are below the contractual expense limit, the Adviser may retain the difference between the Fund's total annual Fund operating expenses (not including excluded expenses) and the contractual expense limit to recover all or a portion of its fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by the Adviser's Co-Chief Investment Officers, T. Ritson Ferguson, Steven D. Burton and Joseph P. Smith, who are primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Mr. Ferguson is one of the firm's founders and has been with the Adviser since 1992. Mr. Ferguson has over 27 years of investment experience.
Steven D. Burton has been with the Adviser since 1995 and has more than 29 years of investment experience.
Joseph P. Smith has been with the Adviser since 1997 and has more than 23 years of investment experience.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Institutional Class Shares of the Fund.
The Institutional Class Shares offered are exclusively to the following groups of investors:
1. Institutional investors such as qualified retirement plans;
2. Fee-based accounts and programs offered by certain financial intermediaries, such as registered investment advisers, broker-dealers, bank trust departments, wrap programs and unified managed accounts;
3. Tax-exempt retirement plans of the Adviser and its affiliates and rollover accounts from those plans, as well as employees of the Adviser and its affiliates, trustees and officers of the Trust and members of their immediate families;
4. Investment professionals, employees of broker-dealers or other financial intermediaries, and their immediate family members; and
5. Any other investors that meet the investment minimum requirements described below under "Minimum Purchases."
The Fund reserves the right to change the criteria for eligible investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
You will ordinarily submit your purchase orders through the securities broker or other financial intermediary through which you opened your shareholder account.
To purchase shares directly from the Fund through its transfer agent, complete and send in the application. If you need an application or have questions, please call 1-855-520-4CCS (4227).
All investments must be made by check, wire or ACH. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "CBRE Clarion Long/Short Fund."
REGULAR MAIL ADDRESS
CBRE Clarion Long/Short Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
CBRE Clarion Long/Short Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-855-520-4CCS (4227) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA # 101000695
CBRE Clarion Long/Short Fund
DDA # 9870523965
Ref: Fund name/account number/account name
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. The price per share will be the net asset value ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number or tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund (or an authorized institution) must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays --the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries
such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow its procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time as of which the Fund prices its shares, the value the Fund assigns to securities may not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency
appreciation/depreciation, securities market movements in the United States, or other relevant information related to the securities.
There may be limited circumstances in which a Fund would price securities at fair value for stocks of U.S. companies that are traded on U.S. exchanges -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
When valuing fixed income securities with remaining maturities of more than 60 days, the Fund uses the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security if a quotation is readily available, or may be based upon the values of securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Fund uses the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
MINIMUM PURCHASES
You can open an account with Institutional Class Shares of the Fund with a minimum initial investment of $1,000,000 (including for individual retirement accounts ("IRAs").
The following groups of investors may open an account with Institutional Class Shares of the Fund with a minimum initial investment of $100,000 (including for individual retirement accounts ("IRAs"):
o Institutional investors such as qualified retirement plans; Fee-based accounts and programs offered by certain financial intermediaries, such as registered investment advisers, broker-dealers, bank trust departments, wrap programs and unified managed accounts; and
o Investment professionals, employees of broker-dealers or other financial intermediaries, and their immediate family members
The minimum initial investment may be waived for:
o Tax-exempt retirement plans of the Adviser and its affiliates and rollover accounts from those plans, as well as employees of the Adviser and its affiliates, trustees and officers of the Trust and members of their immediate families
The Fund reserves the right to modify the above eligibility requirements and investment minimum requirements at any time. The Fund reserves the right to waive the minimum initial investment and accept investments of smaller amounts in its sole discretion. In addition, the Fund, in its discretion, may waive the minimum initial investment for investors whose aggregate investments in the Fund equal or exceed the minimum initial investment where investments in a single account may not on its own meet such minimum amount. Investments that may be aggregated include, for example, holdings in personal or retirement accounts, Fund shares owned by immediate family members, and holdings in accounts at other brokers or financial intermediaries. You may be required to provide documentation to verify your eligibility for this
waiver. This information may include account statements and records regarding Fund shares held at all financial intermediaries by you and members of your immediate family.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase Institutional Class Shares, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
CBRE Clarion Long/Short Fund CLSIX 0075W0536 8651
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-855-520-4CCS (4227).
If you own your shares through an account with a broker or other intermediary, contact that broker or intermediary to sell your shares. Your broker or intermediary may charge a fee for its services, in addition to the fees charged by the Fund.
Certain redemption requests will require Medallion signature guarantees by a bank or member firm of a national securities exchange. For example, Medallion signature guarantees may be required if your address of record or banking instructions have been changed in the last 30 days, or if you ask that the proceeds be sent to a different person or address. A Medallion signature is a formal certification offered by firms participating in the Medallion Stamp Program that guarantees that a signature is original and authentic. Signature guarantees are for the protection of shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
The sale price of each share will be the NAV next determined after the Fund receives your request in proper form.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
CBRE Clarion Long/Short Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
CBRE Clarion Long/Short Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY TELEPHONE
To redeem shares by telephone, you must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-855-520-4CCS (4227) to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank via wire or ACH (may be subject to a $10 fee).
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the effective date of your order. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares. The Fund reserves the right to waive the minimum account value requirement in their sole discretion. If your Fund shares are redeemed for this reason within 30 calendar days of their purchase, the redemption fee will not be applied.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
HOW TO EXCHANGE FUND SHARES
At no charge, you may exchange Institutional Class shares of the Fund directly for Investor Class shares of the Fund, subject to the fees and expenses of Investor Class shares, and provided that you meet the eligibility requirements applicable to investing in Investor Class shares, as set forth in the Investor Class shares prospectus.
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Fund may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Fund. For more information about the Fund's policy on excessive trading, see Excessive Trading Policies and Procedures."
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial intermediary transact with the Fund over the telephone, you will generally bear the risk of any loss.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Fund has adopted a shareholder servicing plan for Institutional Class Shares that provides that the Fund may pay financial intermediaries for shareholder services in an amount not to exceed 0.10% based on the average daily net assets of the Fund's Institutional Class Shares. The Fund does not pay these service fees on assets of the Fund that are attributable to shares purchased directly through the Fund's transfer agent. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay
financial intermediaries for these and other services to the Fund's shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any shareholder servicing fees that are reflected in the fees and expenses listed in the fee table section of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" under the heading "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
In addition, because the Fund may invest in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of the Fund's shares if the prices of the Fund's foreign securities do not reflect their fair value. Although the Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage.
In addition, because the Fund may invest in small- and mid-cap securities, which often trade in lower volumes and may be less liquid, the Fund may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market prices of these types of securities.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than one (1) "round trip," into or out of the Fund within any 30-day period. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 60 days (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. In accordance with Rule 22c-2 under the Investment Company Act of 1940, as amended (the "1940 Act"), the Fund has entered into information sharing agreements with certain financial intermediaries. Under these agreements, a financial intermediary is obligated to: (1) enforce during the term of the agreement, the Fund's, or in certain instances, the financial intermediary's, market-timing policy; (2) furnish the Fund, upon its request, with information regarding customer trading activities in shares of the Fund; and (3) enforce the Fund's, or in certain instances, the financial intermediary's, market-timing policy with respect to customers identified by the Fund as having engaged in market timing. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons. Please contact your financial intermediary for more information.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 2.00% redemption fee on redemptions of shares that have been held for less than 60 days. The fee is deducted from the sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly from the Fund or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that due to operational and systems limitations, intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's. Therefore, to the extent that financial intermediaries are unable to collect the redemption fee, the Fund may not be able to defray the expenses associated with those short-term trades made by that financial intermediary's customers.
The Fund reserves the right to waive its redemption fee at its discretion when
it believes such waiver is in the best interests of the Fund, including with
respect to certain categories of redemptions that the Fund reasonably believes
may not raise frequent trading or market timing concerns or where the financial
intermediary's processing systems are unable to properly apply the redemption
fee. These categories currently include, but are not limited to, the following:
(i) participants in certain group retirement plans; (ii) redemptions resulting
from certain transfers upon the death of a shareholder; (iii) redemptions by
certain pension plans as required by law or by regulatory authorities; (iv)
systematic withdrawals; and (v) retirement loans and withdrawals.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution. Dividends and distributions will automatically be reinvested in additional shares of the Fund, unless you elect to have the distributions paid in cash. To elect to receive your distribution in cash, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions made available by the Fund in cash after the Fund receives your notice. To cancel your election, simply send written notice to the Fund. Distributions from the Fund will be taxable to shareholders whether received in cash or reinvested in additional shares. Shareholders who reinvest distributions in the Fund will be required to pay taxes on such distributions from other resources.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the cost basis reporting law applies to
them.
To the extent that the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. If more than 50% of the total assets of the Fund consists of foreign securities, the Fund will be
eligible to elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The
information is intended to help you understand the Fund's financial performance
for the period of the Fund's operations. Some of this information reflects
financial information for a single Fund share. The total return in the table
represents the rate that you would have earned (or lost) on an investment in
the Fund, assuming you reinvested all of your dividends and distributions. The
information provided below has been audited by Ernst & Young LLP, independent
registered public accounting firm for the Fund. The financial statements and
the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual
Report of the Fund, which is available upon request by calling 1-855-520-4CCS
(4227) or on the Fund's website at www.cbreclarion.org.
-------------------------------------------------------------------------------------------------------------------
PERIOD ENDED OCTOBER 31,
CBRE CLARION LONG/SHORT FUND INSTITUTIONAL CLASS 2012*
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
Income from Operations:
Net Investment Loss(1) (0.21)
Net Realized and Unrealized Gain on Investments 0.12
------
Total From Operations (0.09)
------
Redemption Fees --
------
Net Asset Value, End of Period $9.91
======
Total Return(+) (0.90)%
======
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $236,818
Ratio of Expenses to Average Net Assets (including dividends
and brokerage fees on short sales, including waivers and 4.98%**
reimbursements)(2)
Ratio of Expenses to Net Assets (including dividends and 4.99%**
brokerage fees on Averge short sales, excluding waivers and reimbursements)
Ratio of Net Investment Loss to Average Net Assets (2.50)%**
Portfolio Turnover Rate 90%***
|
* Commenced operations on December 30, 2011.
** Annualized.
*** Portfolio turnover rate is for the period indicated and has not been annualized.
+ Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total return would have been lower had the Adviser not waived a portion of its fee during the period.
(1) Per share data calculated using average shares method.
(2) Excluding dividends and prime broker fees on short sales, the ratio of expenses to average net assets would have been 1.64%.
Amount designated as "--" has been rounded to $0.00.
THE ADVISORS' INNER CIRCLE FUND
CBRE CLARION LONG/SHORT FUND
INVESTMENT ADVISER
CBRE Clarion Securities LLC
201 King of Prussia Road
Suite 600
Radnor, Pennsylvania 19087
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the CBRE Clarion Long/Short Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-855-520-4CCS (4227)
BY MAIL: Write to us at:
CBRE Clarion Long/Short Fund
P.O. Box 219009
Kansas City, MO 64121-9009
BY INTERNET: www.cbreclarion.com
|
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
CCS-PS-001-0200
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
CBRE CLARION LONG/SHORT FUND
INVESTOR CLASS SHARES (CLSVX)
INVESTOR CLASS SHARES
INVESTMENT ADVISER:
CBRE CLARION SECURITIES LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
CBRE CLARION LONG/SHORT FUND
INVESTMENT OBJECTIVE ........................................1
FUND FEES AND EXPENSES ......................................1
PRINCIPAL INVESTMENT STRATEGIES .............................2
PRINCIPAL RISKS .............................................3
PERFORMANCE INFORMATION .....................................7
INVESTMENT ADVISER ..........................................7
PORTFOLIO MANAGERS ..........................................8
PURCHASE AND SALE OF FUND SHARES ............................8
TAX INFORMATION .............................................8
PAYMENTS TO BROKER-DEALERS AND OTHER
FINANCIAL INTERMEDIARIES COMPENSATION .....................8
MORE INFORMATION ABOUT RISK ......................................9
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE
AND INVESTMENTS ..................................................10
INFORMATION ABOUT PORTFOLIO HOLDINGS .............................10
INVESTMENT ADVISER ...............................................10
PORTFOLIO MANAGERS ...............................................11
PURCHASING SELLING AND EXCHANGING FUND SHARES ....................11
DISTRIBUTION OF FUND SHARES ......................................18
SHAREHOLDER SERVICING ARRANGEMENTS ...............................18
PAYMENTS TO FINANCIAL INTERMEDIARIES .............................19
OTHER POLICIES ...................................................19
DIVIDENDS AND DISTRIBUTIONS ......................................23
TAXES ............................................................23
FINANCIAL HIGHLIGHTS .............................................25
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................Back Cover
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CBRE CLARION LONG/SHORT FUND
INVESTMENT OBJECTIVE
The investment objective of the CBRE Clarion Long/Short Fund (the "Fund") is to provide total return, consisting of capital appreciation and current income, while attempting to preserve capital and mitigate risk by employing hedging strategies, primarily short selling.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Redemption Fee (as a percentage of amount redeemed, if shares redeemed have been held for less than 60 days) 2.00%
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INVESTOR CLASS
SHARES
Management Fees 1.25%
Distribution (12b-1) Fees 0.25%
Other Expenses
Dividend, Interest and Stock Loan Expense
on Securities Sold Short 3.34%
Other Operating Expenses 0.49%
Total Other Expenses 3.83%
Acquired Fund Fees and Expenses 0.02%
Total Annual Fund Operating Expenses(1) 5.35%
Less Fee Reductions and/or Expense Reimbursements(2) 0.00%
Total Annual Fund Operating Expenses after Fee 5.35%
Reductions and/or Expense Reimbursements(1,2)
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(1) The Total Annual Fund Operating Expenses in this fee table, both before and after fee reductions and/or expense reimbursements, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) CBRE Clarion Securities LLC (the "Adviser") has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep Total Annual Fund Operating Expenses after Fee Reductions and/or Expense Reimbursements (excluding interest, dividend, interest and stock loan expense on securities sold short, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.99% of the Fund's Investor Class Shares' average daily net assets until February 28, 2014 (the "contractual expense limit"). In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the contractual expense limit, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the contractual expense limit to recover all or a portion of its fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. This agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$534 $1,597 $2,652 $5,257
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from December 30, 2011 (commencement of operations) to October 31, 2012, the Fund's portfolio turnover rate was 90% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objective by taking long and short positions in equity securities of companies that are principally engaged in the real estate industry ("real estate companies"). CBRE Clarion Securities LLC (the "Adviser"), the Fund's adviser, defines a real estate company as a company that derives its intrinsic value from owning, operating, leasing, developing, managing, brokering and/or selling commercial or residential real estate, land or infrastructure. Real estate companies include, for example, real estate investment trusts ("REITs"). To take a long position, the Fund purchases a security outright; with a short position, the Fund sells a security that it has borrowed. When the Fund sells a security short, it borrows the security from a third party and sells it at the then current market price. The Fund is then obligated to buy the security on a later date so that it can return the security to the lender. Short positions may be used either to hedge long positions or to seek positive returns in instances where the Adviser believes a security's price will decline. The Fund will either realize a profit or incur a loss from a short position, depending on whether the value of the underlying stock decreases or increases, respectively, between the time it is sold and the time when the Fund replaces the borrowed security. The Fund may reinvest the proceeds of its short sales by taking additional long positions, thus allowing the Fund to maintain long positions in excess of 100% of its net assets. The Adviser varies the Fund's long and short exposures over time, based on its assessment of market conditions and other factors, but expects the Fund to maintain net-long exposure over multi-year periods.
While the Fund expects to invest primarily in common stock, it may also invest in other equity securities including preferred stocks, shares of exchange-traded funds, convertible securities, and
rights or warrants to buy common stocks. The Fund may also create short
positions in ETFs. In addition, the Fund may invest in exchange-traded options
(i) as tools in the management of portfolio assets, (ii) to hedge various
investments for risk management and/or (iii) for income enhancement, which is
also known as speculation.
The Fund may invest in securities of companies of any market capitalization and, as a general matter, the Fund expects its investments to be primarily in equity securities issued by U.S. companies. However, the Fund may invest up to 50% of its assets in securities of non-U.S. issuers, including emerging market issuers, denominated in U.S. dollars, non-U.S. currencies or multinational currency units. The Fund is non-diversified, meaning that it may invest a large percentage of its assets in a single issuer or a relatively small number of issuers.
The Adviser utilizes a multi-step investment process for constructing the Fund's investment portfolio that combines top-down region and sector allocation with bottom-up individual stock selection. The Adviser first selects property sectors and geographic regions in which to invest, and determines the degree of representation of such sectors and regions, through a systematic evaluation of listed and direct real estate market trends and conditions. The Adviser then uses an in-house valuation process to identify investments that it believes demonstrate superior current income and growth potential relative to their peers. The Adviser's in-house valuation process examines several factors, including the value and quality of a company's properties, its capital structure, its strategy and the ability of its management team. Short positions are an important part of the Fund's investment strategy. Short selling is expected to contribute to performance as well as to help preserve capital during declines in the real estate securities market. Companies that are valued poorly using the Adviser's in-house process are considered for short positions, although the Adviser also considers a company's size relative to its property sector or geographic region, as well as its liquidity. The Fund may buy and sell investments frequently, which could result in a high portfolio turnover rate.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices will fall over short or extended periods of time. This is true despite the Fund's strategy to employ short positions as a means to help preserve capital and mitigate risk. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund. This risk is greater for small- and medium-sized companies, which tend to be more vulnerable to adverse developments than larger companies.
SHORT SALES RISK -- Short sales are transactions in which the Fund sells a security it does not own. The Fund must borrow the security to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be higher or lower than the price at which the security
was sold by the Fund. If the underlying security goes down in price between the time the Fund sells the security and buys it back, the Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, the Fund will realize a loss on the transaction. Because the market price of the security sold short could increase without limit, the Fund could be subject to a theoretically unlimited loss. The risk of such price increases is the principal risk of engaging in short sales.
In addition, the Fund's investment performance may suffer if the Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required the Fund to deliver the securities the Fund borrowed at the commencement of the short sale and the Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. Moreover, the Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Fund's open short positions. These expenses negatively impact the performance of the Fund. For example, when the Fund short sells an equity security that pays a dividend, it is obligated to pay the dividend on the security it has sold. However, a dividend paid on a security sold short generally reduces the market value of the shorted security and thus increases the Fund's unrealized gain or reduces the Fund's unrealized loss on its short sale transaction. To the extent the dividend that the Fund is obligated to pay is greater than the return earned by the Fund on investments, the performance of the Fund will be negatively impacted. Furthermore, the Fund may be required to pay a premium or interest to the lender of the security. The foregoing types of short sale expenses are sometimes referred to as the "negative cost of carry," and will tend to cause the Fund to lose money on a short sale even in instances where the price of the underlying security sold short does not change over the duration of the short sale. The "negative cost of carry" will increase in periods when the Fund engages in more short sales, such as when the Adviser believes the market is likely to decline. The Fund is also required to segregate other assets on its books to cover its obligation to return the security to the lender which means that those other assets may not be available to meet the Fund's needs for immediate cash or other liquidity.
REAL ESTATE SECTOR AND REIT RISK -- The Fund will concentrate its investments in the real estate sector. Investing in real estate securities (which include REITs) may subject the Fund to risks associated with the direct ownership of real estate, such as casualty or condemnation losses; fluctuations in rental income, declines in real estate values and other risks related to local or general economic conditions; increases in operating costs and property taxes, potential environmental liabilities, changes in zoning laws and regulatory limitations on rent. Changes in interest rates may also affect the value of the Fund's investment in real estate securities. REITs are pooled investment vehicles that own, and usually operate, income-producing real estate. REITs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's shareholders will indirectly bear a proportionate share of the REITs' operating expenses, in addition to paying Fund expenses. REIT operating expenses are not reflected in the fee table and example above. In addition, REITs are subject to the possibility of failing to qualify for tax-free pass-through of income under the Internal Revenue Code and maintaining exemption from the registration requirements of the Investment Company Act of 1940, as amended.
INVESTMENTS IN ETFS RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. and non-U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index.
ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
INVERSE ETF RISK -- Inverse ETFs contain all of the risks that regular ETFs present. Additionally, to the extent the Fund invests in ETFs that seek to provide investment results that match a negative multiple of the performance of an underlying index, the Fund will indirectly be subject to the risk that the performance of such ETF will fall as the performance of that ETF's benchmark rises -- a result that is the opposite from traditional mutual funds.
INITIAL PUBLIC OFFERINGS ("IPO") RISK -- The Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on a fund with a small asset base. The impact of IPOs on the Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to the Fund for investing. Because IPO shares frequently are volatile in price, the Fund may hold IPO shares for a very short period of time. This may increase the turnover of the Fund's portfolio and may lead to increased expenses for the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
FOREIGN COMPANY RISK -- When the Fund invests in foreign securities, it will be subject to risks not typically associated with domestic securities. Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it difficult for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- Fund investments in foreign currencies and securities denominated in foreign currencies are subject to currency risk. As a result, the value of securities denominated in
foreign currencies can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Additionally, the value of a Fund's assets measured in U.S. dollars may be affected by exchange control regulations. The Fund will generally incur transaction costs in connection with conversions between various currencies which will negatively impact performance.
DERIVATIVES RISK -- The Fund may invest in derivatives. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold. The lack of a liquid secondary market for a derivative may prevent the Fund from closing its derivative positions and could adversely impact its ability to achieve its objective and to realize profits or limit losses. Since derivatives may be purchased for a fraction of their value, a relatively small price movement in a derivative may result in an immediate and substantial loss or gain to the Fund. Derivatives are often more volatile than other investments and the Fund may lose more in a derivative than it originally invested in it. There can be no assurance that the Adviser's use of derivatives will be successful in achieving their intended goals.
The Fund may purchase or sell options, which involve the payment or receipt of a premium by the investor and the corresponding right or obligation, as the case may be, to either purchase or sell the underlying security for a specific price at a certain time or during a certain period. Purchasing options involves the risk that the underlying instrument will not change price in the manner expected, so that the investor loses its premium. Selling put options involves potentially greater risk because the investor is exposed to the extent of the actual price movement in the underlying security rather than only the premium payment received (which could result in a potentially unlimited loss).
HEDGING RISK -- The Fund may use derivative instruments for hedging purposes. Hedging through the use of these instruments does not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. While entering into these instruments tends to reduce the risk of loss due to a decline in the value of the hedged asset, such instruments also limit any potential gain that may result from the increase in value of the asset. To the extent that the Fund engages in hedging strategies, there can be no assurance that such strategy will be effective or that there will be a hedge in place at any given time.
PORTFOLIO TURNOVER RISK. The Fund may buy and sell investments frequently. Such a strategy often involves higher expenses, including brokerage commissions, and may increase the amount of capital gains (in particular, short term gains) realized by the Fund. Shareholders may pay tax on such capital gains.
NON-DIVERSIFICATION RISK -- The Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the Fund may be more susceptible to a single adverse economic or political occurrence affecting one or more of these issuers, and may experience increased volatility due to its investments in those securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund by showing how the Fund's average
annual returns for 1 year and since inception compare with those of a broad
measure of market performance. In addition, the information shows how the
Fund's average annual total returns compare with the returns of (i) an index
designed to represent the performance of the long/short hedge fund market and
(ii) an index designed to represent the performance of the U.S. equity REIT
market. Of course, the Fund's past performance (before and after taxes) does
not necessarily indicate how the Fund will perform in the future. Updated
performance information is available by calling 1-855-520-4CCS (4227) or by
visiting the Fund's website at www.cbreclarion.com.
TOTAL RETURNS BY CALENDAR YEAR
-------------------------------------------- BEST QUARTER WORST QUARTER -------------------------------------------- 2.40% (2.54)% -------------------------------------------- (03/31/2012) (06/30/2012) -------------------------------------------- |
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
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SINCE INCEPTION
CBRE CLARION LONG/SHORT FUND INVESTOR CLASS 1 YEAR (12/30/2011)*
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FUND RETURNS BEFORE TAXES 0.91% 0.91%
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FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 0.88% 0.88%
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FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND 0.64% 0.77%
SHARES
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S&P 500 INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES OR TAXES) 16.00% 16.00%
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DOW JONES/CREDIT SUISSE LONG/SHORT EQUITY INDEX (REFLECTS NO 8.21% 8.21%
DEDUCTION FOR FEES, EXPENSES OR TAXES)
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MSCI US REIT INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES OR 17.77% 17.77%
TAXES)
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* Index returns shown from December 31, 2011.
INVESTMENT ADVISER
CBRE Clarion Securities LLC
PORTFOLIO MANAGERS
The Fund is managed by the Adviser's Co-Chief Investment Officers, T. Ritson Ferguson, Steven D. Burton and Joseph P. Smith.
Mr. Ferguson is a co-founder of the Adviser and has been employed by the firm since 1992. He is also the Adviser's Chief Executive Officer and a Co-Chief Investment Officer. He has managed the Fund since its inception, and also managed the predecessor fund since its inception.
Mr. Burton joined the Adviser in 1995 and is one of the firm's Managing Directors and Co-Chief Investment Officers. He has managed the Fund since its inception, and also managed the predecessor fund since its inception.
Mr. Smith joined the Adviser in 1997 and is likewise one of the firm's Managing Directors and Co-Chief Investment Officers. He has managed the Fund since its inception, and also managed the predecessor fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Investor Class Shares of the Fund for the first time, you must invest at least $5,000 ($2,500 for individual retirement accounts ("IRAs")). Thereafter your investments must be at least $100.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at: CBRE Clarion Long/Short Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (express mail address: CBRE Clarion Long/Short Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or by telephone at 1-855-520-4CCS (4227).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with other investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which it trades. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings. The Fund is non-diversified, meaning that it may invest a large percentage of its assets in a single issuer or a relatively small number of issuers.
EQUITY RISK -- Equity securities in which the Fund invests include common stock, preferred stock, convertible debt, warrants and rights and shares of ETFs that attempt to track the price movement of equity securities indexes. Some equity securities in which the Fund invests may not be listed on an exchange, although the issuer will generally be listed. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stockholders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy all of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN SECURITY RISK -- Investments in securities of foreign companies (including direct investments as well as investments through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes
are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE AND INVESTMENTS
The investment objective of the Fund is to provide total return, consisting of capital appreciation and current income, while attempting to preserve capital and mitigate risk by employing hedging strategies, primarily short selling. The investment objective of the Fund may be changed without shareholder approval upon 60 days' prior notice to shareholders.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in cash, money market instruments or other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will do so only if the Adviser believes that the risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategy and risks, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, the 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 the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that the Fund will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
INVESTMENT ADVISER
CBRE Clarion Securities LLC, a Delaware limited liability company formed in 2009, serves as the investment adviser to the Fund. The Adviser and its predecessors have been engaged in the investment management business since 1992. The Adviser's principal place of business is located at 201 King of Prussia Road, Suite 600, Radnor, PA 19087. As of December 31, 2012, the Adviser had approximately $24 billion in assets under management.
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board of Trustees of the Trust (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
For its services to the Fund, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.25% based on the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep the Fund's net operating expenses (excluding interest, dividend, interest and stock loan expense on securities sold short, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.99% of the
Fund's Investor Class Shares' average daily net assets until February 28, 2014 (the "contractual expense limit"). If at any point total annual Fund operating expenses (not including excluded expenses) are below the contractual expense limit, the Adviser may retain the difference between the Fund's total annual Fund operating expenses (not including excluded expenses) and the contractual expense limit to recover all or a portion of its fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by the Adviser's Co-Chief Investment Officers, T. Ritson Ferguson, Steven D. Burton and Joseph P. Smith, who are primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Mr. Ferguson is one of the firm's founders and has been with the Adviser since 1992. Mr. Ferguson has over 27 years of investment experience.
Steven D. Burton has been with the Adviser since 1995 and has more than 29 years of investment experience.
Joseph P. Smith has been with the Adviser since 1997 and has more than 23 years of investment experience.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Investor Class Shares of the Fund.
The Investor Class Shares offered are exclusively to the following groups of investors:
1. Institutional investors such as qualified retirement plans;
2. Fee-based accounts and programs offered by certain financial intermediaries, such as registered investment advisers, broker-dealers, bank trust departments, wrap programs and unified managed accounts; and
3. Any other investors that meet the investment minimum requirements described below under "Minimum Purchases."
The Fund reserves the right to change the criteria for eligible investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
You will ordinarily submit your purchase orders through the securities broker or other financial intermediary through which you opened your shareholder account.
To purchase shares directly from the Fund through its transfer agent, complete and send in the application. If you need an application or have questions, please call 1-855-520-4CCS (4227).
All investments must be made by check, wire or ACH. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "CBRE Clarion Long/Short Fund."
REGULAR MAIL ADDRESS
CBRE Clarion Long/Short Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
CBRE Clarion Long/Short Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-855-520-4CCS (4227) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA # 101000695
CBRE Clarion Long/Short Fund
DDA # 9870523965
Ref: Fund name/account number/account name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR "ACH")
You may not open an account via ACH. If you would like to establish an
Automatic Investment Plan, please complete the Automatic Investment Plan
section of the application when you send it to the Fund. These purchases can be
made monthly, quarterly, semi-annually and annually in amounts of at least
$100. To cancel or change a plan, write to the Fund at: CBRE Clarion
Long/Short Fund, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address:
CBRE Clarion Long/Short Fund, c/o DST Systems, Inc., 430 West 7th Street,
Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3
days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. The price per share will be the net asset value ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number or tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund (or an authorized institution) must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays --the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when
the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow its procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such
cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time as of which the Fund prices its shares, the value the Fund assigns to securities may not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information related to the securities.
There may be limited circumstances in which a Fund would price securities at fair value for stocks of U.S. companies that are traded on U.S. exchanges -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
When valuing fixed income securities with remaining maturities of more than 60 days, the Fund uses the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security if a quotation is readily available, or may be based upon the values of securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Fund uses the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
MINIMUM PURCHASES
You can open an account with Investor Class Shares of the Fund with a minimum initial investment of $5,000 ($2,500 for IRAs). Thereafter your investments must be at least $100. The minimum initial investment may be waived for:
o Institutional investors such as qualified retirement plans; and
o Fee-based accounts and programs offered by certain financial intermediaries, such as registered investment advisers, broker-dealers, bank trust departments, wrap programs and unified managed accounts.
The Fund reserves the right to modify the above eligibility requirements and investment minimum requirements at any time. The Fund reserves the right to waive the minimum initial investment and accept investments of smaller amounts in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase Investor Class Shares, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
CBRE Clarion Long/Short Fund CLSVX 0075W0528 8650
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-855-520-4CCS (4227).
If you own your shares through an account with a broker or other intermediary, contact that broker or intermediary to sell your shares. Your broker or intermediary may charge a fee for its services, in addition to the fees charged by the Fund.
Certain redemption requests will require Medallion signature guarantees by a bank or member firm of a national securities exchange. For example, Medallion signature guarantees may be required if your address of record or banking instructions have been changed in the last 30 days, or if you ask that the proceeds be sent to a different person or address. A Medallion signature is a formal certification offered by firms participating in the Medallion Stamp Program that guarantees that a signature is original and authentic. Signature guarantees are for the protection of shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
The sale price of each share will be the NAV next determined after the Fund receives your request in proper form.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
CBRE Clarion Long/Short Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
CBRE Clarion Long/Short Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY TELEPHONE
To redeem shares by telephone, you must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-855-520-4CCS (4227) to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank via wire or ACH (may be subject to a $10 fee).
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $20,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Fund.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the effective date of your order. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $1,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares. The Fund reserves the right to waive the minimum account value requirement in their sole discretion. If your Fund shares are redeemed for this reason within 30 calendar days of their purchase, the redemption fee will not be applied.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
HOW TO EXCHANGE FUND SHARES
At no charge, you may exchange Investor Class shares of the Fund directly for Institutional Class shares of the Fund, subject to the fees and expenses of Institutional Class shares, and provided that you meet the eligibility requirements applicable to investing in Institutional Class shares, as set forth in the Institutional Class shares prospectus.
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Fund may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Fund. For more information about the Fund's policy on excessive trading, see Excessive Trading Policies and Procedures."
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial intermediary transact with the Fund over the telephone, you will generally bear the risk of any loss.
DISTRIBUTION OF FUND SHARES
The Fund has adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, for Investor Class Shares that allows the Fund to pay distribution and service fees for the sale and distribution of its shares, and for services provided to shareholders. Because these fees are paid out of the Fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The maximum annual distribution fee for Investor Class Shares of the Fund is 0.25%.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Fund has adopted a shareholder servicing plan for Investor Class Shares that provides that the Fund may pay financial intermediaries for shareholder services in an amount not to exceed
0.20% based on the average daily net assets of the Fund's Investor Class Shares. The Fund does not pay these service fees on assets of the Fund that are attributable to shares purchased directly through the Fund's transfer agent. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to the Fund's shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any Rule 12b-1 fees and/or shareholder servicing fees that are reflected in the fees and expenses listed in the fee table section of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" under the heading "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of
taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
In addition, because the Fund may invest in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of the Fund's shares if the price of the Fund's foreign securities do not reflect their fair value. Although the Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage.
In addition, because the Fund may invest in small- and mid-cap securities, which often trade in lower volumes and may be less liquid, the Fund may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market prices of these types of securities.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than one (1) "round trip," into or out of the Fund within any 30-day period. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 60 days (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of
these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. In accordance with Rule 22c-2 under the Investment Company Act of 1940, as amended (the "1940 Act"), the Fund has entered into information sharing agreements with certain financial intermediaries. Under these agreements, a financial intermediary is obligated to: (1) enforce during the term of the agreement, the Fund's, or in certain instances, the financial intermediary's, market-timing policy; (2) furnish the Fund, upon its request, with information regarding customer trading activities in shares of the Fund; and (3) enforce the Fund's, or in certain instances, the financial intermediary's, market-timing policy with respect to customers identified by the Fund as having engaged in market timing. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons. Please contact your financial intermediary for more information.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 2.00% redemption fee on redemptions of shares that have been held for less than 60 days. The fee is deducted from the sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly from the Fund or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that due to operational and systems limitations, intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's. Therefore, to the extent that financial intermediaries are unable to collect the redemption fee, the Fund may not be able to defray the expenses associated with those short-term trades made by that financial intermediary's customers.
The Fund reserves the right to waive its redemption fee at its discretion when
it believes such waiver is in the best interests of the Fund, including with
respect to certain categories of redemptions that the Fund reasonably believes
may not raise frequent trading or market timing concerns or where the financial
intermediary's processing systems are unable to properly apply the redemption
fee. These categories currently include, but are not limited to, the following:
(i) participants in certain group retirement plans; (ii) redemptions resulting
from certain transfers upon the death of a shareholder; (iii) redemptions by
certain pension plans as required by law or by regulatory authorities; (iv)
systematic withdrawals; and (v) retirement loans and withdrawals.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution. Dividends and distributions will automatically be reinvested in additional shares of the Fund, unless you elect to have the distributions paid in cash. To elect to receive your distribution in cash, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions made available by the Fund in cash after the Fund receives your notice. To cancel your election, simply send written notice to the Fund. Distributions from the Fund will be taxable to shareholders whether received in cash or reinvested in additional shares. Shareholders who reinvest distributions in the Fund will be required to pay taxes on such distributions from other resources.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the cost basis reporting law applies to
them.
To the extent that the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. If more than 50% of the total assets of the Fund consists of foreign securities, the Fund will be
eligible to elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The
information is intended to help you understand the Fund's financial performance
for the period of the Fund's operations. Some of this information reflects
financial information for a single Fund share. The total return in the table
represents the rate that you would have earned (or lost) on an investment in
the Fund, assuming you reinvested all of your dividends and distributions. The
information provided below has been audited by Ernst & Young LLP, independent
registered public accounting firm for the Fund. The financial statements and
the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual
Report of the Fund, which is available upon request by calling 1-855-520-4CCS
(4227) or on the Fund's website at www.cbreclarion.org.
------------------------------------------------------------------------------------------------------------
PERIOD ENDED OCTOBER 31,
CBRE CLARION LONG/SHORT FUND INVESTOR CLASS 2012(*)
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
Income from Operations:
Net Investment Loss(1) (0.27)
Net Realized and Unrealized Gain on Investments 0.17
------
Total From Operations (0.10)
Redemption Fees --
------
Net Asset Value, End of Period $9.90
======
Total Return(+) (1.00)%
=======
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $55,332
Ratio of Expenses to Average Net Assets (including dividends
and brokerage fees on short sales, including waivers and 5.33%(**)
reimbursements)(2)
Ratio of Expenses to Net Assets (including dividends and 5.33%(**)
brokerage fees on short sales, excluding waivers and reimbursements)
Ratio of Net Investment Loss to Average Net Assets (3.27)%(**)
Portfolio Turnover Rate 90%(***)
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* Commenced operations on December 30, 2011.
** Annualized.
*** Portfolio turnover rate is for the period indicated and has not been annualized.
+ Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total return would have been lower had the Adviser not waived a portion of its fee during the period.
(1) Per share data calculated using average shares method.
(2) Excluding dividends and prime broker fees on short sales, the ratio of expenses to average net assets would have been 1.99%.
Amount designated as "--" has been rounded to $0.00.
THE ADVISORS' INNER CIRCLE FUND
CBRE CLARION LONG/SHORT FUND
INVESTMENT ADVISER
CBRE Clarion Securities LLC
201 King of Prussia Road
Suite 600
Radnor, Pennsylvania 19087
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the CBRE Clarion Long/Short Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-855-520-4CCS (4227)
BY MAIL: Write to us at:
CBRE Clarion Long/Short Fund
P.O. Box 219009
Kansas City, MO 64121-9009
BY INTERNET: www.cbreclarion.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
|
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
CCS-PS-002-0200
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
CORNERSTONE ADVISORS GLOBAL PUBLIC EQUITY FUND
TICKER SYMBOL: CAGLX
CORNERSTONE ADVISORS INCOME OPPORTUNITIES FUND
TICKER SYMBOL: CAIOX
CORNERSTONE ADVISORS PUBLIC ALTERNATIVES FUND
TICKER SYMBOL: CAALX
CORNERSTONE ADVISORS REAL ASSETS FUND
TICKER SYMBOL: CAREX
INSTITUTIONAL SHARES
INVESTMENT ADVISER:
CORNERSTONE ADVISORS, INC.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT EACH FUND, PLEASE SEE:
PAGE
CORNERSTONE ADVISORS GLOBAL PUBLIC EQUITY FUND ............................. 1
FUND INVESTMENT OBJECTIVE ............................................. 1
FUND FEES AND EXPENSES ................................................ 1
PRINCIPAL INVESTMENT STRATEGIES ....................................... 2
PRINCIPAL RISKS ....................................................... 3
PERFORMANCE INFORMATION ............................................... 6
INVESTMENT ADVISER AND PORTFOLIO MANAGERS ............................. 6
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS ........................ 7
CORNERSTONE ADVISORS INCOME OPPORTUNITIES FUND .............................13
FUND INVESTMENT OBJECTIVE .............................................13
FUND FEES AND EXPENSES ................................................13
PRINCIPAL INVESTMENT STRATEGIES .......................................14
PRINCIPAL RISKS .......................................................15
PERFORMANCE INFORMATION ...............................................19
INVESTMENT ADVISER AND PORTFOLIO MANAGERS .............................20
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS ........................20
CORNERSTONE ADVISORS PUBLIC ALTERNATIVES FUND ..............................21
FUND INVESTMENT OBJECTIVE .............................................21
FUND FEES AND EXPENSES ................................................21
PRINCIPAL INVESTMENT STRATEGIES .......................................22
PRINCIPAL RISKS .......................................................23
PERFORMANCE INFORMATION ...............................................28
INVESTMENT ADVISER AND PORTFOLIO MANAGERS .............................28
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS ........................28
CORNERSTONE ADVISORS REAL ASSETS FUND ......................................32
FUND INVESTMENT OBJECTIVE .............................................32
FUND FEES AND EXPENSES ................................................32
PRINCIPAL INVESTMENT STRATEGIES .......................................33
PRINCIPAL RISKS .......................................................34
PERFORMANCE INFORMATION ...............................................38
INVESTMENT ADVISER AND PORTFOLIO MANAGERS .............................38
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS ........................38
SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF
FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY
COMPENSATION ..........................................................40
MORE INFORMATION ABOUT RISK ................................................41
MORE INFORMATION ABOUT FUND INVESTMENTS ....................................44
INFORMATION ABOUT PORTFOLIO HOLDINGS .......................................44
INVESTMENT ADVISER AND PORTFOLIO MANAGERS ..................................44
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INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS .............................46 PURCHASING AND SELLING FUND SHARES .........................................58 SHAREHOLDER SERVICING ARRANGEMENTS .........................................61 PAYMENTS TO FINANCIAL INTERMEDIARIES .......................................62 OTHER POLICIES .............................................................63 DIVIDENDS AND DISTRIBUTIONS ................................................65 TAXES ......................................................................65 FINANCIAL HIGHLIGHTS .......................................................67 HOW TO OBTAIN MORE INFORMATION ABOUT THE FUNDS .....................Back Cover |
CORNERSTONE ADVISORS GLOBAL PUBLIC EQUITY FUND
FUND INVESTMENT OBJECTIVE
The Cornerstone Advisors Global Public Equity Fund (the "Global Public Equity Fund" or "Fund") seeks capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fee(1) 0.70%
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Shareholder Servicing Fee 0.05%
--------------------------------------------------------------------------------
Remaining Other Expenses(2) 0.18%
--------------------------------------------------------------------------------
Total Other Expenses 0.23%
--------------------------------------------------------------------------------
Acquired Fund Fees and Expenses(3) 0.06%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(4) 0.99%
--------------------------------------------------------------------------------
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(1) The fee shown is the total management fee actually paid by the Fund to the Adviser and the sub-advisers during the prior fiscal year based on the allocation of Fund assets among the sub-advisers during such time. Each sub-adviser receives a fee from the Fund based on the portion of the Fund's assets allocated to such sub-adviser. Asset allocations and fees payable to the sub-advisers may vary and, consequently, the total management fee actually payable by the Fund will fluctuate and may be higher or lower than that shown above. However, the total annual management fee payable by the Fund to the Adviser and the sub-advisers is subject to a maximum annual management fee of 1.25% (referred to as a Fund's "Fee Ceiling").
(2) Remaining Other Expenses are based on estimated amounts for the current fiscal year.
(3) Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(4) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
------------------- 1 YEAR 3 YEARS ------------------- $101 $315 ------------------- |
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from August 30, 2012 to October 31, 2012, the Fund's portfolio turnover rate was 17% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its investment objective by allocating its assets among one or more investment strategies directly through the use of one or more sub-advisers and/or indirectly through investments in affiliated and unaffiliated open-end funds, closed-end funds, unregistered funds (including hedge funds) and exchange-traded funds ("Underlying Funds"). The Fund will invest in Underlying Funds and/or use one or more sub-advisers to invest its assets in global, publicly-traded equity securities as part of one of the following primary investment strategies: (i) Structured Global Strategy, (ii) Global Opportunistic Strategy and (iii) Style Specialist Strategy. The Structured Global Strategy is a broadly-diversified equity investment process designed to efficiently capture the long-term returns of global equity markets -developed and emerging. The Global Opportunistic Investment Strategy, which may use "value" and "growth" styles of investing, seeks to be opportunistic in pursuing companies that meet its investment criteria regardless of geographic location and, therefore, at certain times, the Strategy could have a sizable position in either developed countries or emerging markets. In the Style Specialist Strategy, an Underlying Fund or one or more sub-advisers use value and growth styles of investing to select securities in specific parts of the global, publicly-traded equity market, such as emerging markets, U.S. small-, mid-, or micro-cap companies, or non-U.S. small-, mid- or micro-cap companies. The Fund may, from time to time, pursue its investment objective by investing substantially all of its assets in Underlying Funds, typically known as a "fund of funds" strategy.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in publicly traded equity investments, derivatives with economic characteristics similar to publicly traded equity investments, and/or shares of Underlying Funds that primarily invest in publicly traded equity investments (the "80% Investment Policy"). The 80% Investment Policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund may invest in securities of companies of any market capitalization and expects, under normal market conditions, to invest at least 40% of its assets in non-U.S. companies. The Adviser will consider a company a "non-US" company if (i) 50% of the company's assets are located outside of the United States; (ii) 50% of the company's revenues are generated outside of the United States; or (iii) the company is domiciled outside of the United States. From time to time, the Fund may also focus its investments in a particular geographic region, such as Europe, Asia and North America.
The Fund uses a multi-manager and/or multi-fund approach, relying on one or more sub-advisers and/or Underlying Funds with differing investment philosophies to manage portions of the Fund's portfolio under the general supervision of Cornerstone Advisors, Inc. (the "Adviser"). The Fund allocates its assets among strategies and sub-advisers and/or Underlying Funds according to an allocation schedule,
determined by the Adviser. The Adviser expects to rebalance allocation weightings for each strategy, sub-adviser or Underlying Fund on an annual basis, but may do so more frequently based on market conditions, the performance of a strategy, sub-adviser or Underlying Fund, or other factors. The Adviser may change an allocation schedule based on, among other factors, the Adviser's analysis of the Fund's investment strategies, the potential for each strategy to perform independently of the other, historical performance, and market conditions.
Subject to the 80% Investment Policy, the Fund's assets may be invested in a range of asset classes, securities and other investments to implement the three primary investment strategies. The Fund may invest in equity securities of all types and capitalization ranges, principally U.S., foreign and emerging markets common stocks, preferred stocks, convertible securities and warrants. The Fund may invest directly in foreign and emerging markets equity securities or through depositary receipts. In addition, the Fund may also invest in exchange-traded funds. The Fund may invest in derivative instruments, principally options, futures contracts, options on futures contracts, forward contracts and swap agreements. The Fund may engage in such derivatives transactions to gain exposure to, for example, certain securities, markets or asset classes, to hedge the Fund's positions in or exposure to securities, currencies or other instruments, to equitize cash positions in the Fund's portfolio, or to enhance the Fund's return, which is also known as speculation. The Fund may also invest in cash, money market instruments and other short-term obligations to achieve its investment objective.
The Fund may buy and sell securities frequently in seeking to achieve its objective.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Because an Underlying Fund's use of an investment strategy or investment in an asset class, security or other investment is subject to the same or similar risks as the Fund's use of such strategy or investment in such asset class, security or other investment, the term "the Fund" in the paragraphs below collectively refers to both the Fund and each Underlying Fund.
ALLOCATION RISK -- The Adviser's judgment about, and allocations among, funds, sub-advisers, asset classes and investment strategies may adversely affect the Fund's performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the Fund would be adversely affected.
DERIVATIVES RISK -- The Fund's use of futures contracts, options, forward contracts and swaps for all purposes, including speculative purposes, is subject to market risk, leverage risk, correlation risk and liquidity risk. In addition, the Fund's use of derivatives for hedging purposes is subject to hedging risk. Leverage risk, hedging risk and liquidity risk are described below. Market risk is the risk that the market
value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. The Fund's use of forward contracts and swap agreements is also subject to credit risk and valuation risk. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Credit risk is described above. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
EQUITY MARKET RISK -- The risk that stock prices and prices of other equity securities will fall over short or extended periods of time.
EXCHANGE-TRADED FUNDS (ETFS) RISK -- The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, although lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio securities.
FOREIGN INVESTMENT/EMERGING MARKETS RISK -- The risk that non-U.S. securities may be subject to additional risks due to, among other things, political, social and economic developments abroad, currency movements and different legal, regulatory and tax environments. These additional risks may be heightened with respect to emerging market countries since political turmoil and rapid changes in economic conditions are more likely to occur in these countries.
GEOGRAPHIC RISK -- The Fund's investments may be focused in particular countries or geographic regions and, therefore, the Fund will be more susceptible to adverse market, political, regulatory, and geographic events affecting those regions than a fund that does not focus its investments in a particular region.
GROWTH INVESTMENT STYLE RISK -- An investment in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. Growth stocks typically have little or no dividend income to cushion the effect of adverse market conditions. In addition, growth stocks may be particularly volatile in the event of earnings disappointments or other financial difficulties experienced by the issuer.
HEDGING RISK -- The Fund may use derivative instruments for hedging purposes. Hedging through the use of these instruments does not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. While entering into these instruments tends to reduce the risk of loss due to a decline in the value of the hedged asset, such instruments also limit any potential gain that may result from the increase in value of the asset. There can be no assurance that any hedging strategy will be effective or that there will be a hedge in place at any given time.
INVESTMENT COMPANY RISK -- When the Fund invests in an investment company, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the investment company's expenses. In addition, while the risks of owning shares of an investment company generally reflect the risks of owning the underlying investments of the investment company, the Fund may be subject to additional or different risks than if the Fund had invested directly in the underlying investments. For example, the lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio securities. Closed-end investment companies issue a fixed number of shares that trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value. As a result, a closed-end fund's share price fluctuates based on what another investor is willing to pay rather than on the market value of the securities in the fund.
LEVERAGE RISK -- The use of leverage can amplify the effects of market volatility on the Fund's share price and may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
MICRO-CAPITALIZATION COMPANY RISK -- Micro-capitalization companies may be newly-formed or in the early stages of development with limited product lines, markets or financial resources. In addition, there may be less public information available about these companies. Micro-cap stock prices may be more volatile than small-, mid- and large-capitalization companies and such stocks may be more thinly-traded and thus difficult for the Fund to buy and sell in the market.
MULTI-MANAGER RISK -- The Adviser may be unable to identify and retain sub-advisers who achieve superior investment records relative to other similar investments or effectively allocate the Fund's assets among sub-advisers to enhance the return and reduce the volatility that would typically be expected of any one management style. While the Adviser monitors the investments of each sub-adviser and monitors the overall management of the Fund, each sub-adviser makes investment decisions for the assets it manages independently from one another. It is possible that the investment styles used by a sub-adviser in an asset class will not always be complementary to those used by others, which could adversely affect the performance of the Fund. A multi-manager fund may, under certain circumstances, incur trading costs that might not occur in a fund that is served by a single adviser.
NON-DIVERSIFIED RISK -- The Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the Fund may be more susceptible to a single adverse economic or political occurrence affecting one or more of these issuers and may experience increased volatility due to its investments in those securities.
PORTFOLIO TURNOVER RISK -- Due to its investment strategies, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities.
SECTOR FOCUS RISK -- Because the Fund's investments may, from time to time, be more heavily invested in particular sectors, the value of its shares may be especially sensitive to factors and economic risks that specifically affect those sectors. As a result, the Fund's share price may fluctuate more widely than the value of shares of a mutual fund that invests in a broader range of sectors. The specific risks for each of the sectors in which the Fund may focus its investments include the additional risks described below:
o Financial Services. Companies in the financial services sector are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments they can make, the interest rates and fees they can charge, the scope of their activities, the prices they can charge and the amount of capital they must maintain.
o Information Technology. Companies in the information technology sector are subject to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition, both domestically and internationally, including competition from foreign competitors with lower production costs.
o Consumer Discretionary. Companies in the consumer discretionary sector are subject to the performance of the overall international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and consumer spending.
SMALL AND MEDIUM CAPITALIZATION COMPANIES RISK -- The smaller and medium capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic events than larger,
more established companies. In particular, small and medium capitalization companies may have limited product lines, markets and financial resources and may depend upon a relatively small management group. Therefore, small and medium capitalization stocks may be more volatile than those of larger companies. Small and medium capitalization stocks may be traded over-the-counter or listed on an exchange.
VALUE INVESTMENT STYLE RISK -- An investment in value stocks presents the risk that the stocks may never reach what the Adviser or a sub-adviser believes are their full market values, either because the market fails to recognize what the Adviser or a sub-adviser considers to be the companies' true business values or because the Adviser or sub-adviser misjudged those values. In addition, value stocks may fall out of favor with investors and underperform growth stocks during given periods.
VALUATION RISK -- The Fund may value certain securities at a price higher than the price at which they can be sold. This risk may be especially pronounced for investments that may be illiquid or may become illiquid.
UNDERLYING FUND RISK -- The Fund's performance is subject to the risks associated with the securities and other investments held by the underlying funds in which the Fund may invest. The ability of the Fund to achieve its investment objective may depend upon the ability of the underlying funds to achieve their investment objectives. When the Fund invests in an underlying fund, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the underlying fund's expenses.
UNREGISTERED FUND RISK - Unlike the Fund, unregistered funds are not subject to the investor protections provided under the Investment Company Act of 1940 (the "1940 Act"). Accordingly, (i) the relationship between the unregistered fund and its adviser will not be regulated by the 1940 Act; (ii) unregistered funds are not required to have a majority of disinterested directors; (iii) unregistered funds are not subject to the various custody and safekeeping provisions under the 1940 Act designed to protect fund assets; and (iv) unregistered funds are not subject to the various investment limitations under the 1940 Act.
WARRANTS RISK -- Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Warrants may be more speculative than other types of investments. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. A warrant ceases to have value if it is not exercised prior to its expiration date.
PERFORMANCE INFORMATION
The Fund commenced operations on August 30, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER AND PORTFOLIO MANAGERS
CORNERSTONE ADVISORS, INC.
Paul W. Pedalino, CFA, Managing Director and Principal, has managed the Fund since its inception.
Michael G. Hughes, CFA, CAIA, Chief Investment Officer and Principal, has managed the Fund since its inception.
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS
ACADIAN ASSET MANAGEMENT LLC
John Chisholm, CFA, Chief Investment Officer and Executive Vice President, has managed the portion of the assets of the Global Public Equity Fund allocated to Acadian Asset Management LLC ("Acadian") since the Fund's inception.
Asha Mehta, CFA, Vice President and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Acadian since the Fund's inception.
Joshua S. White, Ph.D., Senior Vice President, Portfolio Manager and Researcher, has managed the portion of the assets of the Global Public Equity Fund allocated to Acadian since the Fund's inception.
ALLIANZ GLOBAL INVESTORS U.S. CAPITAL LLC
John C. McCraw, Managing Director and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Allianz Global Investors U.S. LLC ("Allianz Global Investors U.S.") since the Fund's inception.
Robert S. Marren, Managing Director and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Allianz Global Investors U.S. since the Fund's inception.
K. Mathew Axline, CFA, Senior Vice President and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Allianz Global Investors U.S. since the Fund's inception.
CRAMER ROSENTHAL MCGLYNN LLC
Robert Rewey, III, CFA, Senior Vice President, has managed the portion of the assets of the Global Public Equity Fund allocated to Cramer Rosenthal McGlynn LLC ("CRM") since the Fund's inception.
Jay Abramson, Chief Executive Officer and Chief Investment Officer, has managed the portion of the assets of the Global Public Equity Fund allocated to CRM since the Fund's inception.
Thad Pollock, Vice President, has managed the portion of the assets of the Global Public Equity Fund allocated to CRM since the Fund's inception.
DRIEHAUS CAPITAL MANAGEMENT LLC
Howard Schwab, Lead Portfolio Manager, Driehaus Emerging Markets Growth Strategy and Co-Portfolio Manager, Driehaus International Small Cap Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus Capital Management LLC ("Driehaus") since the Fund's inception.
Chad Cleaver, CFA, Co-Portfolio Manager, Driehaus Emerging Markets Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus since the Fund's inception.
David Mouser, Lead Portfolio Manager, Driehaus International Small Cap Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus since the Fund's inception.
Ryan Carpenter, Assistant Portfolio Manager, Driehaus International Small Cap Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus since the Fund's inception.
FAIRPOINTE CAPITAL LLC
Thyra Zerhusen, Principal Founder, Chief Executive Officer and Chief Investment Officer, has managed the portion of the assets of the Global Public Equity Fund allocated to Fairpointe Capital LLC ("Fairpointe") since the Fund's inception.
Marie Lorden, Co-Founder and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Fairpointe since the Fund's inception.
Mary Pierson, Co-Founder and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Fairpointe since the Fund's inception.
HARRIS ASSOCIATES L.P.
David Herro, CFA, Vice President and Chief Investment Officer of International Equity, has managed the portion of the assets of the Global Public Equity Fund allocated to Harris Associates L.P. ("Harris") since the Fund's inception.
William Nygren, CFA, Vice President, has managed the portion of the assets of the Global Public Equity Fund allocated to Harris since the Fund's inception.
LSV ASSET MANAGEMENT
Josef Lakonishok, Ph.D., Chief Executive Officer, Chief Investment Officer and Partner, has managed the portion of the assets of the Global Public Equity Fund allocated to LSV Asset Management ("LSV") since the Fund's inception.
Menno Vermeulen, CFA, Partner, has managed the portion of the assets of the Global Public Equity Fund allocated to LSV since the Fund's inception.
Puneet Mansharamani, CFA, Partner, has managed the portion of the assets of the Global Public Equity Fund allocated to LSV since the Fund's inception.
MARSICO CAPITAL MANAGEMENT, LLC
Thomas F. Marsico, Chief Investment Officer, Chief Executive Officer and Portfolio Manager, has managed the portion of the Fund's assets allocated to Marsico Capital Management, LLC ("Marsico") since the Fund's inception.
James G. Gendelman, Portfolio Manager and Senior Analyst, has managed the portion of the Fund's assets allocated to Marsico since the Fund's inception.
PARAMETRIC PORTFOLIO ASSOCIATES LLC
Thomas Seto, Managing Director of Portfolio Management, has managed the portion of the Fund's assets allocated to Parametric Portfolio Associates LLC ("Parametric") since the Fund's inception.
David Stein, Ph.D., Chief Investment Officer, has managed the portion of the Fund's assets allocated to Parametric since the Fund's inception.
PHOCAS FINANCIAL CORPORATION
William Schaff, Chief Executive Officer and President, has managed the portion of the Fund's assets allocated to Phocas Financial Corporation ("Phocas") since the Fund's inception.
Steve Block, Portfolio Manager, has managed the portion of the Fund's assets allocated to Phocas since the Fund's inception.
TCW INVESTMENT MANAGEMENT COMPANY
Chang Lee, Managing Director, has managed the portion of the Fund's assets allocated to TCW Investment Management Company ("TIMCO") since 2013.
Mike Olson, Managing Director, has managed the portion of the Fund's assets allocated to TIMCO since 2013.
THORNBURG INVESTMENT MANAGEMENT INC.
Brian J. McMahon, Chief Executive Officer and Chief Investment Officer, has managed the portion of the Fund's assets allocated to Thornburg Investment Management Inc. ("TIM") since the Fund's inception.
W. Vinson Walden, CFA, Portfolio Manager, Managing Director, has managed the portion of the Fund's assets allocated to TIM since the Fund's inception.
TURNER INVESTMENTS, L.P.
Christopher McHugh, Vice Chairman, Senior Portfolio Manager and Founder, has managed the portion of the Fund's assets allocated to Turner Investments, L.P. ("Turner") since the Fund's inception.
FOR IMPORTANT INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 40 OF THE PROSPECTUS.
CORNERSTONE ADVISORS INCOME OPPORTUNITIES FUND
FUND INVESTMENT OBJECTIVE
The Cornerstone Advisors Income Opportunities Fund (the "Income Opportunities Fund" or "Fund") seeks current income.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fee(1) 0.20%
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Other Expenses
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Shareholder Servicing Fee 0.05%
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Remaining Other Expenses(2) 0.19%
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Total Other Expenses 0.24%
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Acquired Fund Fees and Expenses(3) 0.54%
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Total Annual Fund Operating Expenses(4) 0.98%
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(1) The fee shown is the total management fee actually paid by the Fund to the Adviser and the sub-advisers during the prior fiscal year based on the allocation of Fund assets among the sub-advisers during such time. Each sub-adviser receives a fee from the Fund based on the portion of the Fund's assets allocated to such sub-adviser. Asset allocations and fees payable to the sub-advisers may vary and, consequently, the total management fee actually payable by the Fund will fluctuate and may be higher or lower than that shown above. However, the total annual management fee payable by the Fund to the Adviser and the sub-advisers is subject to a maximum annual management fee of 1.25% (referred to as a Fund's "Fee Ceiling").
(2) Remaining Other Expenses are based on estimated amounts for the current fiscal year.
(3) Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(4) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
------------------- 1 YEAR 3 YEARS ------------------- $100 $312 ------------------- |
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from August 30, 2012 to October 31, 2012, the Fund's portfolio turnover rate was 0% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its investment objective by allocating its assets among one or more investment strategies directly through the use of one or more sub-advisers and/or indirectly through investments in affiliated and unaffiliated open-end funds, closed-end funds, unregistered funds (including hedge funds) and exchange-traded funds ("Underlying Funds"). The Fund will invest in Underlying Funds and/or use one or more sub-advisers to invest its assets in the following four primary investment categories: (i) investment in U.S. and non-U.S. convertible securities; (ii) investment in U.S. and non-U.S. debt securities issued by corporate or sovereign entities in emerging markets and denominated in local (non-U.S.) currency; (iii) investment in U.S. and non-U.S. debt securities that are rated below-investment grade ("high yield" or "junk" bonds); and (iv) investment in income-oriented publicly traded master limited partnerships ("MLPs") and securities of MLP affiliates, including companies that own MLP partner interests. The Fund may, from time to time, pursue its investment objective by investing substantially all of its assets in Underlying Funds, typically known as a "fund of funds" strategy. From time to time, the Fund may also focus its investments in a particular geographic region, such as Europe, Asia and North America.
The Fund uses a multi-manager and/or multi-fund approach, relying on one or more sub-advisers and/or Underlying Funds with differing investment philosophies to manage portions of the Fund's portfolio under the general supervision of the Fund's primary investment adviser, Cornerstone Advisors, Inc. (the "Adviser"). The Fund allocates its assets among strategies and sub-advisers or Underlying Funds according to an allocation schedule, determined by the Adviser. The Adviser expects to rebalance allocation weightings for each strategy, sub-adviser or Underlying Fund on an annual basis, but may do so more frequently based on market conditions, the performance of a strategy, sub-adviser or Underlying Fund or other factors. The Adviser may change an allocation schedule based on, among other factors, the Adviser's analysis of the Fund's investment strategies, the potential for each strategy to perform independently of the other, historical performance, and market conditions.
The Fund's assets may be invested, directly and/or through Underlying Funds, in a broad range of asset classes, securities and other investments to implement its four primary investment strategies. In particular, investments may include U.S. and foreign investment and non-investment grade fixed income securities of any duration or maturity issued by corporations or governments, including mortgage-backed and asset-backed securities, and securities denominated in local currency. The Fund's investments may include securities of emerging markets issuers. In addition, the Fund may also invest in convertible securities and MLPs. The Fund may also invest in equity securities and derivative instruments, principally options, futures contracts, options on futures contracts, forward contracts and swap agreements. The Fund may engage in such derivatives transactions to gain exposure to, for example,
certain securities, markets or asset classes, to hedge the Fund's positions in or exposure to securities, currencies or other instruments, or to enhance the Fund's return, which is also known as speculation. The Fund may also invest in cash, money market instruments and other short-term obligations to achieve its investment objective.
The Fund may buy and sell securities frequently in seeking to achieve its objective.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Because an Underlying Fund's use of an investment strategy or investment in an asset class, security or other investment is subject to the same or similar risks as the Fund's use of such strategy or investment in such asset class, security or other investment, the term "the Fund" in the paragraphs below collectively refers to both the Fund and each Underlying Fund.
ALLOCATION RISK -- The Adviser's judgment about, and allocations among, funds, sub-advisers, asset classes and investment strategies may adversely affect the Fund's performance.
ASSET-BACKED SECURITIES RISK -- Payment of principal and interest on asset-backed securities is dependent largely on the cash flows generated by the assets backing the securities, and asset-backed securities may not have the benefit of any security interest in the related assets.
CASH FLOW RISK -- A portion of the cash flow received by the Fund will be derived from its investment in MLPs, debt and equity securities of MLP affiliates, including other companies that own MLP partner interests and derive a significant portion of their revenue from energy-related activities ("Energy Companies"). In addition to the risk factors described below under "Energy Companies Risk," other factors which may reduce the amount of cash an Energy Company has available for distribution include increased operating costs, maintenance capital expenditures, acquisition costs, expansion, construction or exploration costs and borrowing costs.
CONVERTIBLE SECURITIES RISK -- Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of underlying common stock (or cash or securities of equivalent value). An issuer of a convertible security may fail to pay interest or dividends and principal in a timely manner. Negative perceptions of the issuer's ability to make such payments will cause the price of that security to decline. Companies that issue convertible securities are often small to mid-size, and they often have low credit ratings, including below investment grade ratings. In addition, the credit rating of a company's convertible securities is generally lower than that of its nonconvertible debt securities. Convertibles are normally considered "junior" securities--that is, the company usually must pay interest on its nonconvertible debt before it can make payments on its convertible securities. If an issuer stops making interest or principal payments, these securities may become worthless and the Fund could lose its entire investment.
CORPORATE FIXED INCOME SECURITIES RISK -- Corporate fixed income securities respond to economic developments, especially changes in interest rates, as well as perceptions of the creditworthiness and business prospects of individual issuers.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the Fund would be adversely affected.
DERIVATIVES RISK -- The Fund's use of futures contracts, options, forward contracts and swaps for all purposes, including speculative purposes, is subject to market risk, leverage risk, correlation risk and liquidity risk. In addition, the Fund's use of derivatives for hedging purposes is subject to hedging risk. Leverage risk is the risk that the use of leverage can amplify the effects of market volatility on the Fund's share price and may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations. Hedging risk and liquidity risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. The Fund's use of forward contracts and swap agreements is also subject to credit risk and valuation risk. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Credit risk is described above. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
ENERGY COMPANIES RISK -- Energy Companies are susceptible to adverse economic, environmental or regulatory occurrences affecting the energy industry. Risks associated with investments in Energy Companies include but are not limited to the following:
o Commodity Pricing Risk. Energy companies may be affected by fluctuations in the prices of energy commodities. Fluctuations in energy commodity prices would directly impact companies that own such energy commodities and could indirectly impact MLP companies that engage in transportation, storage, processing, distribution or marketing of such energy commodities.
o Depletion and Exploration Risk. Energy reserves naturally deplete as they are produced over time. The financial performance of Energy Companies may be adversely affected if they, or the companies to which they provide the service, are unable to cost-effectively acquire additional reserves sufficient to replace the natural decline. If an Energy Company is not able to raise capital on favorable terms, it may not be able to add or maintain its reserves.
o Supply and Demand Risk. Energy Companies may be impacted by the levels of supply and demand for energy commodities.
o Environmental and Regulatory Risk. Energy Companies are subject to significant regulation of their operations by federal, state and local governmental agencies. Additionally, voluntary initiatives and mandatory controls have been adopted or are being studied and evaluated, both in the United States and worldwide, to address current potentially hazardous environmental issues, including hydraulic fracturing and related waste disposal and geological concerns, as well as those that may develop in the future.
o Acquisition Risk. An Energy Company's ability to grow and, where applicable, increase distributions to its equity holders, may be highly dependent on its ability to make acquisitions that increase adjusted operating surplus per unit in order to increase distributions to unit holders. In
the event that Energy Companies are unable to make such acquisitions, their future growth and ability to raise distributions will be limited and their ability to repay their debt holders may be weakened.
o Interest Rate Risk. Rising interest rates could increase the costs of capital thereby increasing operating costs and reducing the ability of Energy Companies to carry out acquisitions or expansions in a cost-effective manner. Rising interest rates may also impact the price of the securities of Energy Companies as the yields on alternative investments increase.
o Catastrophic Event Risk. Energy Companies are subject to many dangers inherent in the production, exploration, management, transportation, processing and distribution of natural gas, natural gas liquids, crude oil, refined petroleum and petroleum products and other hydrocarbons. Any occurrence of a catastrophic event, such as a terrorist attack, could bring about a limitation, suspension or discontinuation of the operations of Energy Companies.
EQUITY MARKET RISK -- The risk that stock prices and prices of other equity securities will fall over short or extended periods of time.
FIXED INCOME MARKET 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 and their agencies. In the case of foreign securities, price fluctuations will reflect international economic and political events, as well as changes in currency valuations relative to the U.S. dollar.
FOREIGN INVESTMENT/EMERGING MARKETS RISK -- The risk that non-U.S. securities may be subject to additional risks due to, among other things, political, social and economic developments abroad, currency movements and different legal, regulatory and tax environments. These additional risks may be heightened with respect to emerging market countries since political turmoil and rapid changes in economic conditions are more likely to occur in these countries.
GEOGRAPHIC RISK -- The Fund's investments may be focused in particular countries or geographic regions and, therefore, the Fund will be more susceptible to adverse market, political, regulatory, and geographic events affecting those regions than a fund that does not focus its investments in a particular region.
HEDGING RISK -- The Fund may use derivative instruments for hedging purposes. Hedging through the use of these instruments does not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. While entering into these instruments tends to reduce the risk of loss due to a decline in the value of the hedged asset, such instruments also limit any potential gain that may result from the increase in value of the asset. There can be no assurance that any hedging strategy will be effective or that there will be a hedge in place at any given time.
HIGH YIELD BOND RISK - High yield, or "junk," bonds are highly speculative securities that are usually issued by smaller, less creditworthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds are considered to carry a greater degree of risk and are considered to be less likely to make payments of interest and principal. In particular, lower-quality high yield bonds (rated CCC, CC, C, or unrated securities judged to be of comparable quality) are subject to a greater degree of credit risk than higher-quality high yield bonds and may be near default. High yield bonds rated D are in default. Market developments and the financial and business conditions of the corporation issuing these securities generally influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities.
INTEREST RATE RISK -- The risk that the value of fixed income securities, including U.S. Government securities, will fall due to rising interest rates.
INVESTMENT COMPANY RISK -- When the Fund invests in an investment company, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the investment company's expenses. In addition, while the risks of owning shares of an investment company generally reflect the risks of owning the underlying investments of the investment company, the Fund may be subject to additional or different risks than if the Fund had invested directly in the underlying investments. For example, the lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio securities. Closed-end investment companies issue a fixed number of shares that trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value. As a result, a closed-end fund's share price fluctuates based on what another investor is willing to pay rather than on the market value of the securities in the fund.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
MLP RISK - MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the SEC and are freely traded on a securities exchange or in the over-the-counter market. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. MLPs are exposed to many of the same risks as other Energy Companies, summarized above. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation; for example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
MORTGAGE-BACKED SECURITIES RISK -- Mortgage-backed securities are affected by, among other things, interest rate changes and the possibility of prepayment of the underlying mortgage loans. Mortgage-backed securities are also subject to the risk that underlying borrowers will be unable to meet their obligations.
MULTI-MANAGER RISK -- The Adviser may be unable to identify and retain sub-advisers who achieve superior investment records relative to other similar investments or effectively allocate the Fund's assets among sub-advisers to enhance the return and reduce the volatility that would typically be expected of any one management style. While the Adviser monitors the investments of each sub-adviser and monitors the overall management of the Fund, each sub-adviser makes investment decisions for the assets it manages independently from one another. It is possible that the investment styles used by a sub-adviser in an asset class will not always be complementary to those used by others, which could adversely affect the performance of the Fund. A multi-manager fund may, under certain circumstances, incur trading costs that might not occur in a fund that is served by a single adviser.
NON-DIVERSIFIED RISK -- The Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the Fund may be more susceptible to a single adverse economic or political occurrence affecting one or more of these issuers and may experience increased volatility due to its investments in those securities.
PORTFOLIO TURNOVER RISK -- Due to its investment strategies, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities.
SMALL AND MEDIUM CAPITALIZATION COMPANIES RISK -- The smaller and medium capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, small and medium capitalization companies may have limited product lines, markets and financial resources and may depend upon a relatively small management group. Therefore, small and medium capitalization stocks may be more volatile than those of larger companies. Small and medium capitalization stocks may be traded over-the-counter or listed on an exchange.
SOVEREIGN DEBT RISK -- Sovereign debt instruments are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entity's debt position in relation to the economy or the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies.
TAX RISK -- The Fund is subject to the following tax risks: the risk that MLPs in which the Fund invest will be classified as corporations rather than as partnerships for federal income tax purposes, which may reduce the Fund's return and negatively affect the Fund's net asset value; the risk associated with the monitoring of the investments of the Fund to ensure compliance with the qualifying income and distribution requirements applicable to RICs which may result in the Fund failing to qualify as a RIC unless certain relief provisions are available; the risk of changes in tax laws or regulations, or interpretations thereof, which could adversely affect the Fund or the MLPs in which the Fund invests.
UNDERLYING FUND RISK -- The Fund's performance is subject to the risks associated with the securities and other investments held by the underlying funds in which the Fund may invest. The ability of the Fund to achieve its investment objective may depend upon the ability of the underlying funds to achieve their investment objectives. When the Fund invests in an underlying fund, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the underlying fund's expenses.
UNREGISTERED FUND RISK - Unlike the Fund, unregistered funds are not subject to the investor protections provided under the Investment Company Act of 1940 (the "1940 Act"). Accordingly, (i) the relationship between the unregistered fund and its adviser will not be regulated by the 1940 Act; (ii) unregistered funds are not required to have a majority of disinterested directors; (iii) unregistered funds are not subject to the various custody and safekeeping provisions under the 1940 Act designed to protect fund assets; and (iv) unregistered funds are not subject to the various investment limitations under the 1940 Act.
VALUATION RISK -- The Fund may value certain securities at a price higher than the price at which they can be sold. This risk may be especially pronounced for investments that may be illiquid or may become illiquid.
PERFORMANCE INFORMATION
The Fund commenced operations on August 30, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER AND PORTFOLIO MANAGERS
CORNERSTONE ADVISORS, INC.
Paul W. Pedalino, CFA, Managing Director and Principal, has managed the Fund since its inception.
Michael G. Hughes, CFA, CAIA, Chief Investment Officer and Principal, has managed the Fund since its inception.
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS
OFI STEELPATH, INC.
Gabriel Hammond, Senior Vice President of OFI SteelPath, Inc. ("OFI SteelPath") has managed the portion of the Fund's assets allocated to OFI Steelpath since the Fund's inception in 2012.
Stuart Cartner, Vice President of OFI SteelPath, has managed the portion of the Fund's assets allocated to OFI SteelPath since the Fund's inception in 2012.
Brian Watson, Vice President of OFI SteelPath, has managed the protion of the Fund's assets allocated to OFI SteelPath since the Fund's inception in 2012.
FOR IMPORTANT INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 40 OF THE PROSPECTUS.
CORNERSTONE ADVISORS PUBLIC ALTERNATIVES FUND
FUND INVESTMENT OBJECTIVE
The Cornerstone Advisors Public Alternatives Fund (the "Public Alternatives Fund" or "Fund") seeks capital appreciation with lower correlation to traditional global fixed income and public equity markets.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fee(1) 0.44%
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Other Expenses
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Shareholder Servicing Fee 0.05%
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Dividend, Interest and Stock Loan
Expense on Securities Sold Short 0.54%
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Remaining Other Expenses(2) 0.15%
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Total Other Expenses 0.74%
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Acquired Fund Fees and Expenses(3) 0.97%
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Total Annual Fund Operating Expenses(4) 2.15%
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(1) The fee shown is the total management fee actually paid by the Fund to the Adviser and the sub-advisers during the prior fiscal year based on the allocation of Fund assets among the sub-advisers during such time. Each sub-adviser receives a fee from the Fund based on the portion of the Fund's assets allocated to such sub-adviser. Asset allocations and fees payable to the sub-advisers may vary and, consequently, the total management fee actually payable by the Fund will fluctuate and may be higher or lower than that shown above. However, the total annual management fee payable by the Fund to the Adviser and the sub-advisers is subject to a maximum annual management fee of 1.85% (referred to as a Fund's "Fee Ceiling").
(2) Remaining Other Expenses are based on estimated amounts for the current fiscal year.
(3) Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(4) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
------------------- 1 YEAR 3 YEARS ------------------- $218 $673 ------------------- |
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from August 30, 2012 to October 31, 2012, the Fund's portfolio turnover rate was 19% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its investment objective by allocating its assets among one or more investment strategies directly through the use of one or more sub-advisers and/or indirectly through investments in affiliated and unaffiliated open-end funds, closed-end funds, unregistered funds (including hedge funds) and exchange-traded funds ("Underlying Funds"). The Fund will initially, and may from time to time thereafter, pursue its investment objective by investing substantially all of its assets in Underlying Funds, typically referred to as a "fund of funds" strategy. The Fund will invest in Underlying Funds and/or use one or more sub-advisers that employ one of the Fund's two primary investment strategies: global macro and arbitrage. In the global macro strategy, the Fund's assets may be invested across all capital markets and in any type of security or other instrument that the Underlying Fund's adviser or one or more sub-advisers believe presents the best investment opportunities, consistent with the Fund's 80% investment policy described below. The Fund's sub-advisers or an Underlying Fund's adviser may use a combination of investment techniques in the global macro strategy, including "bottom up" and "top down" approaches to investing. In the arbitrage strategy, the Fund takes "long" positions in securities that are believed will go up in price and "short" positions in securities that are believed will go down in price. Underlying Funds and one or more sub-advisers that employ a global macro strategy will also engage in short selling. The Fund may use one or more sub-advisers, invest in Underlying Funds or employ strategies that pursue a blend of value and growth equity investing.
The Fund invests in publicly-traded investments, and derivatives thereof, and shares of Underlying Funds that are publicly available (collectively, "Publicly Available Investments"). Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowing for investment purposes, in Publicly Available Investments and derivatives and other instruments with economic characteristics similar to Publicly Available Investments (the "80% Investment Policy"). The 80% Investment Policy may be changed by the Fund upon 60 days' prior notice to shareholders. From time to time, the Fund may also focus its investments in a particular geographic region, such as Europe, Asia and North America.
The Fund uses a multi-manager and/or multi-fund approach, relying on one or more sub-advisers and/or Underlying Funds with differing investment philosophies to manage portions of the Fund's portfolio under the general supervision of the Fund's primary investment adviser, Cornerstone Advisors, Inc. (the "Adviser"). The Fund allocates its assets among strategies and sub-advisers or Underlying Funds according to an allocation schedule, determined by the Adviser. The Adviser expects to rebalance allocation weightings for each strategy, sub-adviser or Underlying Fund on an annual basis, but may do so more frequently based on market conditions, the performance of a strategy, sub-adviser or Underlying Fund or other factors. The Adviser may change an allocation schedule based on, among other factors, the
Adviser's analysis of the Fund's investment strategies, the potential for each strategy to perform independently of the other, historical performance, and market conditions.
The Fund's assets may be invested, directly and/or through Underlying Funds, in a broad range of asset classes, securities and other investments to implement its two primary investment strategies. These may include, subject to the Fund's 80% Investment Policy, U.S., foreign and emerging markets securities, equity securities of all types and capitalization ranges, investment and non-investment grade fixed income securities of any duration or maturity issued by corporations or governments, including mortgage-backed and asset-backed securities, commodities, currencies, warrants, depositary receipts, exchange-traded notes, shares of other investment companies, including exchange-traded funds, and derivative instruments, principally options, futures contracts, options on futures contracts, forward contracts and swap agreements. An Underlying Fund or sub-adviser may engage in such derivatives transactions to gain exposure to, for example, certain securities, markets or asset classes, to hedge the Fund's positions in or exposure to securities, currencies or other instruments, or to enhance the Fund's return, which is also known as speculation. An Underlying Fund or Sub-Adviser may also invest in cash, money market instruments and other short-term obligations to achieve its investment objective and, at times, such investments may be significant in order for an Underlying Fund or a sub-adviser to maintain flexibility to pursue its investment strategies.
An Underlying Fund or sub-adviser may engage in short sales, particularly in implementing the arbitrage strategy. When a fund sells a security short, it borrows the security from a third party and sells it at the then current market price. The fund is then obligated to buy the security at a later date so that it can return the security to the lender. Short positions may be used either to hedge long positions or to seek positive returns in instances where an adviser believes a security's price will decline. A fund will either realize a profit or incur a loss from a short position, depending on whether the value of the security decreases or increases, respectively, between the time it is sold and the time when the fund replaces the borrowed security. An Underlying Fund or sub-adviser may reinvest the proceeds of its short sales by taking additional long positions, thus allowing the Fund or an Underlying Fund to maintain long positions in excess of 100% of its net assets. An Underlying Fund or sub-adviser may vary the long and short exposures in its portfolio over time, based on its assessment of market conditions and other factors.
As a result of the Fund's strategies, the Fund may have highly leveraged exposure to one or more asset classes at times. The Fund may buy and sell securities frequently in seeking to achieve its objective.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Because an Underlying Fund's use of an investment strategy or investment in an asset class, security or other investment is subject to the same or similar risks as the Fund's use of such strategy or investment in such asset class, security or other investment, the term "the Fund" in the paragraphs below collectively refers to both the Fund and each Underlying Fund.
ALLOCATION RISK -- The Adviser's judgment about, and allocations among, funds, sub-advisers, asset classes and investment strategies may adversely affect the Fund's performance.
ARBITRAGE STRATEGIES RISK -- The Fund may utilize strategies that involve engaging in transactions that attempt to exploit price differences of identical, related or similar securities on different markets or in different forms. The Fund may realize losses or reduced rate of return if underlying relationships among securities in which it takes investment positions change in an adverse manner or if a transaction is unexpectedly terminated or delayed.
ASSET-BACKED SECURITIES RISK -- Payment of principal and interest on asset-backed securities is dependent largely on the cash flows generated by the assets backing the securities, and asset-backed securities may not have the benefit of any security interest in the related assets.
BELOW INVESTMENT GRADE SECURITIES RISK -- Fixed income securities rated below investment grade (junk bonds) involve greater risks of default or downgrade and are more volatile than investment grade securities because the prospect of repayment of principal and interest of many of these securities is speculative.
COMMODITY RISK -- Investing in the commodity futures markets may subject the Fund to greater volatility than investments in traditional securities. Commodity futures prices may be influenced by unfavorable weather, animal and plant disease, geologic and environmental factors as well as changes in government regulation such as tariffs, embargoes or burdensome production rules and restrictions.
COMMODITY-LINKED SECURITIES RISK -- Investments in commodity-linked securities may be more volatile and less liquid than direct investments in the underlying commodities themselves. Commodity-related equity returns can also be affected by the issuer's financial structure or the performance of unrelated businesses.
CORPORATE FIXED INCOME SECURITIES RISK -- Corporate fixed income securities respond to economic developments, especially changes in interest rates, as well as perceptions of the creditworthiness and business prospects of individual issuers.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the Fund would be adversely affected.
DERIVATIVES RISK -- The Fund's use of futures contracts, options, forward contracts and swaps for all purposes, including speculative purposes, is subject to market risk, leverage risk, commodity risk, correlation risk and liquidity risk. In addition, the Fund's use of derivatives for hedging purposes is subject to hedging risk. Commodity risk is described above. Leverage risk, hedging risk and liquidity risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. The Fund's use of forward contracts and swap agreements is also subject to credit risk and valuation risk. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Credit risk is described above. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
EQUITY MARKET RISK -- The risk that stock prices and prices of other equity securities will fall over short or extended periods of time.
EXCHANGE-TRADED FUNDS (ETFS) RISK -- The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities the ETF is designed to track, although lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio securities.
EXCHANGE-TRADED NOTES (ETNS) -- The value of an ETN is subject to the credit risk of the issuer. There may not be an active trading market available for some ETNs. Additionally, trading of ETNs may be halted or delisted by the listing exchange.
FIXED INCOME MARKET 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 and their agencies. In the case of foreign securities, price fluctuations will reflect international economic and political events, as well as changes in currency valuations relative to the U.S. dollar.
FOREIGN INVESTMENT/EMERGING MARKETS RISK -- The risk that non-U.S. securities may be subject to additional risks due to, among other things, political, social and economic developments abroad, currency movements and different legal, regulatory and tax environments. These additional risks may be heightened with respect to emerging market countries since political turmoil and rapid changes in economic conditions are more likely to occur in these countries.
GEOGRAPHIC RISK -- The Fund's investments may be focused in particular countries or geographic regions and, therefore, the Fund will be more susceptible to adverse market, political, regulatory, and geographic events affecting those regions than a fund that does not focus its investments in a particular region.
GROWTH INVESTMENT STYLE RISK -- An investment in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. Growth stocks typically have little or no dividend income to cushion the effect of adverse market conditions. In addition, growth stocks may be particularly volatile in the event of earnings disappointments or other financial difficulties experienced by the issuer.
HEDGING RISK -- The Fund may use derivative instruments for hedging purposes. Hedging through the use of these instruments does not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. While entering into these instruments tends to reduce the risk of loss due to a decline in the value of the hedged asset, such instruments also limit any potential gain that may result from the increase in value of the asset. There can be no assurance that any hedging strategy will be effective or that there will be a hedge in place at any given time.
INTEREST RATE RISK -- The risk that the value of fixed income securities, including U.S. Government securities, will fall due to rising interest rates.
INVESTMENT COMPANY RISK -- When the Fund invests in an investment company, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the investment company's expenses. In addition, while the risks of owning shares of an investment company generally reflect the risks of owning the underlying investments of the investment company, the Fund may be subject to additional or different risks than if the Fund had invested directly in the underlying investments. For example, the lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio securities. Closed-end investment companies issue a fixed number of shares that trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value. As
a result, a closed-end fund's share price fluctuates based on what another investor is willing to pay rather than on the market value of the securities in the fund.
LEVERAGE RISK -- The use of leverage can amplify the effects of market volatility on the Fund's share price and may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
MICRO-CAPITALIZATION COMPANY RISK -- Micro-capitalization companies may be newly-formed or in the early stages of development with limited product lines, markets or financial resources. In addition, there may be less public information available about these companies. Micro-cap stock prices may be more volatile than small-, mid- and large-capitalization companies and such stocks may be more thinly-traded and thus difficult for the Fund to buy and sell in the market.
MORTGAGE-BACKED SECURITIES RISK -- Mortgage-backed securities are affected by, among other things, interest rate changes and the possibility of prepayment of the underlying mortgage loans. Mortgage-backed securities are also subject to the risk that underlying borrowers will be unable to meet their obligations.
MULTI-MANAGER RISK -- The Adviser may be unable to identify and retain sub-advisers who achieve superior investment records relative to other similar investments or effectively allocate the Fund's assets among sub-advisers to enhance the return and reduce the volatility that would typically be expected of any one management style. While the Adviser monitors the investments of each sub-adviser and monitors the overall management of the Fund, each sub-adviser makes investment decisions for the assets it manages independently from one another. It is possible that the investment styles used by a sub-adviser in an asset class will not always be complementary to those used by others, which could adversely affect the performance of the Fund. A multi-manager fund may, under certain circumstances, incur trading costs that might not occur in a fund that is served by a single adviser.
NON-DIVERSIFIED RISK -- The Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the Fund may be more susceptible to a single adverse economic or political occurrence affecting one or more of these issuers and may experience increased volatility due to its investments in those securities.
PORTFOLIO TURNOVER RISK -- Due to its investment strategies, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities.
SHORT SALES RISK -- A short sale involves the sale of a security that the Fund does not own in the expectation of purchasing the same security (or a security exchangeable therefore) at a later date at a lower price. Short sales expose the Fund to the risk that it will be required to buy the security sold short (also known as "covering" the short position) at a time when the security has appreciated in value, thus resulting in a loss to the Fund. Investment in short sales may also cause the Fund to incur expenses related to borrowing securities. Reinvesting proceeds received from short selling may create leverage which can amplify the effects of market volatility on the Fund or an Underlying Fund and, therefore, the Fund's share prices. Theoretically, uncovered short sales have the potential to expose the Fund to unlimited losses.
SMALL AND MEDIUM CAPITALIZATION COMPANIES RISK -- The smaller and medium capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, small and medium capitalization companies may have limited product lines, markets and financial resources and may depend upon a relatively small management group. Therefore, small and medium capitalization stocks may be more volatile than those of larger companies. Small and medium capitalization stocks may be traded over-the-counter or listed on an exchange.
TAX RISK -- In order for the Fund to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code"), the Fund must derive at least 90 percent of its gross income each taxable year from qualifying income, which is described in more detail in the Statement of Additional Information ("SAI"). Income from certain Fund investments which provide exposure to changes in commodity prices, such as commodity-linked derivative instruments, may not be considered qualifying income for these purposes. The Fund will therefore seek to restrict its income from direct investments in investments that do not generate qualifying income to a maximum of 10 percent of its gross income.
UNDERLYING FUND RISK -- The Fund's performance is subject to the risks associated with the securities and other investments held by the underlying funds in which the Fund may invest. The ability of the Fund to achieve its investment objective may depend upon the ability of the underlying funds to achieve their investment objectives. When the Fund invests in an underlying fund, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the underlying fund's expenses.
UNREGISTERED FUND RISK - Unlike the Fund, unregistered funds are not subject to the investor protections provided under the Investment Company Act of 1940 (the "1940 Act"). Accordingly, (i) the relationship between the unregistered fund and its adviser will not be regulated by the 1940 Act; (ii) unregistered funds are not required to have a majority of disinterested directors; (iii) unregistered funds are not subject to the various custody and safekeeping provisions under the 1940 Act designed to protect fund assets; and (iv) unregistered funds are not subject to the various investment limitations under the 1940 Act.
U. S. GOVERNMENT SECURITIES RISK -- Although U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to changing interest rates. Obligations issued by some U.S. Government agencies are backed by the U.S. Treasury, while others are backed solely by the ability of the agency to borrow from the U.S. Treasury or by the agency's own resources.
VALUE INVESTMENT STYLE RISK -- An investment in value stocks presents the risk that the stocks may never reach what the Adviser or a sub-adviser believes are their full market values, either because the market fails to recognize what the Adviser or a sub-adviser considers to be the companies' true business values or because the Adviser or sub-adviser misjudged those values. In addition, value stocks may fall out of favor with investors and underperform growth stocks during given periods.
VALUATION RISK -- The Fund may value certain securities at a price higher than the price at which they can be sold. This risk may be especially pronounced for investments that may be illiquid or may become illiquid.
WARRANTS RISK -- Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Warrants may be more speculative than other types of investments. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. A warrant ceases to have value if it is not exercised prior to its expiration date.
PERFORMANCE INFORMATION
The Fund commenced operations on August 30, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER AND PORTFOLIO MANAGERS
CORNERSTONE ADVISORS, INC.
Paul W. Pedalino, CFA, Managing Director and Principal, has managed the Fund since its inception.
Michael G. Hughes, CFA, CAIA, Chief Investment Officer and Principal, has managed the Fund since its inception.
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS
ALPHASIMPLEX GROUP, LLC
While the Board of Trustees of the Public Alternatives Fund and the Fund's sole initial shareholder have approved the appointment of AlphaSimplex Group, LLC ("AlphaSimplex") as a sub-adviser to the Fund and the investment sub-advisory agreement with AlphaSimplex, as of the date of this prospectus, no assets of the Fund have been allocated to AlphaSimplex.
The Adviser, on any future date as is agreed between the Adviser and AlphaSimplex and without any further action being taken by shareholders, may allocate Fund assets to AlphaSimplex in accordance with the terms of the investment sub-advisory agreement with AlphaSimplex.
Andrew W. Lo, Ph.D., Chief Investment Strategist, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex.
Jeremiah H. Chafkin, President and Chief Executive Officer, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex.
Philippe P. Ludi, Ph.D., CFA, Senior Research Scientist, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex.
Robert W. Sinnott, Research Scientist, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex.
AQR CAPITAL MANAGEMENT, LLC
While the Board of Trustees of the Public Alternatives Fund and the Fund's sole initial shareholder have approved the appointment of AQR Capital Management, LLC ("AQR") as a sub-adviser to the Fund and the investment sub-advisory agreement between the Adviser, the Trust and AQR, as of the date of this prospectus, no assets of the Fund have been allocated to AQR.
The Adviser, on any future date as is agreed between the Adviser and AQR and without any further action being taken by shareholders, may allocate Fund assets to AQR in accordance with the terms of the investment sub-advisory agreement between the Adviser, the Trust and AQR. Until such time, AQR will not have any responsibilities with respect to the management of Fund assets, nor any obligations to the Fund or the Trust.
Brian Hurst, Principal, is expected to manage the portion of the Fund's assets allocated to AQR at the inception date of the allocation of Fund assets to AQR.
Yao Hua Ooi, Principal, is expected to manage the portion of the Fund's assets allocated to AQR at the inception date of the allocation of Fund assets to AQR.
Michael Mendelson, Principal, is expected to manage the portion of the Fund's assets allocated to AQR at the inception date of the allocation of Fund assets to AQR.
CLARIVEST ASSET MANAGEMENT LLC
Todd Wolter, CFA, Portfolio Manager, has managed the portion of the Fund's assets allocated to ClariVest Asset Management LLC ("ClariVest") since the Fund's inception.
Michael Waterman, CFA, Portfolio Manager, has managed the portion of the Fund's assets allocated to ClariVest since the Fund's inception.
TURNER INVESTMENTS, L.P.
David Honold, Jr., CFA, Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner Investments, L.P. ("Turner") since the Fund's inception.
Frank Sustersic, CFA, Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception.
Jason Schrotberger, CFA, Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception.
Vijay Shankaran, MD, Ph.D., Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception.
Christopher Baggini, CFA, Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception.
Donald Smith, CFA, Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception.
Matthew Glaser, Chief of Investment Strategies, Executive Managing Director, Principal and Lead Portfolio Manager -- Turner Market Neutral Equity, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception.
Joshua Kohn, CFA, Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception.
FOR IMPORTANT INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 40 OF THE PROSPECTUS.
CORNERSTONE ADVISORS REAL ASSETS FUND
FUND INVESTMENT OBJECTIVE
The Cornerstone Advisors Real Assets Fund (the "Real Assets Fund" or "Fund") seeks capital appreciation and, as a secondary objective, current income.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fee(1) 0.49%
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Other Expenses
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Shareholder Servicing Fee 0.05%
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Remaining Other Expenses(2) 0.19%
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Total Other Expenses 0.24%
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Acquired Fund Fees and Expenses(3) 0.24%
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Total Annual Fund Operating Expenses(4) 0.97%
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(1) The fee shown is the total management fee actually paid by the Fund to the Adviser and the sub-advisers during the prior fiscal year based on the allocation of Fund assets among the sub-advisers during such time. Each sub-adviser receives a fee from the Fund based on the portion of the Fund's assets allocated to such sub-adviser. Asset allocations and fees payable to the sub-advisers may vary and, consequently, the total management fee actually payable by the Fund will fluctuate and may be higher or lower than that shown above. However, the total annual management fee payable by the Fund to the Adviser and the sub-advisers is subject to a maximum annual management fee of 1.25% (referred to as a Fund's "Fee Ceiling").
(2) Remaining Other Expenses are based on estimated amounts for the current fiscal year.
(3) Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(4) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
------------------- 1 YEAR 3 YEARS ------------------- $99 $309 ------------------- |
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from August 30, 2012 to October 31, 2012, the Fund's portfolio turnover rate was 7% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its investment objective by allocating its assets among one or more investment strategies directly through the use of one or more sub-advisers and/or indirectly through investments in affiliated and unaffiliated open-end funds, closed-end funds, unregistered funds (including hedge funds) and exchange-traded funds ("Underlying Funds"). The Fund will invest in Underlying Funds and/or use one or more sub-advisers to invest its assets in the following three primary investment categories: global corporate and government-issued inflation-protected securities; energy infrastructure master limited partnerships ("MLPs") and securities of MLP affiliates, including companies that own MLP partner interests; and commodity futures (collectively, these assets are referred to as "Real Assets"). Under normal circumstances, the Fund will invest at least 80% of its net assets, plus borrowings for investment purposes, in Real Assets, and derivatives and other instruments with economic characteristics similar to Real Assets, and/or Underlying Funds which primarily invest in Real Assets (the "80% Investment Policy"). The Fund may, from time to time, pursue its investment objective by investing substantially all of its assets in Underlying Funds, typically known as a "fund of funds" strategy.
The Fund uses a multi-manager and/or multi-fund approach, relying on one or more sub-advisers and/or Underlying Funds with differing investment philosophies to manage portions of the Fund's portfolio under the general supervision of the Fund's primary investment adviser, Cornerstone Advisors, Inc. (the "Adviser"). The Fund allocates its assets among strategies and sub-advisers or Underlying Funds according to an allocation schedule, determined by the Adviser. The Adviser expects to rebalance allocation weightings for each strategy, sub-adviser or Underlying Fund on an annual basis, but may do so more frequently based on market conditions, the performance of a strategy, sub-adviser or Underlying Fund, or other factors. The Adviser may change an allocation schedule based on, among other factors, the Adviser's analysis of the Fund's investment strategies, the potential for each strategy to perform independently of the other, historical performance, and market conditions.
Subject to its 80% Investment Policy, the Fund's assets may be invested, directly and/or through Underlying Funds, in a broad range of asset classes, securities and other investments to implement its primary investment strategies. The Fund may invest in U.S., foreign and emerging markets securities, MLPS, investment and non-investment grade fixed income securities of any duration or maturity issued by corporations or governments, and commodities. In addition the Fund may invest in derivative instruments, principally options, futures contracts, options on futures contracts, forward contracts and swap agreements (including inflation swaps and total return swaps). An Underlying Fund or sub-adviser may engage in such derivatives transactions to gain exposure to, for example, certain securities, markets or asset classes, to hedge the Fund's positions in or exposure to securities or other instruments, or to enhance the Fund's return, which is also known as speculation. The Fund may also write covered call options. An Underlying Fund or sub-adviser may also invest in cash, money market instruments and other short-term obligations to achieve its investment objective.
The Fund may buy and sell securities frequently in seeking to achieve its objective.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Because an Underlying Fund's use of an investment strategy or investment in an asset class, security or other investment is subject to the same or similar risks as the Fund's use of such strategy or investment in such asset class, security or other investment, the term "the Fund" in the paragraphs below collectively refers to both the Fund and each Underlying Fund.
ALLOCATION RISK -- The Adviser's judgment about, and allocations among, funds, sub-advisers, asset classes and investment strategies may adversely affect the Fund's performance.
BELOW INVESTMENT GRADE SECURITIES RISK -- Fixed income securities rated below investment grade (junk bonds) involve greater risks of default or downgrade and are more volatile than investment grade securities because the prospect of repayment of principal and interest of many of these securities is speculative.
CASH FLOW RISK -- A portion of the cash flow received by the Fund will be derived from its investment in MLPs, debt and equity securities of MLP affiliates, including other companies that own MLP partner interests and derive a significant portion of their revenue from energy-related activities ("Energy Companies"). In addition to the risk factors described below under "Energy Companies Risk," other factors which may reduce the amount of cash an Energy Company has available for distribution include increased operating costs, maintenance capital expenditures, acquisition costs, expansion, construction or exploration costs and borrowing costs.
COMMODITY RISK -- Investing in the commodity futures markets may subject the Fund to greater volatility than investments in traditional securities. Commodity futures prices may be influenced by unfavorable weather, animal and plant disease, geologic and environmental factors as well as changes in government regulation such as tariffs, embargoes or burdensome production rules and restrictions.
COMMODITY-LINKED SECURITIES RISK -- Investments in commodity-linked securities may be more volatile and less liquid than direct investments in the underlying commodities themselves. Commodity-related equity returns can also be affected by the issuer's financial structure or the performance of unrelated businesses.
CORPORATE FIXED INCOME SECURITIES RISK -- Corporate fixed income securities respond to economic developments, especially changes in interest rates, as well as perceptions of the creditworthiness and business prospects of individual issuers.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar or, in the case of hedging
positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in the Fund would be adversely affected.
DERIVATIVES RISK -- The Fund's use of futures contracts, options, forward contracts and swaps for all purposes, including speculative purposes, is subject to market risk, leverage risk, commodity risk, correlation risk and liquidity risk. In addition, the Fund's use of derivatives for hedging purposes is subject to hedging risk. Commodity risk is described above. Leverage risk, hedging risk and liquidity risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. The Fund's use of forward contracts and swap agreements is also subject to credit risk and valuation risk. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Credit risk is described above. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
ENERGY COMPANIES RISK -- Energy Companies are susceptible to adverse economic, environmental or regulatory occurrences affecting the energy industry. Risks associated with investments in Energy Companies include but are not limited to the following:
o Commodity Pricing Risk. Energy Companies may be affected by fluctuations in the prices of energy commodities. Fluctuations in energy commodity prices would directly impact companies that own such energy commodities and could indirectly impact MLP companies that engage in transportation, storage, processing, distribution or marketing of such energy commodities.
o Depletion and Exploration Risk. Energy reserves naturally deplete as they are produced over time. The financial performance of Energy Companies may be adversely affected if they, or the companies to which they provide the service, are unable to cost-effectively acquire additional reserves sufficient to replace the natural decline. If an Energy Company is not able to raise capital on favorable terms, it may not be able to add or maintain its reserves.
o Supply and Demand Risk. Energy Companies may be impacted by the levels of supply and demand for energy commodities.
o Environmental and Regulatory Risk. Energy Companies are subject to significant regulation of their operations by federal, state and local governmental agencies. Additionally, voluntary initiatives and mandatory controls have been adopted or are being studied and evaluated, both in the United States and worldwide, to address current potentially hazardous environmental issues, including hydraulic fracturing and related waste disposal and geological concerns, as well as those that may develop in the future.
o Acquisition Risk. An Energy Company's ability to grow and, where applicable, increase distributions to its equity holders, may be highly dependent on its ability to make acquisitions that increase adjusted operating surplus per unit in order to increase distributions to unit holders. In the event that Energy Companies are unable to make such acquisitions, their future growth and ability to raise distributions will be limited and their ability to repay their debt holders may be weakened.
o Interest Rate Risk. Rising interest rates could increase the costs of capital thereby increasing operating costs and reducing the ability of Energy Companies to carry out acquisitions
or expansions in a cost-effective manner. Rising interest rates may also impact the price of the securities of Energy Companies as the yields on alternative investments increase.
o Catastrophic Event Risk. Energy Companies are subject to many dangers inherent in the production, exploration, management, transportation, processing and distribution of natural gas, natural gas liquids, crude oil, refined petroleum and petroleum products and other hydrocarbons. Any occurrence of a catastrophic event, such as a terrorist attack, could bring about a limitation, suspension or discontinuation of the operations of Energy Companies.
EQUITY MARKET RISK -- The risk that stock prices and prices of other equity securities will fall over short or extended periods of time.
FIXED INCOME MARKET 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 and their agencies. In the case of foreign securities, price fluctuations will reflect international economic and political events, as well as changes in currency valuations relative to the U.S. dollar.
FOREIGN INVESTMENT/EMERGING MARKETS RISK -- The risk that non-U.S. securities may be subject to additional risks due to, among other things, political, social and economic developments abroad, currency movements and different legal, regulatory and tax environments. These additional risks may be heightened with respect to emerging market countries since political turmoil and rapid changes in economic conditions are more likely to occur in these countries.
HEDGING RISK -- The Fund may use derivative instruments for hedging purposes. Hedging through the use of these instruments does not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. While entering into these instruments tends to reduce the risk of loss due to a decline in the value of the hedged asset, such instruments also limit any potential gain that may result from the increase in value of the asset. There can be no assurance that any hedging strategy will be effective or that there will be a hedge in place at any given time.
INFLATION PROTECTED SECURITIES RISK -- The value of inflation protected securities generally fluctuates in response to changes in real interest rates, which are in turn tied to the relationship between nominal (or stated) interest rates and the rate of inflation. In general, the price of an inflation-protected debt security can decrease when real interest rates increase, and can increase when real interest rates decrease. Interest payments on inflation-protected debt securities will fluctuate as the principal and/or interest is adjusted for inflation and can be unpredictable. The market for inflation protected securities may be less developed or liquid, and more volatile, than certain other securities markets.
INTEREST RATE RISK -- The risk that the value of fixed income securities, including U.S. Government securities, will fall due to rising interest rates.
INVESTMENT COMPANY RISK -- When the Fund invests in an investment company, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the investment company's expenses. In addition, while the risks of owning shares of an investment company generally reflect the risks of owning the underlying investments of the investment company, the Fund may be subject to additional or different risks than if the Fund had invested directly in the underlying investments. For example, the lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio securities. Closed-end investment companies issue a fixed number of shares that trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value. As
a result, a closed-end fund's share price fluctuates based on what another investor is willing to pay rather than on the market value of the securities in the fund.
LEVERAGE RISK -- The use of leverage can amplify the effects of market volatility on the Fund's share price and may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
MLP RISK - MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the SEC and are freely traded on a securities exchange or in the over-the-counter market. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. MLPs are exposed to many of the same risks as other Energy Companies, summarized above. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation; for example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
MULTI-MANAGER RISK -- The Adviser may be unable to identify and retain sub-advisers who achieve superior investment records relative to other similar investments or effectively allocate the Fund's assets among sub-advisers to enhance the return and reduce the volatility that would typically be expected of any one management style. While the Adviser monitors the investments of each sub-adviser and monitors the overall management of the Fund, each sub-adviser makes investment decisions for the assets it manages independently from one another. It is possible that the investment styles used by a sub-adviser in an asset class will not always be complementary to those used by others, which could adversely affect the performance of the Fund. A multi-manager fund may, under certain circumstances, incur trading costs that might not occur in a fund that is served by a single adviser.
NON-DIVERSIFIED RISK -- The Fund is non-diversified, which means that it may invest in the securities of relatively few issuers. As a result, the Fund may be more susceptible to a single adverse economic or political occurrence affecting one or more of these issuers and may experience increased volatility due to its investments in those securities.
PORTFOLIO TURNOVER RISK -- Due to its investment strategies, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities.
TAX RISK -- In order for the Fund to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code"), the Fund must derive at least 90 percent of its gross income each taxable year from qualifying income, which is described in more detail in the SAI. Income from certain Fund investments which provide exposure to changes in commodity prices, such as commodity-linked derivative instruments, may not be considered qualifying income for these purposes. The Fund will therefore seek to restrict its income from direct investments in investments that do not generate qualifying income to a maximum of 10 percent of its gross income, but cannot be assured it will successfully do so and the Fund may not qualify as a RIC if certain relief provisions are not available to the Fund. The Fund is also subject to the risk that MLPs in which the Fund invest will be classified as corporations rather than
as partnerships for federal income tax purposes, which may reduce the Fund's return and negatively affect the Fund's net asset value. There is a risk of changes in tax laws or regulations, or interpretations thereof, which could adversely affect the Fund or the MLPs in which the Fund invests.
UNDERLYING FUND RISK -- The Fund's performance is subject to the risks associated with the securities and other investments held by the underlying funds in which the Fund may invest. The ability of the Fund to achieve its investment objective may depend upon the ability of the underlying funds to achieve their investment objectives. When the Fund invests in an underlying fund, in addition to directly bearing the expenses associated with its own operations, it will bear a pro rata portion of the underlying fund's expenses.
UNREGISTERED FUND RISK - Unlike the Fund, unregistered funds are not subject to the investor protections provided under the Investment Company Act of 1940 (the "1940 Act"). Accordingly, (i) the relationship between the unregistered fund and its adviser will not be regulated by the 1940 Act; (ii) unregistered funds are not required to have a majority of disinterested directors; (iii) unregistered funds are not subject to the various custody and safekeeping provisions under the 1940 Act designed to protect fund assets; and (iv) unregistered funds are not subject to the various investment limitations under the 1940 Act.
VALUATION RISK -- The Fund may value certain securities at a price higher than the price at which they can be sold. This risk may be especially pronounced for investments that may be illiquid or may become illiquid.
PERFORMANCE INFORMATION
The Fund commenced operations on August 30, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER AND PORTFOLIO MANAGERS
CORNERSTONE ADVISORS, INC.
Paul W. Pedalino, CFA, Managing Director and Principal, has managed the Fund since its inception.
Michael G. Hughes, CFA, CAIA, Chief Investment Officer and Principal, has managed the Fund since its inception.
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS
BLACKROCK FINANCIAL MANAGEMENT, LLC
Martin Hegarty, Managing Director/Co-Head of Inflation-Linked Bond Portfolio Team and Lead Portfolio Manager, has managed the portion of the Fund's assets allocated to BlackRock Financial Management, LLC ("BlackRock") since the Fund's inception.
Brian Weinstein, Managing Director/Co-Head of Inflation-Linked Bond Portfolio Team and Lead Portfolio Manager, has managed the portion of the Fund's assets allocated to BlackRock since the Fund's inception.
KAYNE ANDERSON CAPITAL ADVISORS, L.P.
John (J.C.) Frey, Managing Partner and Portfolio Manager, has managed the portion of the Fund's assets allocated to Kayne Anderson Capital Advisors, L.P. since the Fund's inception.
FOR IMPORTANT INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 40 OF THE PROSPECTUS.
SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION
PURCHASE AND SALE OF FUND SHARES
To purchase shares of each Fund for the first time, you must invest at least $2,000. There is no minimum for subsequent investments.
Shares of each Fund are offered exclusively to certain advisory clients of the Adviser. Shares can normally be redeemed only by contacting your client service manager or calling 1-888-762-1442.
TAX INFORMATION
Each Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of a 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 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.
MORE INFORMATION ABOUT RISK
Investing in each Fund involves risk and there is no guarantee that each Fund will achieve its goals. The Adviser and the sub-advisers' judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job an investment manager does, you could lose money on your investment in a Fund, just as you could with similar investments.
The value of your investment in a Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities a Fund owns and the markets in which they trade. The effect on a Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
ALLOCATION RISK (ALL FUNDS) -- The Funds may invest in a wide range of investments ranging from stocks and corporate bonds issued by companies of all sizes in diverse industries, government bonds from developed and emerging countries, other investment companies such as exchange traded funds, put and call options, and take substantial short positions, among other investments. Given the wide scope of the many investments it can make, the Adviser could be wrong in determining the combination of investments, funds or sub-advisers that produce good returns under changing market conditions. The Funds could miss attractive investment opportunities by underweighting markets that subsequently experience significant returns and could lose value by overweighting markets that subsequently experience significant declines.
DERIVATIVES RISK (ALL FUNDS) -- Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect a Fund's ability to achieve its investment objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. A Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
The lack of a liquid secondary market for a derivative may prevent a Fund from closing its derivative positions and could adversely impact its ability to achieve its investment objective or to realize profits or limit losses.
Because derivative instruments may be purchased by a Fund for a fraction of the market value of the investments underlying such instruments, a relatively small price movement in the underlying investment may result in an immediate and substantial gain or loss to the Fund. Derivatives are often more volatile than other investments and the Fund may lose more in a derivative than it originally invested in it.
Additionally, derivative instruments are subject to counterparty risk, meaning that the party that issues the derivative may experience a significant credit event and may be unwilling or unable to make timely settlement payments or otherwise honor its obligations.
EQUITY RISK (ALL FUNDS) -- Since they purchases equity securities, the Funds are subject to the risk that stock prices will fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, shares of REITs and ADRs, as well as shares of mutual funds and ETFs that attempt to track the price movement of equity indices. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of such securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN COMPANY RISK (ALL FUNDS) -- Investing in foreign companies, whether through investments made in foreign markets or made through the purchase of American Depository Receipts ("ADRs"), which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
Investments in securities of foreign companies (including through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
The European financial markets have been experiencing increased volatility due to concerns over rising government debt levels of several European countries and these events may continue to significantly affect all of Europe. European economies could be significantly affected by rising unemployment, tight fiscal and monetary controls imposed on member countries of the European Economic and Monetary Union, and uncertainty surrounding the euro.
Many Asian economies have at various times been negatively affected by inflation, an over-reliance on international trade, political and social instability, and less developed financial systems and securities trading markets. Trade restrictions, unexpected decreases in exports, changes in government policies, or natural disasters could have a significant impact on companies doing business in Asia.
EMERGING MARKET SECURITIES RISK (ALL FUNDS) -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, emerging markets securities may be subject to smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers.
FOREIGN CURRENCY RISK (ALL FUNDS) -- Because non-U.S. securities are usually denominated in currencies other than the dollar, the value of a Fund's portfolio may be influenced by currency exchange rates and exchange control regulations. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by a Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
SHORT SALES RISK (PUBLIC ALTERNATIVES FUND ONLY) -- The Fund is subject to short sales risk. Short sales are transactions in which the Fund sells a security it does not own. A Fund must borrow the security to make delivery to the buyer. A Fund is then obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be higher or lower than the price at which the security was sold by a Fund. If the underlying security goes down in price between the time a Fund sells the security and buys it back, a Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, a Fund will realize a loss on the transaction. Because the market price of the security sold short could increase without limit, a Fund could be subject to a theoretically unlimited loss. The risk of such price increases is the principal risk of engaging in short sales.
In addition, a Fund's investment performance may suffer if the Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required the Fund to deliver the securities the Fund borrowed at the commencement of the short sale and the Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. Moreover, a Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Fund's open short positions. These expenses negatively impact the performance of a Fund. For example, when a Fund short sells an equity security that pays a dividend, it is obligated to pay the dividend on the security it has sold. However, a dividend paid on a security sold short generally reduces the market value of the shorted security and thus, increases a Fund's unrealized gain or reduces a Fund's unrealized loss on its short sale transaction. To the extent that the dividend that a Fund is obligated to pay is greater than the return earned by the Fund on investments, the performance of the Fund will be negatively impacted. Furthermore, a Fund may be required to pay a premium or interest to the lender of the security. The foregoing types of short sale expenses are sometimes referred to as the "negative cost of
carry," and will tend to cause the Fund to lose money on a short sale even in instances where the price of the underlying security sold short does not change over the duration of the short sale. A Fund is also required to segregate other assets on its books to cover its obligation to return the security to the lender which means that those other assets may not be available to meet the Fund's needs for immediate cash or other liquidity.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investment objective of the Global Public Equity Fund is to seek capital appreciation. The investment objective of the Income Opportunities Fund is to seek current income. The investment objective of the Public Alternatives Fund is to seek capital appreciation with lower correlation to traditional global fixed income and public equity markets. The investment objective of the Real Assets Fund is to seek capital appreciation and, as a secondary objective, current income. The investment objectives of the Funds are non-fundamental and may be changed without shareholder approval.
The investments and strategies described in 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 money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objectives. If a Fund invests in this manner, it may not achieve its investment objective. The Funds will only do so if a Sub-Adviser believes that the risk of loss outweighs the opportunity for capital appreciation or current income.
This prospectus describes the Funds' principal investment strategies, and the Funds will normally invest in the types of securities and other investments described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, each Fund also may invest to a lesser extent in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Funds' SAI (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that a Fund will achieve its investment goals.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Funds' policy and procedures with respect to the circumstances under which the Funds disclose their portfolio securities is available in the SAI. Within 10 days of the end of each month end, each Fund will post its top ten portfolio holdings on the internet at http://www.aicfundholdings.com/cornerstone. The Funds provide information about their complete portfolio holdings, updated as of the most recent calendar month, on the internet at http://aicfundholdings.com/cornerstone. This information is provided with a lag of at least 30 days and is publicly available to shareholders.
INVESTMENT ADVISER AND PORTFOLIO MANAGERS
Cornerstone Advisors, Inc., a Washington corporation formed in 1983, serves as the overall investment adviser to the Funds. The Adviser's principal place of business is located at 225 108th Avenue NE , Suite 400, Bellevue, Washington 98004-5782. As of December 31, 2012, the Adviser had approximately $2.5 billion in assets under management.
The Adviser continuously monitors the performance of various investment sub-advisers to the Funds. Although the Adviser advises the Board of Trustees with regard to investment matters, the Adviser does
not make the day-to-day investment decisions for Funds except for allocating Fund assets directly to Underlying Funds. The Adviser is, however, responsible for establishing and/or rebalancing allocation of the Funds' assets among strategies and sub-advisers and/or Underlying Funds. The Adviser is also responsible for monitoring both the overall performance of each Fund and the individual performance of each sub-adviser within those Funds served by one or more sub-advisers. Each of the Funds is authorized to operate on a "multi-manager" basis. This means that a single Fund may be managed by one or more sub-advisers. The Adviser may, from time to time, reallocate the assets of a multi-manager Fund among the sub-advisers that provide portfolio management services to that Fund when it believes that such action would be appropriate to achieve the overall objectives of the particular Fund. The Adviser may also, from time to time, reallocate assets of a multi-manager Fund to other sub-advisers. The Adviser is an integral part of the sub-adviser selection process and instrumental in the supervision of sub-advisers. For its services, the Adviser receives an annual fee of 0.01% of each Fund's average net assets.
Paul W. Pedalino, CFA, is a Managing Director and a Principal of Cornerstone Advisors, Inc. He has been with the firm for over 10 years with prior experience at Frank Russell Company, Russell/Mellon Analytical Services and T. Rowe Price. Mr. Pedalino is responsible for the firm's Global Public Equity, Public Alternatives, Private Alternatives, Real Assets and Income Opportunities strategies. Additionally, Mr. Pedalino is a member of the firm's Asset Allocation and Manager Review Committees.
Michael G. Hughes, CFA and CAIA, is the Chief Investment Officer and a Principal of Cornerstone Advisors, Inc. He has been with the firm for over four years with prior experience at Perkins Coie Capital Management LLC, Safeco Insurance and First Interstate Bank. Mr. Hughes is responsible for oversight of all of the firm's strategies including Global Public Equity, Public Alternatives, Private Alternatives, Private Real Estate, Private Equity, Real Assets and Income Opportunities strategies. Additionally, Mr. Hughes is the Head of the Investment Policy Committee, Asset Allocation Committee and Manager Review Committee.
A discussion regarding the basis for the Board's approval of the Funds' investment advisory agreement and investment sub-advisory agreements is available in the Funds' Annual Report dated October 31, 2012, which covers the period from August 30, 2012 to October 31, 2012.
The Board of Trustees has authorized the officers of The Advisors' Inner Circle Fund (the "Trust") to request an order from the Securities and Exchange Commission ("SEC") that would permit the Trust to enter into portfolio management agreements with sub-advisers that are not affiliates of the Adviser ("unaffiliated sub-advisers") upon the approval of the Board of Trustees but without submitting such contracts for the approval of the shareholders of the relevant Fund (the "Manager of Managers Order"). The Trust's shareholders have also approved the arrangements contemplated by the Manager of Managers Order; however, the SEC has not yet approved the Manager of Managers Order. Assuming that the SEC approves the Manager of Managers Order, the Funds may begin to operate in reliance on the Manager of Managers Order without seeking any further authorization from shareholders. Accordingly, at some time in the future, it is anticipated that the Funds, upon the recommendation of Cornerstone, will be able to enter into and amend agreements with unaffiliated sub-advisers without shareholder approval.
It is anticipated that the Manager of Managers Order will be subject to a number of operating requirements that are imposed as conditions to the granting of, and the Trusts' operation in reliance on, the Manager of Mangers Order (the "Conditions"). While it is not possible to describe each of the Conditions at this time, it is anticipated that one of the Conditions will prohibit reliance on the Manager of Managers Order to approve a management agreement with a unaffiliated sub-adviser that would result in an increase in the total fees payable to Cornerstone (if any) and the unaffiliated sub-advisers by a Fund. The Trust has proposed that this Condition would be structured so that, upon the granting of the Manager of Managers Order, a "Fee Ceiling" would be established for each Fund at the following rate:
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FUND FEE CEILING
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Global Public Equity Fund 1.25%
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Income Opportunities Fund 1.25%
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Public Alternatives Fund 1.85%
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Real Assets Fund 1.25%
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As proposed by the Trust, the Fee Ceiling would be equal to the maximum aggregate amount of management and advisory fees payable annually by a Fund to Cornerstone and all sub-advisers. Each day a Fund's net asset value is calculated, its dollar-weighted Adviser and sub-adviser daily management and advisory fee accruals will be monitored for compliance with the Fee Ceiling and any initial approval of a sub-advisory agreement, or any amendment thereto, that would cause a Fund to exceed its Fee Ceiling will require shareholder approval. Any increase in a Fund's Fee Ceiling would require shareholder approval. The Fee Ceiling would apply at the Fund level, and would not apply to any particular sub-advisory agreement. Accordingly, depending on how a Fund's assets are allocated among sub-advisers, it is possible that a sub-advisory agreement would pay a fee to one or more sub-advisers that is higher than the Fee Ceiling.
No assurance can be given that the Manager of Managers Order will contain the Conditions proposed by the Trust and described above. The Manager of Managers Order may contain additional or different Conditions, each as determined necessary or advisable by the SEC.
INVESTMENT SUB-ADVISERS AND PORTFOLIO MANAGERS
CORNERSTONE ADVISORS, INC. ACTS AS THE MANAGER OF MANAGERS OF THE FUNDS AND IS RESPONSIBLE FOR THE INVESTMENT PERFORMANCE OF THE FUNDS SINCE IT ALLOCATES EACH FUND'S ASSETS TO ONE OR MORE SUB-ADVISERS AND RECOMMENDS HIRING OR CHANGING SUB-ADVISERS TO THE BOARD OF TRUSTEES.
In accordance with the terms of separate investment sub-advisory agreements relating to the respective Funds, and subject to the general supervision of the Board of Trustees, each Sub-Adviser makes investment decisions for the assets it manages and continuously reviews, supervises and administers its investment program. Cornerstone oversees each Sub-Adviser to ensure compliance with the Funds' investment policies and guidelines and monitors each Sub-Adviser's adherence to its investment style. The Board supervises Cornerstone and each Sub-Adviser, establishes policies that they must follow in their management activities and oversees the hiring, termination and replacement of the sub-advisers recommended by Cornerstone.
INFORMATION ON SUB-ADVISORY FEES AND TOTAL MANAGEMENT FEE. In addition to the fee payable by each Fund to the Adviser, each of the Funds pays a fee to its sub-adviser(s). For each Fund, the sub-advisers receive a fee based on a specified percentage of that portion of the Fund's assets allocated to that sub-adviser. The total management fee shown in each Fund's Fee Table (in the summary section of this Prospectus) is based on the allocation of assets among the Fund's sub-advisers as of the Fund's most recently completed fiscal year and the fee paid to the Adviser. Asset allocations and fees payable to each Fund's sub-advisers may vary and, consequently, the total management fee payable will fluctuate and may be higher or lower that that shown in each Fund's Fee Table.
The rates at which the fees paid to the sub-advisers are calculated, which may vary among sub-advisers, is set forth in the SAI. However, the Trust has requested an order from the SEC, in connection with the Manager of Managers Order, that would permit each Fund to disclose (as a dollar amount and a percentage of a Fund's net assets) only (i) the aggregate fees paid to the Adviser and any affiliated sub-
advisers, and (ii) the aggregate fees paid to unaffiliated sub-advisers (collectively, the "Aggregate Fee Disclosure"). Accordingly, if the Manager of Managers Order is granted in the form proposed by the Trust, the Funds will provide the Aggregate Fee Disclosure in lieu of disclosing the fees paid to each sub-adviser in the SAI. A Fund that employs an affiliated sub-adviser would continue to provide separate disclosure of any fees paid to such affiliated sub-adviser.
The following are currently the sub-advisers and their respective portfolio managers responsible for management of each Fund's assets:
GLOBAL PUBLIC EQUITY FUND
ACADIAN ASSET MANAGEMENT LLC ("Acadian"), 260 Franklin Street, Boston, Massachusetts 02110, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Acadian, a Delaware limited liability company, was founded in 1986 and is a subsidiary of Old Mutual Asset Managers (US) LLC, which is an indirect wholly owned subsidiary of Old Mutual plc. Old Mutual plc is a publicly traded company listed on the U.K. and South African stock exchanges. As of December 31, 2012, Acadian had approximately $51.9 billion in assets under management.
PORTFOLIO MANAGERS:
John Chisholm, CFA, Chief Investment Officer and Executive Vice President, has managed the portion of the assets of the Global Public Equity Fund allocated to Acadian since the Fund's inception. Mr. Chisholm joined Acadian in July 1987. As CIO, he oversees Acadian's investment process and investment team. Earlier in his career, Mr. Chisholm served as systems engineer at Draper Laboratories and as an analyst for the International Asset Management Department at the State Street Bank and Trust Company (now SSgA). He is a CFA charterholder and a member of the Boston Security Analysts Society. He earned a B.S. in Engineering and an M.S. in Management from the Massachusetts Institute of Technology.
Asha Mehta, CFA, Vice President and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Acadian since the Fund's inception. Ms. Mehta joined Acadian in April 2007. She focuses on the Frontier Market Strategy and directs the Responsible Investment initiative. Prior to Acadian, she was an Investment Banker at Goldman Sachs, managed international marketing strategy at Johnson & Johnson, and worked in microfinance in India. Ms. Mehta earned a B.S. in Biological Science and an A.B. in Anthropology from Stanford University and an M.B.A. from The Wharton School at the University of Pennsylvania.
Joshua S. White, Ph.D., Senior Vice President, Portfolio Manager and
Researcher, has managed the portion of the assets of the Global Public
Equity Fund allocated to Acadian since the Fund's inception. Dr. White
joined Acadian in October 2010. His training is in the area of behavioral
asset pricing and portfolio choice for long-term investors. His research
influences Acadian's forecasting framework. Prior to Acadian, he was an
Assistant Director at the U.S. Securities and Exchange Commission, advising
the Commission on disclosure and governance issues. Earlier, he was an
assistant professor at the University of Illinois, where he developed and
taught classes on asset management and fixed income. Dr. White earned an
A.B. in Economics and a Ph.D. in Business Economics from Harvard
University.
ALLIANZ GLOBAL INVESTORS U.S. LLC ("Allianz Global Investors U.S."), 1633 Broadway New York, NY 10019, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Allianz Global Investors U.S., a Delaware limited liability company, was founded in 2009 and is a wholly owned subsidiary of Allianz Asset Management of America LP. Allianz SE, a public company, indirectly holds a controlling interest in Allianz Asset Management of America LP. As of December 31, 2012, Allianz Global Investors U.S. had approximately $53 billion in assets under management.
PORTFOLIO MANAGERS:
John C. McCraw, Managing Director and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Allianz since the Fund's inception. Prior to joining Allianz Global Investors U.S. via a predecessor affiliate in 1992, Mr. McCraw was branch manager/loan officer with the Citizens & Southern National Bank. He has 22 years of investment industry experience. Mr. McCraw earned his B.A. from Flagler College and his M.B.A. from the University of California, Irvine.
Robert S. Marren, Managing Director and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Allianz Global Investors U.S. since the Fund's inception. Prior to joining Allianz Global Investors U.S. via a predecessor affiliate in 2007, Mr. Marren was a Director of Research and Portfolio Manager for micro-cap growth strategies and a Management Committee member for Duncan-Hurst Capital Management. Prior to that, he was an assistant manager in corporate finance at Hughes Aircraft Company, a research analyst at Security Pacific Merchant Bank and at Hambrecht & Quist, Inc., and a financial analyst and operations planner for VLSI Technology, Inc. He is currently a Trustee for the UC San Diego Foundation and serves as chair of their Investment Committee. Mr. Marren has 21 years of investment industry experience. Mr. Marren earned his M.B.A. at Duke University, Fuqua School of Business and his B.A. at the University of California, San Diego.
K. Mathew Axline, CFA, Senior Vice President and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Allianz Global Investors U.S. since the Fund's inception. Mr. Axline joined a predecessor affiliate in 2004. Prior to joining Allianz Global Investors U.S., he was an associate with Pescadero Ventures, LLC, a business development manager for Icarian, Inc., and a financial advisor with Merrill Lynch, Pierce, Fenner & Smith. He has 13 years of investment industry experience. Mr. Axline earned his M.B.A from Indiana University's Kelly School of Business and his B.S. from The Ohio State University.
CRAMER ROSENTHAL MCGLYNN LLC ("CRM"), 520 Madison Avenue, 20th Floor, New York, New York 10022, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. CRM, a Delaware limited liability company, was established in 1973. WT Investments, Inc., a subsidiary of Wilmington Trust Corporation, owns 79.45% of CRM. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. As of December 31, 2012, CRM had approximately $13.5 billion in assets under management.
PORTFOLIO MANAGERS:
Robert Rewey, III, CFA, Senior Vice President, has managed the portion of the assets of the Global Public Equity Fund allocated to CRM since the Fund's inception. Mr. Rewey joined CRM in 2003. Before joining CRM, he was a portfolio manager/senior analyst at Sloate, Weisman, Murray & Co., Inc., a boutique money management firm. He received a B.S. from the Carroll School of Management, Boston College and an M.B.A. from Fuqua School of Business at Duke University.
Jay Abramson, Chief Executive Officer and Chief Investment Officer, has managed the portion of the assets of the Global Public Equity Fund allocated to CRM since the Fund's inception. Mr. Abramson has been with CRM since 1985. Prior to CRM, Mr. Abramson earned his CPA. He received a B.S.E. from The Wharton School at the University of Pennsylvania and a J.D. from the University of Pennsylvania Law School. He is a Trustee and Chairman of the Investment Committee for Montefiore Medical Center.
Thad Pollock, Vice President, has managed the portion of the assets of the Global Public Equity
Fund allocated to CRM since the Fund's inception. Mr. Pollock joined the firm in 2003. Prior to CRM, he spent three years as an analyst in Corporate Finance at Lehman Brothers. He received a B.S. from Yale University.
DRIEHAUS CAPITAL MANAGEMENT LLC ("Driehaus"), 25 East Erie Street, Chicago, Illinois 60611, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Driehaus, a Delaware limited liability company established in 1982, is controlled by Richard H. Driehaus. The principal nature of Mr. Driehaus' business is investment advisory and distribution services. As of December 31, 2012, Driehaus had approximately $8.685 billion in assets under management.
PORTFOLIO MANAGERS:
Howard Schwab, Lead Portfolio Manager, Driehaus Emerging Markets Growth Strategy and Co-Portfolio Manager, Driehaus International Small Cap Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus since the Fund's inception. Mr. Schwab joined Driehaus in 2001. He was the Portfolio Manager for the Driehaus International Equity Yield Strategy from its inception in 2003 through 2007 and the Co-Portfolio Manager for the Driehaus Global Growth Strategy from 2008 through 2010. Mr. Schwab received his B.A. in Economics from Denison University in 2001.
Chad Cleaver, CFA, Co-Portfolio Manager, Driehaus Emerging Markets Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus since the Fund's inception. Mr. Cleaver began his career with the Board of Governors of the Federal Reserve System and joined Driehaus in 2004. He received his A.B. in Economics from Wabash College in 2000 and his M.B.A. from the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill in 2004. Mr. Cleaver is a CFA charterholder.
David Mouser, Lead Portfolio Manager, Driehaus International Small Cap Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus since the Fund's inception. Mr. Mouser joined Driehaus in 1999 as a Global Research Associate and Domestic Research Assistant. Prior to assuming portfolio management responsibilities, he was an Analyst on the Micro Cap Growth Strategy and the Long-Short Strategy. He received his B.S. in Finance from the University of Dayton in 1999.
Ryan Carpenter, Assistant Portfolio Manager, Driehaus International Small Cap Growth Strategy, has managed the portion of the assets of the Global Public Equity Fund allocated to Driehaus since the Fund's inception. Mr. Carpenter began his career at Driehaus Capital Management LLC as a research intern in 2005. He received his B.A. in Finance from the University of Illinois at Chicago in 2007.
FAIRPOINTE CAPITAL LLC ("Fairpointe"), One N. Franklin Street, Suite 3300, Chicago, Illinois 60606, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Fairpointe, a Delaware limited liability company established in 2011, is 100% employee owned and majority female owned. As of December 31, 2012, Fairpointe had $3.9 billion in assets under management.
PORTFOLIO MANAGERS:
Thyra Zerhusen, Principal Founder, Chief Executive Officer and Chief Investment Officer, has managed the portion of the assets of the Global Public Equity Fund allocated to Fairpointe since the Fund's inception. Prior to founding Fairpointe in 2011, Ms. Zerhusen was the Chief Investment Officer of Mid Cap Equities at Optimum Investment Advisors beginning in October
2003. From April 1999 to September 2003, she was on the investment team of Talon Asset Management. Ms. Zerhusen has a Diplom Ingenieur from the Swiss Federal Institute of Technology and an M.A. in Economics from the University of Illinois.
Marie Lorden, Co-Founder and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Fairpointe since the Fund's inception. Prior to co-founding Fairpointe in 2011, Ms. Lorden served as a member of the Mid Cap Investment Team at Optimum Investment Advisors beginning in September 2003. Previously, she held positions specializing in equity product analysis with Zurich Insurance Group, Driehaus Capital Management and The Burridge Group. Ms. Lorden received her B.S. from Elmhurst College and her M.B.A. from the Keller Graduate School of Management.
Mary Pierson, Co-Founder and Portfolio Manager, has managed the portion of the assets of the Global Public Equity Fund allocated to Fairpointe since the Fund's inception. Prior to co-founding Fairpointe in 2011, Ms. Pierson served as a member of the Mid Cap Investment Team at Optimum Investment Advisors beginning in May 2004. Her prior experience includes fifteen years with Harris Bancorp and Harris Futures Corporation. Ms. Pierson received her B.A. in Economics from DePauw University, her M.A. in Economics from Northwestern University and her M.B.A. in Finance from The University of Chicago.
HARRIS ASSOCIATES L.P. ("Harris"), Two North LaSalle Street, Suite 500, Chicago, Illinois, 60602-3790, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Harris, a Delaware limited partnership, is managed by its general partner, Harris Associates, Inc. ("HAI"). Harris and HAI are wholly owned subsidiaries of Natixis Global Asset Management, L.P., a indirect subsidiary of Natixis Global Asset Management ("NGAM"), an international asset management group based in Paris, France. NGAM is owned by Natixis, a French investment banking and financial services firm that is principally owned by BPCE, France's second largest banking group. As of the December 31, 2012, Harris had approximately $76 billion in assets under management.
PORTFOLIO MANAGERS:
David Herro, CFA, Vice President and Chief Investment Officer of International Equity, has managed the portion of the assets of the Global Public Equity Fund allocated to Harris since the Fund's inception. Mr. Herro joined Harris in 1992 as a portfolio manager and analyst. Previously, he was an international portfolio manager for the State of Wisconsin Investment Board and The Principal Financial Group. Mr. Herro holds an M.A. in Economics from the University of Wisconsin--Milwaukee (1985) and a B.S. in Business and Economics from the University of Wisconsin--Platteville (1983).
William Nygren, CFA, Vice President, has managed the portion of the assets of the Global Public Equity Fund allocated to Harris since the Fund's inception. Mr. Nygren joined Harris as an analyst in 1983 and was Harris' Director of Research from September 1990 to March 1998. Previously, he was an analyst with Northwestern Mutual Life Insurance Company. Mr. Nygren holds an M.S. in Finance from the University of Wisconsin--Madison (1981) and a B.S. in Accounting from the University of Minnesota (1980).
LSV ASSET MANAGEMENT ("LSV"), 155 North Wacker Drive, Suite 4600, Chicago, Illinois 60606, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. LSV is organized as a Delaware general partnership. An affiliate of SIMC owns an interest in LSV. As of the December 31, 2012, LSV had approximately $65 billion in assets under management.
PORTFOLIO MANAGERS:
Josef Lakonishok, Ph.D., Chief Executive Officer, Chief Investment Officer
and Partner, has managed the portion of the assets of the Global Public
Equity Fund allocated to LSV since the Fund's inception. Dr. Lakonishok
joined LSV in 1994 and has more than 36 years of investment and research
experience. Dr. Lakonishok received a B.A. in Economics and Statistics
(1970) and an M.B.A. (1972) from Tel Aviv University. He earned an M.S. in
Business Administration (1974) and a Ph.D. in Business Administration
(1976) from Cornell University.
Menno Vermeulen, CFA, Partner, has managed the portion of the assets of the Global Public Equity Fund allocated to LSV since the Fund's inception. Mr. Vermeulen joined LSV in 1994 and has more than 21 years of investment experience. Mr. Vermeulen holds a master's degree in econometrics from Erasmus University at Rotterdam.
Puneet Mansharamani, CFA, Partner, has managed the portion of the assets of the Global Public Equity Fund allocated to LSV since the Fund's inception. Mr. Mansharamani joined LSV in 2000 and has more than 14 years of investment experience. Mr. Mansharamani earned a B.S. in Engineering from Delhi University, Delhi College of Engineering and an M.S. in Engineering at Case Western Reserve University, Case School of Engineering.
MARSICO CAPITAL MANAGEMENT, LLC ("Marsico"), 1200 17th Street, Suite 1600, Denver, Colorado 80202, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Marsico is a Delaware limited liability company established in 1997 and provides investment management services to mutual funds and private accounts. As of December 31, 2012, Marsico had approximately $26.8 billion in assets under management.
PORTFOLIO MANAGERS:
Thomas F. Marsico, Chief Investment Officer, Chief Executive Officer and Portfolio Manager, has managed the portion of the Fund's assets allocated to Marsico since the Fund's inception. Mr. Marsico founded Marsico in 1997. He has over 30 years' experience in money management, including 11 years at the Janus Capital Group. Mr. Marsico is a graduate of the University of Colorado and holds an M.B.A. from the University of Denver.
James G. Gendelman, Portfolio Manager and Senior Analyst, has managed the portion of the Fund's assets allocated to Marsico since the Fund's inception. Mr. Gendelman joined Marsico in 2000. Prior to joining Marsico, he was a Vice President of International Sales at Goldman, Sachs & Co. for 13 years. Mr. Gendelman was a certified public accountant for Ernst & Young from 1983 to 1985. He holds a bachelor's degree in accounting from Michigan State University and an M.B.A. from the University of Chicago.
PARAMETRIC PORTFOLIO ASSOCIATES LLC ("Parametric"), 1918 Eighth Avenue, Suite 3100, Seattle, Washington 98101, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Parametric is 93% owned by Eaton Vance Corporation, a Boston-based investment management firm, and is 7% owned by Parametric's executives and employees. As of December 31, 2012, Parametric had approximately $91.7 billion in assets under management.
PORTFOLIO MANAGERS:
Thomas Seto, Managing Director of Portfolio Management, has managed the portion of the Fund's assets allocated to Parametric since the Fund's inception. Mr. Seto joined Parametric in
1998. Prior to joining Parametric, he worked at Barclay's Global Investment. He also has a background in and worked in engineering. He holds an electrical engineering degree from the University of Washington and an M.B.A. from the University of Chicago.
David Stein, Ph.D., Chief Investment Officer, has managed the portion of the Fund's assets allocated to Parametric since the Fund's inception. Dr. Stein joined Parametric in 1996. Dr. Stein serves as Managing Director, Chief Investment Officer and Portfolio Manager of Eaton funds, Adviser funds and Wilmington funds in its fund complex. He served as the Director of Investment Research at GTE Investment Management Corporation, Director of Active Equity Strategies at the The Vanguard Group, Inc., and Director of Quantitative Portfolio Management and Research at IBM Retirement Fund. Dr. Stein was a Research Scientist at IBM Research Laboratories. He serves as a Member of the Board of Experts at Exchange Networks, LLC and a Member of the Advisory Board of The Journal of Wealth Management. He holds a Ph.D. in Applied Mathematics from Harvard University and an M.S. and B.A. from the University of Witwatersrand in South Africa.
PHOCAS FINANCIAL CORPORATION ("Phocas"), 980 Atlantic Avenue, Suite 106, Alameda, California 94501, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Phocas, a California corporation established in 2005, is employee-owned. As of December 31, 2012, Phocas had approximately $1.1 billion in assets under management.
PORTFOLIO MANAGERS:
William Schaff, Chief Executive Officer and President, has managed the portion of the Fund's assets allocated to Phocas since the Fund's inception. Mr. Schaff joined Phocas in 2005. Prior to joining Phocas, Mr. Schaff was President of Bay Isle, Portfolio Manager at Janus Capital Management and Lead Portfolio Manager at the Undiscovered Managers organization. He earned an M.S. in Engineering from the University of California, Davis. He also holds the Chartered Financial Analyst designation, and is a member of the Security Analysts of San Francisco.
Steve Block, Portfolio Manager, has managed the portion of the Fund's assets allocated to Phocas since the Fund's inception. Mr. Block joined Phocas in 2005. Prior to joining Phocas, he worked with Bay Isle Financial, LLC ("Bay Isle"), where he held several positions. Prior to joining Bay Isle, Mr. Block served as Senior Financial Analyst for two years at M&T Bank. In addition, he spent three years as an employee benefit plan Actuarial Consultant for Howard Johnson & Company. Mr. Block received his M.B.A. from the University of Michigan's Ross School of Business in Accounting and Finance. He received his B.A. in Quantitative Economic Decision Science from University of California, San Diego. Mr. Block holds the Chartered Financial Analyst designation, and is a member of the Security Analysts of San Francisco.
TCW INVESTMENT MANAGEMENT COMPANY ("TIMCO"), 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. TIMCO, a California corporation established in 1987, is a wholly-owned subsidiary of TCW Group, Inc. Societe Generale Holding de Participations may be deemed to be a control person of TIMCO by reason of its ownership of more than 25% of the outstanding voting stock of the TCW Group, Inc. Societe Generale Holding de Participations is a wholly-owned subsidiary of Societe Generale, S.A. As of December 31, 2012, TIMCO had approximately $29.15 billion in assets under management.
PORTFOLIO MANAGERS:
Chang Lee, Managing Director, has managed the portion of the Fund's assets allocated to TIMCO since 2013. Mr. Lee joined TIMCO in 2005. Prior to TIMCO, he was a Senior Investment Analyst at Samsung Life Investment from 2003 to 2005 and an Analyst at Lazard Asset Management from 1998 to 2003. Prior to Lazard, he was an Analyst at Bear Stearns. Mr. Lee holds a B.S. in Applied Mathematics and Economics from Johns Hopkins University (1996) and an M.B.A. from the Stern School of Business at New York University (2001).
Mike Olson, Managing Director, has managed the portion of the Fund's assets allocated to TIMCO since 2013. Mr. Olson joined TIMCO in 2001. Prior to TIMCO, Mr. Olson worked at Aegis Asset Management as a Research Analyst. Mr. Olson holds a B.A. in Finance and International Business from California State University at Fullerton and an M.B.A. from the University of Southern California. He is a CFA charterholder.
THORNBURG INVESTMENT MANAGEMENT INC. ("TIM"), 2300 North Ridgetop Road, Santa Fe, New Mexico 87506, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. TIM was incorporated in Delaware in 1982 and is an independent, employee-owned organization. As of December 31, 2012, thirty-six of the firm's professionals (approximately 15% of the firm's employees) share in the ownership of the firm, sixteen of whom are investment professionals. TIM has both voting and non-voting shares. Garrett Thornburg owns 100% of the voting shares and 39% of the non-voting shares, representing 39% of all equity interests. Other TIM employees, in aggregate, own 26% of the equity interests. The remaining 35% is held by employee family trusts and employee family members. As of December 31, 2012, TIM had approximately $84 billion in assets under management.
PORTFOLIO MANAGERS:
Brian J. McMahon, Chief Executive Officer and Chief Investment Officer, has managed the portion of the Fund's assets allocated to TIM since the Fund's inception. Mr. McMahon joined TIM in 1984 as Chief Investment Officer and was named President of TIM in 1997 and CEO in 2008. Prior to his time at TIM, he worked at Norwest Bank. He holds an M.B.A. from Dartmouth College's Amos Tuck School and a B.A. in Economics and Russian Studies from the University of Virginia.
W. Vinson Walden, CFA, Portfolio Manager, Managing Director, has managed the portion of the Fund's assets allocated to TIM since the Fund's inception. Mr. Walden joined TIM as an Associate Portfolio Manager in 2002. He was named Managing Director in 2005 and was promoted to Portfolio Manager in 2006. Prior to joining TIM, Vinson served as an Associate for Lehman Brothers in New York City. Mr. Walden holds a B.S. from Boston University and an M.B.A. from Columbia University. He is a CFA charterholder.
TURNER INVESTMENTS, L.P. ("Turner"), a Pennsylvania limited partnership, is located at 1205 Westlakes Drive, Suite 100, Berwyn, Pennsylvania 19312-2414 and serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Turner was founded in 1990 by Robert E. Turner, Mark D. Turner and Christopher K. McHugh and is an independent, 100% employee-owned investment management firm. As of December 31, 2012, Turner had approximately $10.7 billion in assets under management.
PORTFOLIO MANAGER:
Christopher McHugh, Vice Chairman, Senior Portfolio Manager and Founder, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. McHugh has over 27 years of investment experience. Prior to joining Turner Investments, Mr. McHugh was a
performance specialist at Provident Capital Management. Mr. McHugh holds a B.S. in Accounting from Philadelphia University and an M.B.A. in Finance from Saint Joseph's University. He is also on the board of trustees at Philadelphia University and is an affiliate member of the CFA Society of Philadelphia.
INCOME OPPORTUNITIES FUND
OFI STEELPATH, INC. ("OFI SteelPath"), 2100 McKinney Avenue, Suite 1401, Dallas, TX 75201, serves as investment sub-adviser to the Cornerstone Advisors Income Opportunities Fund. OFI SteelPath, a Delaware corporation, is a successor to SteelPath Capital Management, LLC and SteelPath Fund Advisors, LLC, which were established in 2004. OFI SteelPath is a wholly-owned subsidiary of Oppenheimer Funds, Inc., and also advises individuals, financial institutions, private equity funds and other pooled investment vehicles. As of December 31, 2012, OFI SteelPath had approximately $3.2 billion in assets under management.
PORTFOLIO MANAGERS:
Gabriel Hammond, Senior Vice President of OFI SteelPath has managed the portion of the Fund's assets allocated to OFI Steelpath since the Fund's inception in 2012. Mr. Hammond founded SteelPath Capital Management, LLC ("SteelPath"), the predecessor of OFI SteelPath, in 2004. Prior to founding SteelPath, Mr. Hammond worked in the Equity Research Division at Goldman, Sachs & Co. Currently, he is a member of the Board of Directors of the National Association of Publicly Traded Partnerships. Mr. Hammond holds a degree in economics (with Honors) from Johns Hopkins University.
Stuart Cartner, Vice President of OFI SteelPath, has managed the portion of the Fund's assets allocated to OFI SteelPath since the Fund's inception in 2012. Mr. Cartner joined SteelPath in April of 2007. Prior to that, he was a Vice President in the Private Wealth Management Division of Goldman, Sachs. Prior to his time at Goldman Sachs, Mr. Cartner worked at Trammell Crow Co. and General Electric Co. Mr. Cartner received a B.S. in Finance and Management from Indiana University and an M.B.A. in Finance and Marketing with Distinction from the Kellogg Graduate School of Management, Northwestern University.
Brian Watson, Vice President of OFI SteelPath, has managed the protion of the Fund's assets allocated to OFI SteelPath since the Fund's inception in 2012. Mr. Watson joined SteelPath in July of 2009. Prior to that, he was a portfolio manager and led the MLP research effort at Swank Capital LLC, in Dallas, Texas. Mr.Watson received his B.B.A. from the University of Texas at Austin and his M.B.A. from the McCombs School of Business at the University of Texas at Austin. He is the chartered financial analyst designation.
PUBLIC ALTERNATIVES FUND
ALPHASIMPLEX GROUP, LLC ("AlphaSimplex"), One Cambridge Center, Cambridge, Massachusetts 02142, is a Delaware limited liability company founded in 1999. AlphaSimplex is a subsidiary of Natixis US. As of December 31, 2012, AlphaSimplex had approximately $2.41 billion in assets under management. While the Board of Trustees of the Cornerstone Advisors Public Alternatives Fund and the Fund's sole initial shareholder have approved the appointment of AlphaSimplex as a sub-adviser to the Fund and the investment sub-advisory agreement with AlphaSimplex, as of the date of this prospectus no assets of the Fund have been allocated to AlphaSimplex. The Adviser, on any future date as is agreed between the Adviser and AlphaSimplex and without any further action being taken by shareholders, may
allocate Fund assets to AlphaSimplex in accordance with the terms of the investment sub-advisory agreement with AlphaSimplex.
PORTFOLIO MANAGERS:
Andrew W. Lo, Ph.D., Chief Investment Strategist, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex. Dr. Lo founded AlphaSimplex in 1999 and has over 25 years of industry experience. Prior to starting AlphaSimplex, he developed investment strategies and trading technologies as a consultant to Wall Street firms. In addition to his responsibilities at AlphaSimplex, Dr. Lo is the Harris & Harris Group Professor of Finance at the MIT Sloan School of Management and Director of MIT's Laboratory for Financial Engineering. Dr. Lo received a B.A. in Economics from Yale University and a Ph.D. in Economics from Harvard University.
Jeremiah H. Chafkin, President and Chief Executive Officer, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex. Mr. Chafkin joined AlphaSimplex in 2007 from Natixis Global Asset Management, where he served as President and Chief Executive Officer with responsibility for all of its affiliated managers in the United States and Asia. He came to Natixis from the Charles Schwab Corporation where he was a member of its Executive Committee and was President of its Advised Investor Division. Mr. Chafkin earned a B.A. in Economics from Yale University and an M.B.A. in Finance from Columbia University.
Philippe P. Ludi, Ph.D., CFA, Senior Research Scientist, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex. Dr. L[]di joined AlphaSimplex in 2006 and has been a co-portfolio manager of the ASG Diversifying Strategies Fund since May 2010. Dr. L[]di received the equivalent of an M.A. in Molecular and Computational Biology from the University of Basel, followed by an M.S. in Statistics and a Ph.D. in Bioinformatics, both from Duke University.
Robert W. Sinnott, Research Scientist, is expected to manage the portion of the Fund's assets allocated to AlphaSimplex at the inception date of the allocation of Fund assets to AlphaSimplex. Mr. Sinnott joined AlphaSimplex in 2009 and has been a co-portfolio manager of the ASG Managed Futures Strategy Fund since September 2012. Mr. Sinnott received both an A.B. and an A.M. in Statistics from Harvard University, where he focused on statistical machine learning, finance and time series analysis.
AQR CAPITAL MANAGEMENT, LLC ("AQR") is a Delaware limited liability company formed in 1998 and is located at Two Greenwich Plaza, 3rd Floor, Greenwich, Connecticut 06830. While the Board of Trustees of the Cornerstone Advisors Public Alternatives Fund and the Fund's sole initial shareholder have approved the appointment of AQR as a sub-adviser to the Fund and the investment sub-advisory agreement between the Adviser, the Trust and AQR, as of the date of this prospectus, no assets of the Fund have been allocated to AQR. The Adviser, on any future date as is agreed between the Adviser and AQR and without any further action being taken by shareholders, may allocate Fund assets to AQR in accordance with the terms of the investment sub-advisory agreement between the Adviser, the Trust and AQR. Until such time, AQR will not have any responsibilities with respect to the management of Fund assets, nor any obligations to the Fund or the Trust. As of December 31, 2012, AQR and its affiliates had approximately $71.2 billion in assets under management.
PORTFOLIO MANAGERS:
Brian Hurst, Principal, is expected to manage the portion of the Fund's assets allocated to AQR at the inception date of the allocation of Fund assets to AQR. Mr. Hurst joined AQR in 1998. Prior to joining AQR, Mr. Hurst was associated with Goldman Sachs & Co. where he worked as an Associate in the Asset Management Division's Quantitative Research Group (1994-1998). He received a B.S. in Economics at the Wharton School at the University of Pennsylvania in 1994.
Yao Hua Ooi, Principal, is expected to manage the portion of the Fund's assets allocated to AQR at the inception date of the allocation of Fund assets to AQR. Mr. Ooi joined AQR in 2004. Prior to joining AQR, Mr. Ooi was a summer analyst in the Fixed Income group at UBS. He received a B.S. in Economics from the Wharton School and a B.S. in Engineering from The School of Engineering and Applied Science at the University of Pennsylvania in 2004.
Michael Mendelson, Principal, is expected to manage the portion of the Fund's assets allocated to AQR at the inception date of the allocation of Fund assets to AQR. Mr. Mendelson joined AQR in 2005. Prior to joining AQR, Mr. Mendelson was Managing Director and Head of Quantitative Trading at Goldman Sachs. Prior to that effort, he was Head of U.S. Program Trading at Goldman Sachs. Mr. Mendelson received an S.M. in Chemical Engineering from MIT along with an S.B. in Chemical Engineering, and S.B. in Mathematics, and an S.B. in Management. He also has an M.B.A. from the University of California at Los Angeles.
CLARIVEST ASSET MANAGEMENT LLC ("ClariVest"), 11452 El Camino Real, Suite 250, San Diego, California 92130, serves as investment sub-adviser to a portion of the assets of the Public Alternatives Fund. ClariVest, a Delaware limited liability company established in 2006, is majority owned by its employees. As of December 31, 2012, ClariVest had approximately $3.1 billion in assets under management.
PORTFOLIO MANAGERS:
Todd Wolter, CFA, Portfolio Manager, has managed the portion of the Fund's
assets allocated to ClariVest since the Fund's inception. Mr. Wolter is a
founder and owner of ClariVest. Prior to forming ClariVest in March 2006,
Mr. Wolter was a Portfolio Manager at Nicholas-Applegate Capital
Management, where he worked from 2000 to 2006. Mr. Wolter started his
career as a Risk Analyst with Credit Suisse Asset Management in 1999. He
holds a Bachelor's in Economics from the University of Southern California
(1995) and an M.B.A. (1999) from the University of California, Irvine.
Michael Waterman, CFA, Portfolio Manager, has managed the portion of the Fund's assets allocated to ClariVest since the Fund's inception. Mr. Waterman joined ClariVest in July 2006. Prior to 2006, Michael Waterman served as a Market Research Analyst at Nicholas-Applegate, conducting research and providing analytics to the entire firm. He earned his B.S. in Management Science from the University of California San Diego.
TURNER INVESTMENTS, L.P. ("Turner"), a Pennsylvania limited partnership, is located at 1205 Westlakes Drive, Suite 100, Berwyn, Pennsylvania 19312-2414 and serves as investment sub-adviser to a portion of the assets of the Public Alternatives Fund. Turner was founded in 1990 by Robert E. Turner, Mark D. Turner and Christopher K. McHugh and is an independent, 100% employee-owned investment management firm. As of December 31, 2012, Turner had approximately $10.7 billion in assets under management.
PORTFOLIO MANAGERS:
David Honold, Jr., CFA, Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. Honold joined Turner in 2005. Mr. Honold has over 15 years of investment experience. Prior to joining Turner Investments, he was employed with Keefe, Bruyette & Woods, UBS, and the Federal Reserve Bank of New York. Mr. Honold earned a B.A. in English, with a concentration in Economics, at the College of the Holy Cross in 1998.
Frank Sustersic, CFA, Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. Sustersic joined Turner in 1994. He has over 24 years of investment experience. Prior to joining Turner Investment Partners, Mr. Sustersic was a Portfolio Manager at First Fidelity Bank Corporation. Mr. Sustersic graduated from the University of Pennsylvania with a B.S. in Economics.
Jason Schrotberger, CFA, Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. Schrotberger joined Turner in 2001. Prior to joining Turner Investment Partners, Mr. Schrotberger was an Investment Analyst at BlackRock Financial Management. He also served as an Equity Analyst at PNC Asset Management and for the Public School Employees' Retirement System for the Commonwealth of Pennsylvania. He began his career with Safeguard Scientifics where he served as a Venture Capital Analyst. Mr. Schrotberger holds a B.A. in Economics from Denison University and an M.B.A. in Finance from the University of Illinois.
Vijay Shankaran, MD, Ph.D., Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Dr. Shankaran joined Turner in 2006. He was previously employed at Caxton Associates, MedImmune, Inc., and RiverVest Ventures. He holds an MD and Ph.D. in Immunology from the Washington University School of Medicine, an M.B.A. from The Wharton School of Business at the University of Pennsylvania and a B.A. in Chemistry from Dartmouth College.
Christopher Baggini, CFA, Senior Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. Baggini joined Turner in 2010. Prior to joining Turner Investments, he was the Lead Portfolio Manager of the Aberdeen Equity Long-Short Fund at Aberdeen Asset Management. He also served as a Senior Portfolio Manager at Nationwide Financial Services (formerly Gartmore/Villanova Capital). Mr. Baggini earned his M.B.A. in Finance from New York University and his B.S. in Economics from Fairfield University.
Donald Smith, CFA, Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. Smith joined Turner in 2003 and has over 16 years of investment experience. Prior to joining Turner Investments, Mr. Smith was employed with Delaware Investment Advisors, Polaris Service, and Miller Anderson & Sherrerd, LLP. Mr. Smith was also a member of the US National Rowing Team (1993-2000) and competed in the 1996 and 2000 Olympics. Mr. Smith received his M.B.A. in finance from MIT and his B.S. in Operations Management from Syracuse University.
Matthew Glaser, Chief of Investment Strategies, Executive Managing Director, Principal and Lead Portfolio Manager -- Turner Market Neutral Equity, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. Glaser joined Turner in 2007. Prior to starting at Turner Investments, Mr. Glaser worked for Susquehanna International Group and served as Managing Director at JP Morgan Chase. Prior to that, he was managing director at
Robertson Stephens & Company. Mr. Glaser holds an M.B.A. from Columbia University and a B.A. from Wesleyan University.
Joshua Kohn, CFA, Portfolio Manager/Global Security Analyst and Principal, has managed the portion of the Fund's assets allocated to Turner since the Fund's inception. Mr. Kohn joined Turner in 2010. Mr. Kohn has over 12 years of investment experience. Prior to joining Turner Investments, Mr. Kohn worked at GCore Capital Management in New York. He also served as Vice President and as an Energy Equity Analyst at George Weiss Associates, LLC. Mr. Kohn holds an M.S. in Engineering and dual bachelor degrees in engineering and economics from the University of Pennsylvania.
REAL ASSETS FUND
BLACKROCK FINANCIAL MANAGEMENT, LLC ("BlackRock"), 55 East 52nd Street New York, New York 10055, serves as investment sub-adviser to a portion of the assets of the Real Assets Fund. BlackRock is a wholly-owned subsidiary of BlackRock, Inc., a New York limited liability company, was established in 1988. The PNC Financial Services Group, Inc. owns economic interests in BlackRock, Inc. approximating 21.8% and institutional investors, employees and the public own economic interest of 78.2% . As of December 31, 2012, BlackRock had approximately $3.79 trillion in assets under management.
PORTFOLIO MANAGERS:
Martin Hegarty, Managing Director/Co-Head of Inflation-Linked Bond Portfolio Team and Lead Portfolio Manager, has managed the portion of the Fund's assets allocated to BlackRock since the Fund's inception. Mr. Hegarty joined Blackrock in 2010. Prior to joining BlackRock in 2010, Mr. Hegarty was a Director at Bank of America Merrill Lynch. Prior to joining Bank of America Merrill Lynch in 2003, he was an Associate at Merrill Lynch in the Global Rates and Currencies Unit in London. Mr. Hegarty earned a B.S., with honors, in Economics from Rhodes University, South Africa in 1997.
Brian Weinstein, Managing Director/Co-Head of Inflation-Linked Bond Portfolio Team and Lead Portfolio Manager, has managed the portion of the Fund's assets allocated to BlackRock since the Fund's inception. Prior to 2010, he was co-head of the Global Bond team. Mr. Weinstein joined BlackRock in 2000 as an Analyst in the Portfolio Analytics Group and became a portfolio manager in 2002. Mr. Weinstein earned a B.A. in History from the University of Pennsylvania in 2000.
KAYNE ANDERSON CAPITAL ADVISORS, L.P. ("KACALP"), 1800 Avenue of the Stars, Third Floor, Los Angeles, California, 90067, serves as investment sub-adviser to a portion of the assets of the Real Assets Fund. KACALP, a California limited partnership established in 1984, is entirely owned by its investment professionals and management. As of December 31, 2012, KACALP had approximately $18 billion in assets under management.
PORTFOLIO MANAGER:
John (J.C.) Frey, Managing Partner and Portfolio Manager, has managed the portion of the Fund's assets allocated to KACALP since the Fund's inception. Mr. Frey joined KACALP in 1997. Prior to joining Kayne Anderson in 1997, Mr. Frey was an audit manager in KPMG Peat Marwick's financial services group. Mr. Frey is a Certified Public Accountant. He earned a B.S. in Accounting from Loyola Marymount University in 1990 and a Master of Taxation from the University of Southern California in 1991.
The Funds' SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Institutional Shares of the Funds.
Institutional Shares are for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Funds, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
Shares of the Fund are offered exclusively to certain advisory clients of the Adviser.
The Funds reserve the right to reject any specific purchase order for any reason. The Funds are not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Funds' policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. Please contact the Funds for more information.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. Each Fund's price per share will be the net asset value per share ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Funds were provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
Each Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, a Fund or authorized institution must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Funds reserve the right to calculate
NAV as of the earlier closing time. The Funds will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Funds may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Funds prior to the time the Funds calculate their NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Funds on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Funds after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Funds with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Funds with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Funds. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUNDS CALCULATE NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund. In calculating NAV, each Fund generally values its investment portfolio at market price. If market prices are not readily available or a Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Funds' Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Funds' Board, these methods are implemented through the Funds' Fair Value Pricing Committee, members of which are appointed by the Board. A Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
The respective prospectuses for the Underlying Funds in which the Funds invest explain the circumstances in which those Funds will use fair value pricing and the effect of fair value pricing.
There may be limited circumstances in which the Funds would price securities at fair value for stocks of U.S. companies that are traded on U.S. exchanges -- for example, if the exchange on which a portfolio
security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Funds calculated their NAV.
With respect to any non-U.S. securities held by the Funds, the Funds may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Funds may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Funds price their shares, the value the Funds assign to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Funds may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, or securities market movements in the United States, or other relevant information as related to the securities.
When valuing fixed income securities with remaining maturities of more than 60 days, the Fund uses the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security if a quotation is readily available, or may be based upon the values of securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Fund uses the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
Redeemable securities issued by open-end investment companies are valued at the investment company's applicable net asset value.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available or reasonably believed to be unreliable will be valued at their fair value as determined in good faith by or under the direction of the Board.
PURCHASES IN-KIND
Subject to the approval of the Funds, an investor may purchase shares of a Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
MINIMUM PURCHASES
You can open an account with the Funds with a minimum initial investment of $2,000. There is no minimum for subsequent investments. Each Fund reserves the right to waive or reduce the minimum initial or subsequent investment amount in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Funds to purchase Institutional Shares of a Fund, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE Global Public Equity Fund CAGLX 00769G634 6530 Income Opportunities Fund CAIOX 00769G626 6531 Public Alternatives Fund CAALX 00769G618 6532 Real Assets Fund CAREX 00769G592 6533 |
HOW TO SELL YOUR FUND SHARES
Shares can only be redeemed by contacting your client service manager or calling 1-888-762-1442.
The sale price will be the NAV next determined after the Funds receive your request.
RECEIVING YOUR MONEY
Normally, the Funds will send your sale proceeds within seven days after the Funds receive your request.
REDEMPTIONS IN KIND
The Funds generally pay sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Funds' remaining shareholders, the Funds might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Funds may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Funds have certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Funds are not responsible for any losses or costs incurred by following telephone instructions they reasonably believe to be genuine. If you or your financial institution transact with the Funds over the telephone, you will generally bear the risk of any loss.
SHAREHOLDER SERVICING ARRANGEMENTS
The Funds may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, their service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Funds generally pay financial intermediaries a fee that is based on the assets of each Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Funds, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Funds have each adopted a shareholder servicing plan that provides that the Funds may pay financial intermediaries for shareholder services in an annual amount not to exceed 0.05% based on the Fund's average daily net assets. Funds do not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Funds, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to the Funds' shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may
make payments to certain affiliated or unaffiliated financial intermediaries to
compensate them for the costs associated with distribution, marketing,
administration and shareholder servicing support. These payments may be in
addition to any shareholder servicing payments that are reflected in the fees
and expenses listed in the fee table sections of this prospectus. These
payments are sometimes characterized as "revenue sharing" payments and are made
out of the Adviser's and/or its affiliates' own legitimate profits or other
resources, and are not paid by the Funds. A financial intermediary may provide
these services with respect to Fund shares sold or held through programs such
as retirement plans, qualified tuition programs, fund supermarkets, fee-based
advisory or wrap fee programs, bank trust programs, and insurance (e.g.,
individual or group annuity) programs. In addition, financial intermediaries
may receive payments for making shares of the Funds available to their
customers or registered representatives, including providing the Funds with
"shelf space," placing it on a preferred or recommended fund list, or promoting
the Funds in certain sales programs that are sponsored by financial
intermediaries. To the extent permitted by SEC and Financial Industry
Regulatory Authority ("FINRA") rules and other applicable laws and regulations,
the Adviser and/or its affiliates may pay or allow other promotional incentives
or payments to financial intermediaries. For more information please see
"Payments to Financial Intermediaries" and "Shareholder Services" in the Funds'
SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Funds' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Funds are intended for long-term investment purposes only and discourage shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Funds may present risks to the Funds' long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Funds' investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Funds to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because the Funds may invest in foreign securities traded primarily on markets that close prior to the time a Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by a Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of their Fund's shares if the price of the Fund's foreign securities do not reflect their fair value. Although the Funds have procedures designed to determine the fair value of foreign securities for purposes of calculating their NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage.
In addition, because the Funds may invest in micro-, small- and mid-cap securities, which often trade in lower volumes and may be less liquid, these Funds may be more susceptible to the risks posed by frequent trading because frequent transactions in the Funds' shares may have a greater impact on the market prices of these types of securities.
The Funds' service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Funds' policies and procedures described in this prospectus and approved by the Funds' Board. For purposes of applying these policies, the Funds' service providers may consider the trading history of accounts under common ownership or control. The Funds' policies and procedures include:
o Shareholders are restricted from making more than 4 "round trips" into or out of any Fund over any rolling 12 month period. If a shareholder exceeds this amount, the Funds and/or their service providers may, at their discretion, reject any additional purchase orders. The Funds define a "round trip" as a purchase into a Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o Each Fund reserve the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Funds and/or their service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Funds' long-term shareholders. The Funds do not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Funds will occur.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Funds for their customers through which transactions are placed. The Funds have entered into "information sharing agreements" with these financial intermediaries, which permit the Funds to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Funds. If the Funds or their service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Funds, the Funds or their service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Funds or their service providers determine that the trading activity of any customer may be detrimental to the Funds, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Funds by that customer. If the Funds are not satisfied that the intermediary has taken appropriate action, the Funds may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Funds' shares is requested by the Funds and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Funds have an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Funds, to restrict or prohibit the indirect intermediary from purchasing shares of the Funds on behalf of other persons.
The Funds and their service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Funds. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Funds to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Funds will ask your name, address, date of birth, and other information that will allow the Funds to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Funds are required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Funds are required to collect documents to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Funds, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the next-determined NAV per share.
The Funds reserve the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if they are unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Funds. Further, the Funds reserve the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Funds' overall obligation to deter money laundering under federal law. The Funds have adopted an anti-money laundering compliance program designed to prevent the Funds from being used for money laundering or the financing of illegal activities. In this regard, the Funds reserve the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Funds or in cases when the Funds are requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Global Public Equity Fund and the Public Alternatives Fund will distribute their net investment income and make distributions of their net realized capital gains, if any, at least annually. The Income Opportunities Fund and the Real Assets Fund will distribute their net investment income quarterly and make distributions of their net realized capital gains, if any, at least annually. If you own Fund shares on a Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Funds in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Funds receive your written notice. To cancel your election, simply send the Funds written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Funds and their shareholders. This summary is based on current tax laws, which may change.
Each Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, depending upon your tax situation. Distributions you receive from each Fund may be taxable whether or not you reinvest them. Dividend distributions, other than distributions of qualified dividend income, and distributions of short-term capital gains are generally taxable at ordinary income tax rates. Distributions of long-term capital gains and distributions of qualified dividend income are generally taxable to individuals at the rates applicable to long-term capital gains of a maximum of 20%.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short term capital gain or loss if you held the shares for 12 months or less or a long term capital gain or loss if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a new 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
Corporate shareholders may be entitled to a dividends-received deduction for the portion of dividends they receive that are attributable to dividends received by the Funds from U.S. corporations, subject to certain limitations.
Distributions paid in January but declared by the Funds in October, November or December of the previous year will be taxable to you in the previous year.
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012 and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, a Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, a Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, a Fund will use the average basis method as the default cost basis method. The cost basis method elected by a Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Because the Funds may invest in foreign securities it may be subject to foreign withholding taxes with respect to dividends or interest that the Fund receives from sources in foreign countries. The Fund may be able to make an election to pass along a tax credit for foreign income taxes it pays. The Fund will notify you if it makes this decision.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Funds. The information is intended to help you understand the Funds' financial performance for the period of the Funds' operations. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rates that you would have earned (or lost) on an investment in the Funds, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Deloitte & Touche LLP, independent registered public accounting firm for the Funds. The financial statements and the unqualified opinion of Deloitte & Touche LLP are included in the 2012 Annual Report of the Funds, which is available upon request by calling 1-888-762-1442.
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CORNERSTONE ADVISORS GLOBAL PUBLIC EQUITY FUND PERIOD ENDED OCTOBER 31,
2012(1)
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NET ASSET VALUE, BEGINNING OF PERIOD $10.00
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Income from Investment Operations:
Net Investment Income* 0.01
Net Realized and Unrealized Gain on Investments 0.21
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Total From Investment Operations 0.22
------
Net Asset Value, End of Period $10.22
======
Total Return+ 2.20%
======
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $551,126
Ratio of Expenses to Average Net Assets (including
reimbursements) 1.11%++
Ratio of Net Investment Income to Average Net Assets 0.56%
Portfolio Turnover Rate++ 17%
|
(1) The Fund commenced operations on August 30, 2012. All ratios for the period have been annualized.
* Per share data calculated using average shares.
+ Total return and portfolio turnover rates are for the period indicated and have not been annualized.
++ The ratio is inclusive of commission recapture. Had commission recapture been excluded, the ratio would have remained unchanged.
--------------------------------------------------------------------------------
CORNERSTONE ADVISORS INCOME OPPORTUNITIES FUND PERIOD ENDED OCTOBER 31,
2012(1)
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
Income from Investment Operations:
Net Investment Income* 0.06
Net Realized and Unrealized Gain on Investments 0.08
------
Total From Investment Operations 0.14
------
Dividends from Net Investment Income (0.02)
------
Net Asset Value, End of Period $10.12
======
Total Return+ 1.37%
======
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $121,936
Ratio of Expenses to Average Net Assets 0.75%
Ratio of Net Investment Income to Average Net Assets 3.44%
Portfolio Turnover Rate+ 0%
|
(1) The Fund commenced operations on August 30, 2012. All ratios for the period have been annualized.
* Per share data calculated using average shares.
+ Total return and portfolio turnover rates are for the period indicated and have not been annualized.
--------------------------------------------------------------------------------
CORNERSTONE ADVISORS PUBLIC ALTERNATIVES FUND PERIOD ENDED OCTOBER 31,
2012(1)
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
Income from Investment Operations:
Net Investment Loss* --
------
Net Realized and Unrealized Loss on Investments (0.03)
------
Total From Investment Operations (0.03)
------
Net Asset Value, End of Period $9.97
======
Total Return+ (0.30)%
======
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $312,444
Ratio of Expenses to Average Net Assets
(excluding dividends on shorts and brokerage
fees on shorts) 0.84%
Ratio of Expenses to Net Assets (including
dividend on shorts and brokerage fees on
shorts) 1.38%
Ratio of Net Investment Loss to Average Net
Assets (0.14)%
Portfolio Turnover Rate+ 19%
|
(1) The Fund commenced operations on August 30, 2012. All ratios for the period have been annualized.
* Per share data calculated using average shares.
+ Total return and portfolio turnover rates are for the period indicated and have not been annualized.
Amounts designated as ("--") are $0.00 or have been rounded to $0.00.
--------------------------------------------------------------------------------
PERIOD ENDED OCTOBER 31,
CORNERSTONE ADVISORS REAL ASSETS FUND 2012(1)
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
Income from Investment Operations:
Net Investment Income* 0.04
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign
Currency Transactions 0.02
Total From Investment Operations 0.06
Dividends from Net Investment Income (0.01)
Net Asset Value, End of Period $10.05
Total Return+ 0.63%
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $122,492
Ratio of Expenses to Average Net Assets 1.05%
Ratio of Net Investment Income to Average Net Assets 2.10%
Portfolio Turnover Rate+ 7%
|
(1) The Fund commenced operations on August 30, 2012. All ratios for the period have been annualized.
* Per share data calculated using average shares.
+ Total return and portfolio turnover rates are for the period indicated and have not been annualized.
THE ADVISORS' INNER CIRCLE FUND
CORNERSTONE ADVISORS FUNDS
INVESTMENT ADVISER
Cornerstone Advisors, Inc.
225 108th Avenue NE, Suite 400
Bellevue, Washington 98004-5782
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
MORE INFORMATION ABOUT THE FUND IS AVAILABLE, WITHOUT CHARGE, THROUGH THE FOLLOWING:
STATEMENT OF ADDITIONAL INFORMATION: The SAI, dated March 1, 2013, includes detailed information about the Funds and The Advisors' Inner Circle Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Funds' holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on the Funds' performance. The reports also contain detailed financial information about the Funds.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-888-762-1442
BY MAIL: CORNERSTONE FUNDS
C/O DST SYSTEMS, INC.
P.O. BOX 219009
KANSAS CITY, MO 64121-9009
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
|
Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov.
THE ADVISORS' INNER CIRCLE FUND'S INVESTMENT COMPANY ACT REGISTRATION NUMBER IS
811-06400.
THE ADVISORS' INNER CIRCLE FUND
EDGEWOOD GROWTH FUND
PROSPECTUS
MARCH 1, 2013
INSTITUTIONAL SHARES TICKER SYMBOL: EGFIX
RETAIL SHARES TICKER SYMBOL: EGFFX
INVESTMENT ADVISER:
EDGEWOOD MANAGEMENT LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
FUND SUMMARY -- INSTITUTIONAL SHARES ....................................... 1
INVESTMENT OBJECTIVE .................................................. 1
FEES AND EXPENSES OF THE FUND ......................................... 1
PRINCIPAL INVESTMENT STRATEGIES ....................................... 2
PRINCIPAL RISKS OF INVESTING IN THE FUND .............................. 2
PERFORMANCE INFORMATION ............................................... 3
INVESTMENT ADVISER .................................................... 4
PORTFOLIO MANAGERS .................................................... 4
PURCHASE AND SALE OF FUND SHARES ...................................... 5
TAX INFORMATION ....................................................... 5
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES ...................................................... 5
FUND SUMMARY -- RETAIL SHARES .............................................. 6
INVESTMENT OBJECTIVE .................................................. 6
FEES AND EXPENSES OF THE FUND ......................................... 6
PRINCIPAL INVESTMENT STRATEGIES ....................................... 7
PRINCIPAL RISKS OF INVESTING IN THE FUND .............................. 7
PERFORMANCE INFORMATION ............................................... 8
INVESTMENT ADVISER .................................................... 9
PORTFOLIO MANAGERS .................................................... 9
PURCHASE AND SALE OF FUND SHARES ...................................... 10
TAX INFORMATION ....................................................... 10
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES ...................................................... 10
MORE INFORMATION ABOUT RISK ................................................ 11
MORE INFORMATION ABOUT FUND INVESTMENTS .................................... 11
INFORMATION ABOUT PORTFOLIO HOLDINGS ....................................... 12
MORE INFORMATION ABOUT THE INVESTMENT ADVISER .............................. 12
INVESTMENT TEAM ............................................................ 12
PURCHASING AND SELLING FUND SHARES ......................................... 13
DISTRIBUTION OF FUND SHARES ................................................ 19
|
TABLE OF CONTENTS
(continued)
PAGE
SHAREHOLDER SERVICING ARRANGEMENTS ........................................ 19
PAYMENTS TO FINANCIAL INTERMEDIARIES ...................................... 20
OTHER POLICIES ............................................................ 20
DIVIDENDS AND DISTRIBUTIONS ............................................... 23
TAXES ..................................................................... 23
FINANCIAL HIGHLIGHTS ...................................................... 25
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ..................... BACK COVER
|
EDGEWOOD GROWTH FUND -- INSTITUTIONAL SHARES
INVESTMENT OBJECTIVE
The investment objective of the Edgewood Growth Fund (the "Fund") is to provide long-term growth of capital.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INSTITUTIONAL
SHARES
----------------------------------------------------------------------------------------------------
Management Fees 1.00%
----------------------------------------------------------------------------------------------------
Other Expenses 0.13%
----------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.13%
----
----------------------------------------------------------------------------------------------------
Less Fee Waivers and/or Expense Reimbursements 0.13%
----
----------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses After Fee Waivers and/or Expense 1.00%
Reimbursements (1)
----------------------------------------------------------------------------------------------------
|
(1) Edgewood Management LLC (the "Adviser") has contractually agreed to waive its fees and reimburse expenses in order to limit the Fund's Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses) to an amount equal to the Management Fees until February 28, 2014. This Expense Limitation Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$102 $346 $610 $1,363
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 rate 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 total
annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 38% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund is non-diversified and primarily invests in a core group of 15-35 equity securities, including both common stocks and sponsored American Depositary Receipts ("ADRs"). The Fund is flexibly managed, with the ability to invest in equity securities of a smaller number of issuers and/or industry sectors than diversified mutual funds. The Fund focuses on U.S. companies that Edgewood Management LLC (the "Adviser") believes are quality companies with stock that offer the potential for future price appreciation.
In selecting investments for the Fund, the Adviser seeks to identify companies possessing fundamentally strong market positions in growing industries, exceptional earnings power, and consistency of earnings performance, with a particular focus on growing companies experiencing superior rates of return over varying economic cycles. Investment decisions are based upon a fundamental analysis that emphasizes company-specific research. The goal of the process is to invest in growth companies in both established and growing industries that display the following characteristics: a record of consistent earnings power; an earnings growth rate in excess of the S&P 500 Growth Index; a dominant market position or proven strength; attractive fundamental financial valuation; superior management; management/insider ownership; and an industry growth rate in excess of the growth of gross domestic product ("GDP"). The Fund's investments are expected to have a bias toward larger capitalization issuers (those with market capitalizations in excess of $10 billion), but the Fund may also invest in small-capitalization (between $100 million and $4 billion) and medium-capitalization (between $4 billion and $10 billion) companies.
The Fund intends to buy and hold securities for the long-term and seeks to keep moderate portfolio turnover. However, the Adviser may sell a security in response to deterioration in a company's business prospects, performance or financial strength, when the security's price is no longer justifiable or if the security demonstrates earnings disappointments.
PRINCIPAL RISKS OF INVESTING IN THE FUND
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
The Fund is non-diversified and its investment strategy often results in a core group of stocks of companies that it believes hold the most growth potential. As a result, poor performance or adverse economic events affecting one or more of these companies could have a greater impact on the Fund than it would on another mutual fund with a broader range of investments.
To the extent that the Fund invests in small- and medium-capitalization companies, the Fund may be subject to additional risk. The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
When the Fund invests in foreign securities, it will be subject to risks not typically associated with domestic securities. Although ADRs are an alternative to directly purchasing the underlying foreign securities in their national markets and currencies, they are also subject to many of the risks associated with investing directly in foreign securities. Foreign investments can be riskier and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it difficult for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly.
PERFORMANCE INFORMATION
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 Institutional Shares' performance from year to year and by showing how the Fund's Institutional Shares' average annual returns for 1 and 5 years and since the Fund's inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.edgewoodfunds.com or by calling 1-800-791-4226.
2007 21.52%
2008 (39.14)%
2009 30.73%
2010 12.15%
2011 3.73%
2012 18.72%
BEST QUARTER WORST QUARTER
18.65% (26.44)%
(09/30/2010) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
EDGEWOOD GROWTH FUND INSTITUTIONAL 1 YEAR 5 YEARS SINCE INCEPTION CLASS (2/28/2006) --------------------------------------------------------------------------------------------------------- FUND RETURN BEFORE TAXES 18.72% 1.90% 5.14% --------------------------------------------------------------------------------------------------------- FUND RETURN AFTER TAXES ON DISTRIBUTIONS 18.69% 1.90% 5.08% FUND RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF 12.22% 1.63% 4.43% FUND SHARES S&P 500 GROWTH INDEX RETURN (REFLECTS NO DEDUCTION 14.61% 3.39% 5.11% FOR FEES, EXPENSES, OR TAXES) |
INVESTMENT ADVISER
Edgewood Management LLC
PORTFOLIO MANAGERS
Mr. Alan W. Breed, President and Member of the Board of Managers, has managed the Fund since its inception.
Mr. Lawrence G. Creel, Partner and Member of the Board of Managers, has managed the Fund since its inception.
Mr. Scott Edwardson, Managing Director, has managed the Fund since its inception.
Mr. Alexander Farman-Farmaian, Vice Chairman and Member of the Board of Managers, has managed the Fund since its inception.
Mr. Peter Jennison, Partner and Member of the Board of Managers, has managed the Fund since its inception.
Mr. James Robillard, Managing Director, has managed the Fund since its inception.
Mr. Kevin R. Seth, Partner and Member of the Board of Managers, has managed the Fund since its inception.
Mr. Nicholas A. Stephens, CFA, Partner and Member of the Board of Managers, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund's transfer agent directly by mail or telephone at 1-800-791-4226.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
EDGEWOOD GROWTH FUND -- RETAIL SHARES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide long-term growth of capital.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
RETAIL
SHARES
-------------------------------------------------------------------------------------------
Management Fees 1.00%
-------------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25%
-------------------------------------------------------------------------------------------
Shareholder Servicing Fees 0.14%
-------------------------------------------------------------------------------------------
Other Expenses 0.13%
-------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.52%
----
-------------------------------------------------------------------------------------------
Less Fee Waivers and/or Expense Reimbursements 0.13%
----
-------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses After Fee Waivers and/or Expense 1.39%
Reimbursements (1)
-------------------------------------------------------------------------------------------
|
(1) The Adviser has contractually agreed to waive its fees and reimburse expenses in order to limit the Fund's Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses) to an amount equal to the sum of the Management Fees, Distribution (12b-1) Fees and shareholder servicing fees until February 28, 2014. This Expense Limitation Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$142 $468 $817 $1,801
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 rate 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 total
annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 38% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund is non-diversified and primarily invests in a core group of 15-35 equity securities, including both common stocks and sponsored American Depositary Receipts ("ADRs"). The Fund is flexibly managed, with the ability to invest in equity securities of a smaller number of issuers and/or industry sectors than diversified mutual funds. The Fund focuses on U.S. companies that Adviser believes are quality companies with stock that offer the potential for future price appreciation.
In selecting investments for the Fund, the Adviser seeks to identify companies possessing fundamentally strong market positions in growing industries, exceptional earnings power, and consistency of earnings performance, with a particular focus on growing companies experiencing superior rates of return over varying economic cycles. Investment decisions are based upon a fundamental analysis that emphasizes company-specific research. The goal of the process is to invest in growth companies in both established and growing industries that display the following characteristics: a record of consistent earnings power; an earnings growth rate in excess of the S&P 500 Growth Index; a dominant market position or proven strength; attractive fundamental financial valuation; superior management; management/insider ownership; and an industry growth rate in excess of the growth of gross domestic product ("GDP"). The Fund's investments are expected to have a bias toward larger capitalization issuers (those with market capitalizations in excess of $10 billion), but the Fund may also invest in small-capitalization (between $100 million and $4 billion) and medium-capitalization (between $4 billion and $10 billion) companies.
The Fund intends to buy and hold securities for the long-term and seeks to keep moderate portfolio turnover. However, the Adviser may sell a security in response to deterioration in a company's business prospects, performance or financial strength, when the security's price is no longer justifiable or if the security demonstrates earnings disappointments.
PRINCIPAL RISKS OF INVESTING IN THE FUND
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
The Fund is non-diversified and its investment strategy often results in a core group of stocks of companies that it believes hold the most growth potential. As a result, poor performance or adverse economic events affecting one or more of these companies could have a greater impact on the Fund than it would on another mutual fund with a broader range of investments.
To the extent that the Fund invests in small- and medium-capitalization companies, the Fund may be subject to additional risk. The small- and mid-capitalization companies in which the Fund may invest
may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
When the Fund invests in foreign securities, it will be subject to risks not typically associated with domestic securities. Although ADRs are an alternative to directly purchasing the underlying foreign securities in their national markets and currencies, they are also subject to many of the risks associated with investing directly in foreign securities. Foreign investments can be riskier and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it difficult for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions.
PERFORMANCE INFORMATION
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 Retail Shares' performance from year to year and by showing how the Fund's Retail Shares' average annual returns for 1 and 5 years and since the Fund's inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.edgewoodfunds.com or by calling 1-800-791-4226.
2007 21.13%
2008 (39.90)%
2009 30.94%
2010 11.97%
2011 3.53%
2012 18.64%
BEST QUARTER WORST QUARTER
18.97% (26.89)%
(09/30/2010) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
1 YEAR 5 YEARS SINCE INCEPTION
EDGEWOOD GROWTH FUND RETAIL CLASS (2/28/2006)
--------------------------------------------------------------------------------------------------------------
FUND RETURNS BEFORE TAXES 18.64% 1.59% 4.80%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 18.64% 1.59% 4.74%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND 12.11% 1.36% 4.13%
SHARES
S&P 500 GROWTH INDEX RETURN (REFLECTS NO DEDUCTION FOR FEES, 14.61% 3.39% 5.11%
EXPENSES, OR TAXES)
|
INVESTMENT ADVISER
Edgewood Management LLC
PORTFOLIO MANAGERS
Mr. Alan W. Breed, President and Member of the Board of Managers, has managed the Fund since its inception.
Mr. Lawrence G. Creel, Partner and Member of the Board of Managers, has managed the Fund since its inception.
Mr. Scott Edwardson, Managing Director, has managed the Fund since its inception.
Mr. Alexander Farman-Farmaian, Vice Chairman and Member of the Board of Managers, has managed the Fund since its inception.
Mr. Peter Jennison, Partner and Member of the Board of Managers, has managed the Fund since its inception.
Mr. James Robillard, Managing Director, has managed the Fund since its inception.
Mr. Kevin R. Seth, Partner and Member of the Board of Managers has managed the Fund since its inception.
Mr. Nicholas A. Stephens, CFA, Partner and Member of the Board of Managers, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, you must invest at least $3,000 ($2,000 for individual retirement accounts ("IRAs")). There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-800-791-4226.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
EQUITY RISK - Equity securities include publicly and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices. Investments in equity securities and equity derivatives in general are subject to market risks that may cause their prices to fluctuate over time. The value of such securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN SECURITY RISK - Investments in securities of foreign companies or governments (including direct investments as well as through ADRs) can be more volatile than investments in U.S. companies or governments. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investment objective of the Fund is to provide long-term growth of capital. This investment objective may be changed without shareholder approval.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. In the event that the Adviser determines that securities meeting the Fund's investment objectives are not readily available for purchase, the Fund may hold uninvested assets in cash or money market instruments in order to maintain liquidity. In addition, during unusual economic or market conditions, or for temporary defensive purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment
objectives. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for growth of total return.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest to a lesser extent in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategy. These investments and strategies, as well as those described in this prospectus, are described in detail in the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that the Fund will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
The Fund generally publishes a complete alphabetical list of its portfolio holdings on a quarterly basis, forty-five (45) days after the end of the fiscal quarter. The portfolio information described above can be found on the internet at http://aicfundholdings.com/edgewood. The information will generally remain available until replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund. Please consult the Fund's SAI for a full description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
Edgewood Management LLC is a New York limited liability company formed in 2006 and is the successor to Edgewood Management Company, founded in 1974. The Adviser's principal place of business is located at 535 Madison Avenue, 15th Floor, New York, New York 10022. As of December 31, 2012, the Adviser had approximately $6.8 billion in assets under management.
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board supervises the Adviser and establishes policies that the Adviser must follow in its management activities. For its services, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.00% based on the average daily net assets of the Fund. The Adviser has contractually agreed to waive its fees and reimburse expenses in order to limit the Fund's total annual fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses) to an amount equal to the sum of the management fees, and, to the extent incurred, distribution (12b-1) fees and shareholder servicing fees until February 28, 2014. For the fiscal year ended October 31, 2012, the Fund paid 0.87% of its average daily net assets (after fee waivers) in advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
INVESTMENT TEAM
The Edgewood Growth Fund is managed by a team of investment professionals. The following portfolio managers are jointly and primarily responsible for the day-to-day management of the Fund. Each portfolio manager has served on the portfolio management team of the Fund since its inception.
Mr. Alan W. Breed joined the Adviser in 1994 as a Partner and has served as President of the Adviser since June 1998, after serving as a Managing Director from January 1994 to June 1998. Mr. Breed has more than 28 years of investment experience.
Mr. Lawrence G. Creel has served as Partner of the Adviser since February 1997. Mr. Creel has more than 28 years of investment experience.
Mr. Scott Edwardson has served as Managing Director of the Adviser since December 2010, after serving as Senior Research Analyst of the Adviser from May 2000 to December 2010. Mr. Edwardson has more than 13 years of investment experience.
Mr. Alexander Farman-Farmaian has served as Vice Chairman and Partner of the Adviser since January 2006. Mr. Farman-Farmaian has more than 25 years of investment experience.
Mr. Peter Jennison has served as Partner of the Adviser since January 2006. Mr. Jennison has more than 27 years of investment experience.
Mr. James Robillard has served as Managing Director of the Adviser since December 2010, after serving as Senior Research Analyst of the Adviser from July 2004 to December 2010. Mr. Robillard has more than 14 years of investment experience.
Mr. Kevin R. Seth has served as Partner of the Adviser since February 1995. Mr. Seth has more than 30 years of investment experience.
Mr. Nicholas A. Stephens, CFA, has served as Partner of the Adviser since January 1993. Mr. Stephens has more than 28 years of investment experience.
The Fund's SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Retail and Institutional Shares of the Fund.
Retail Shares of the Fund are principally designed for purchase by individual investors. Institutional Shares of the Fund are principally designed for purchase by institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund through its transfer agent, complete and send in the application. If you need an application or have questions, please call 1-800-791-4226.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
REGULAR MAIL ADDRESS
Edgewood Growth Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Edgewood Growth Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-800-791-4226 for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA#: 101000695
Edgewood Growth Fund
DDA# 9870523965
Ref: account number/account name
RETAIL SHARES -- BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. Purchases can be made monthly, quarterly, semi-annually, or annually in amounts of at least $100. To cancel or change a plan, write to the Fund at: Edgewood Growth Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Edgewood Growth Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an
appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange ("NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days either the NYSE or the Federal Reserve is closed. The price per share (the offering price) will be the net asset value per share ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Fund is provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund or authorized institution must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early - such as on days in advance of certain holidays - the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund. In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value - for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider any relevant information related to the securities, such as the performance of securities on their primary exchanges, foreign currency appreciation/depreciation or securities market movements in the United States.
MINIMUM INVESTMENTS
To purchase Institutional Shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. To purchase shares of the Retail Shares of the Fund for the first time, you must invest at least $3,000 ($2,000 for an IRA). There are no minimums for subsequent investments. The Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
The Fund's reference information listed below will be helpful to you when you contact the Fund to purchase shares, check daily NAV or obtain additional information.
EDGEWOOD GROWTH FUND TICKER SYMBOL CUSIP FUND CODE -------------------------------------------------------------------------------- Retail Shares EGFFX 0075W0742 2130 -------------------------------------------------------------------------------- Institutional Shares EGFIX 0075W0759 2131 -------------------------------------------------------------------------------- |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund's transfer agent directly by mail or telephone at 1-800-791-4226.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-800-791-4226 for more information.
The sale price will be the NAV next determined after the Fund receives your request.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
Edgewood Growth Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Edgewood Growth Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY TELEPHONE
To redeem shares by telephone, you must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-800-791-4226 to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank by either Fed wire or ACH.
RETAIL SHARES -- BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Fund.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the Fund receives your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $1,000 because of redemptions, you may be required to sell your shares. The Fund will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
DISTRIBUTION OF FUND SHARES
The Fund has adopted a distribution plan pursuant to Rule 12b-1 for Retail Shares that allows the Fund to pay distribution and/or service fees for the sale and distribution of its shares, and for services provided to shareholders. Because these fees are paid out of the Fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The maximum annual distribution and/or service fee for Retail Shares is 0.25% of the average daily net assets of the Fund.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Fund has adopted a shareholder servicing plan for Retail Shares that provides that the Fund may pay financial intermediaries for shareholder services in an annual amount not to exceed 0.25% based on the average daily net assets of the Fund. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any Rule 12b-1 fees and/or shareholder servicing payments that are reflected in the fees and expenses listed in the fee table section of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" under the heading "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because the Fund may invest in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market
reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of their Fund's shares if the price of the Fund's foreign securities does not reflect their fair value. Although the Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than four "round trips" into or out of the Fund over any rolling 12 month period. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to
identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund.
Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; and/or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, depending upon your tax situation. Distributions you receive from the Fund may be taxable whether or not you reinvest them. Income distributions, other than distributions of qualified dividend income and distributions of long-term capital gains, are generally taxable at ordinary income tax rates. Distributions of long-term capital gains and distributions of qualified dividend income are generally taxable at the rates applicable to long-term capital gains and set at a maximum tax rate for individuals at 20% (lower rates apply to individuals in lower tax brackets).
Each sale of Fund shares may be a taxable event. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
To the extent that the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. The Fund may elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the Institutional and Retail Shares of the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in each table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-800-791-4226.
---------------------------------------------------------------------------
Edgewood Growth Fund Year Ended October 31,
(Institutional Shares) ---------------------------------------------------------------------------
2012 2011 2010 2009 2008
---------------------------------------------------------------------------
Net Asset Value, Beginning of $11.86 $10.90 $9.32 $8.45 $13.61
Year
Income (Loss) from Operations:
Net Investment Income (Loss)(1) -- (0.04) (0.04) (0.05) (0.05)
Net Realized and Unrealized
Gain (Loss) 1.47 1.00 1.62 0.92 (4.91)
---- ---- ---- ---- ----
Total from Operations 1.47 0.96 1.58 0.87 (4.96)
---- ---- ---- ---- ----
Distributions:
Net Realized Gain -- -- -- -- (0.20)
---- ---- ---- ---- ----
Net Asset Value, End of Year $13.33 $11.86 $10.90 $9.32 $8.45
===== ===== ===== ==== ====
Total Return(2) 12.39% 8.81% 16.95% 10.30% (36.93)%
===== ===== ===== ===== =====
Ratios and Supplemental Data
Net Assets, End of Year
(Thousands) $1,651,696 $1,230,687 $829,040 $881,970 $448,470
Ratio of Expenses to Average
Net Assets (Including Fees Paid 1.00% 1.00% 1.00% 1.00% 1.00%
Indirectly)
Ratio of Expenses to Average
Net Assets (Excluding Waivers
and Fees Paid Indirectly) 1.13% 1.15% 1.14% 1.16% 1.20%
Ratio of Net Investment Income
(Loss) to Average Net Assets 0.01% (0.37)% (0.36)% (0.56)% (0.44)%
Portfolio Turnover Rate 38% 39% 75% 38% 86%
|
(1) Calculated using average shares.
(2) Total return would have been lower had certain expenses not been waived and assumed by the Adviser during the period. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
Amounts designated as "-" are $0 or have been rounded to $0.
----------------------------------------------------------------
Edgewood Growth Fund Year Ended October 31,
(Retail Shares) ----------------------------------------------------------------
2012 2011 2010 2009 2008
----------------------------------------------------------------
Net Asset Value, Beginning of Year $11.61 $10.70 $9.15 $8.31 $13.53
Income (Loss) from Operations:
Net Investment Income (Loss)(1) (0.05) (0.09) (0.07) (0.08) (0.09)
Net Realized and Unrealized Gain (Loss) 1.47 1.00 1.62 0.92 (4.93)
---- ---- ---- ---- ----
Total from Operations 1.42 0.91 1.55 0.84 (5.02)
---- ---- ---- ---- ----
Distributions:
Net Realized Gain -- -- -- -- (0.20)
---- ---- ---- ---- ----
Net Asset Value, End of Year $13.03 $11.61 $10.70 $9.15 $8.31
===== ===== ===== ==== ====
Total Return(2) 12.23% 8.50% 16.94% 10.11% (37.60)%
===== ===== ===== ===== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $122,930 $77,239 $94,010 $83,007 $16,769
Ratio of Expenses to Average Net Assets
(Including Fees Paid Indirectly) 1.39% 1.40% 1.38% 1.35% 1.50%
Ratio of Expenses to Average Net
Assets(Excluding Waivers and Fees Paid
Indirectly) 1.52% 1.55% 1.53% 1.51% 1.70%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.37)% (0.76)% (0.74)% (0.93)% (0.83)%
Portfolio Turnover Rate 38% 39% 75% 38% 86%
|
(1) Calculated using average shares.
(2) Total return would have been lower had certain expenses not been waived and assumed by the Adviser during the period. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
Amounts designated as "-" are $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
EDGEWOOD GROWTH FUND
INVESTMENT ADVISER
Edgewood Management LLC
535 Madison Avenue, 15th Floor
New York, New York 10022
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
MORE INFORMATION ABOUT THE FUND IS AVAILABLE, WITHOUT CHARGE, THROUGH THE FOLLOWING:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Fund and The Advisors' Inner Circle Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list the Fund's holdings and contain information from the Adviser about strategies and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI OR ANNUAL OR SEMI-ANNUAL REPORT OR MORE INFORMATION:
BY TELEPHONE: 1-800-791-4226
BY MAIL: Edgewood Growth Fund
P.O. Box 219009
Kansas City, MO 64121-9009
BY INTERNET: www.edgewoodfunds.com
|
FROM THE SEC: You can also obtain the SAI, the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
THE TRUST'S INVESTMENT COMPANY ACT REGISTRATION NUMBER IS 811-06400.
EMC-PS-001-0900
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
FMC SELECT FUND
TICKER SYMBOL: FMSLX
INVESTMENT ADVISER:
FIRST MANHATTAN CO.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FMC SELECT FUND (THE "FUND"), PLEASE SEE:
PAGE
FUND SUMMARY .....................................................1
INVESTMENT OBJECTIVE ........................................1
FUND FEES AND EXPENSES ......................................1
PRINCIPAL INVESTMENT STRATEGY ...............................1
PRINCIPAL RISKS OF INVESTING IN THE FUND ....................2
PERFORMANCE INFORMATION .....................................3
INVESTMENT ADVISER ..........................................3
PORTFOLIO MANAGERS ..........................................4
PURCHASE AND SALE OF FUND SHARES ............................4
TAX INFORMATION ..................................................4
MORE INFORMATION ABOUT RISK ......................................5
MORE INFORMATION ABOUT FUND INVESTMENTS ..........................5
INFORMATION ABOUT PORTFOLIO HOLDINGS .............................6
INVESTMENT ADVISER ...............................................6
PORTFOLIO MANAGERS ...............................................6
PURCHASING AND SELLING FUND SHARES ...............................7
OTHER POLICIES ...................................................12
DIVIDENDS AND DISTRIBUTIONS ......................................14
TAXES ............................................................14
FINANCIAL HIGHLIGHTS .............................................16
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................Back Cover
|
FMC SELECT FUND
INVESTMENT OBJECTIVE
Total return, principally through capital appreciation and, to a limited degree, through current income.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE
OF THE VALUE OF YOUR INVESTMENT) -------------------------------------------------------------------------------- Management Fees 0.80% -------------------------------------------------------------------------------- Other Expenses 0.21% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses(1) 1.02% -------------------------------------------------------------------------------- |
(1) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs might be different, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$104 $325 $563 $1,248
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys or sells securities (or "turns over" its portfolio). A higher portfolio turnover rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 14% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
The Fund invests primarily in common stocks of U.S. companies with medium to large market capitalizations (in excess of $1 billion). The Fund's investment approach, with its emphasis on equity securities, has as its objective total return, principally through capital appreciation and, to a
limited degree, through current income. The Fund will generally invest in equity securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). First Manhattan Co. ("FMC" or the "Adviser") expects that the Fund's investments in foreign companies will normally represent less than 20% of the Fund's assets.
In selecting equity securities for the Fund, the Adviser emphasizes companies with strong balance sheets, above average returns on equity and businesses that the Adviser believes it understands. The Adviser will also consider dividends paid by particular issuers when selecting the Fund's investments. The Fund may invest in companies where not all of these factors may be present, but where the Adviser believes the company's shares may be selling at a market price below their intrinsic value.
The Fund intends to buy and hold equity securities of companies for the long-term, and seeks to limit portfolio turnover. The Fund may sell a security, however, if the security achieves a designated price target or if there is a fundamental change in the Adviser's view of an issuer's outlook.
PRINCIPAL RISKS OF INVESTING IN THE FUND
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK - Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate significantly from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of equity securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, whether through investments made in foreign markets or made through purchasing ADRs, which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks because political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies (other than ADRs) are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can have a negative impact on the decision to invest in such securities. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or the security may be valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
The Fund is also subject to the risk that its investment approach may perform differently than other funds which target a specific equity market segment or that invest in other asset classes.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance and a blended index, 80% of which is the S&P 500 Index and 20% of which is the Merrill Lynch 1-10 year Corporate/Government Bond Index. The blended index is provided in the performance table because it better reflects the asset allocation of the Fund prior to July 1, 2007. Prior to July 1, 2007, the Fund's investment strategy also included investing a targeted allocation range of its assets in fixed income securities in addition to investments in equity securities; therefore, the performance shown below may have differed had the Fund's current investment strategy been in effect during those periods. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-877-362-4099.
2003 23.17%
2004 10.98%
2005 2.23%
2006 10.79%
2007 2.63%
2008 (33.99%)
2009 23.57%
2010 13.13%
2011 (1.07)%
2012 17.95%
BEST QUARTER WORST QUARTER
17.82% (24.76)%
(06/30/2009) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown may not be relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts ("IRAs").
FMC SELECT FUND 1 YEAR 5 YEARS 10 YEARS ------------------------------------------------------------------------------------------------ FUND RETURNS BEFORE TAXES 17.95% 1.49% 5.52% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 17.72% 1.36% 5.13% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 11.67% 1.23% 4.73% S&P 500 INDEX RETURNS (REFLECTS NO DEDUCTION FOR FEES, EXPENSES, OR TAXES) 16.00% 1.66% 7.10% 80/20 BLENDED BENCHMARK INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES, OR TAXES) XX% XX% XX% |
INVESTMENT ADVISER
First Manhattan Co.
PORTFOLIO MANAGERS
Timothy C. Muccia, Senior Managing Director, and Andrew M. Freedberg, Senior Managing Director, have co-managed the Fund since May 2010.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase made through an IRA, you must invest at least $10,000. Your subsequent investments in the Fund must be made in amounts of at least $1,000.
The Fund may accept investments of smaller amounts in its sole discretion. In addition, these minimum purchase requirements may be reduced or waived by the Fund's distributor or for investors who purchase shares of the Fund through omnibus accounts maintained by registered broker-dealers who have executed sub-distribution agreements with the distributor, including the Adviser.
If you own your shares directly, you may redeem your shares on any day the New York Stock Exchange ("NYSE") is open (a "Business Day") by contacting the Fund directly by mail or telephone at 1-877-FMC-4099 (1-877-362-4099). If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on, among other factors, how widely the Fund diversifies its holdings, the size of the single security, and the amount of the change in value.
EQUITY RISK - Equity securities include publicly and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of the equity securities in which a mutual fund invests will cause the Fund's net asset value per share ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN SECURITY RISK -- Investments in securities of foreign companies, including direct investments as well as ADRs, can be more volatile than investments in U.S. companies. Diplomatic, political, and/or economic developments, including nationalization or appropriation, could affect investments in securities of foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers may be subject to different accounting, auditing, and financial standards than the financial statements of U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less publicly available information about foreign issuers than about many U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, any non-recovered portion will reduce the net income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in money market instruments or
other cash equivalents that would not ordinarily be consistent with its investment objectives. If the Fund invests in this manner, it may not achieve its investment objectives. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for capital appreciation or higher income.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategy. These investments and strategies, as well as those described in this prospectus, are described in detail in the Statement of Additional Information (for information on how to obtain a copy of the Statement of Additional Information see the back cover of this prospectus).
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the Statement of Additional Information.
INVESTMENT ADVISER
FMC serves as the investment adviser to the Fund. The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees supervises the Adviser and establishes policies that the Adviser must follow in performing its management activities.
FMC's principal place of business is located at 437 Madison Avenue, New York, NY 10022-7001. Effective March 25, 2013, the principal place of business will be 399 Park Avenue, New York, NY 10022-7001. FMC has provided professional investment advisory services to individuals, partnerships, trusts, pension and employee benefit plans and other institutions since its founding in 1964. Because of the amount of their direct and indirect ownership of the Adviser's outstanding ownership interests, Mr. David S. Gottesman and Mr. Robert W. Gottesman are deemed to control the Adviser. As of December 31, 2012, FMC had approximately $13 billion in assets under management. For its services to the Fund, FMC is entitled to an investment advisory fee which is calculated daily and paid monthly, at an annual rate of 0.80% based on the average daily net assets of the Fund. FMC has voluntarily agreed to reduce fees and reimburse expenses to the extent necessary to keep total annual Fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses) from exceeding 1.10% of the Fund's average daily net assets. The Adviser may discontinue all or a portion of its fee reductions or expense reimbursements at any time. For the fiscal year ended October 31, 2012, FMC received advisory fees of 0.80% of the Fund's average daily net assets.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
Timothy C. Muccia is a Senior Managing Director and portfolio manager with the Adviser. He has co-managed the Fund since 2010. He has more than 20 years of financial industry experience. Prior to joining the Adviser in 1999, Mr. Muccia worked at Furman Selz LLC, a private boutique brokerage and investment banking firm.
Andrew M. Freedberg is a Senior Managing Director and portfolio manager with the Adviser. He has co-managed the Fund since 2010. He has 13 years of investment research experience. Prior to joining the Adviser in 2000, Mr. Freedberg worked at Salomon Brothers.
The Fund's Statement of Additional Information provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
PURCHASING AND SELLING FUND SHARES
This section explains how you may purchase and sell (sometimes called "redeem") shares of the Fund.
The Fund's shares are intended to be held by individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in an application. If you need an application or have questions, please call 1-877-FMC-4099 (1-877-362-4099).
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
BY MAIL
REGULAR MAIL ADDRESS
FMC Select Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
FMC Select Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-877-FMC-4099 (1-877-362-4099) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
FMC Funds
DDA Account #9870601087
Ref: account number/account name
You may also buy shares through accounts with brokers and other institutions that are authorized to place trades in Fund shares for their customers, including FMC. If you invest through an authorized institution, you will have to follow its procedures, which may be different from the procedures for investing directly. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund. In general, you will also have to address your correspondence or questions regarding the Fund to your broker or institution.
The Fund reserves the right to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
GENERAL INFORMATION
You may purchase shares on any Business Day. Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed.
The price per share will be the net asset value per share next determined after the Fund receives your purchase order.
The Fund calculates NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your order in good form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.) before the close of trading on the NYSE that day. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Because securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Board. Pursuant to policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than what the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information as related to the securities.
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $25. To cancel or change a plan, write to the Fund at: FMC Select Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: FMC Select Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
FUND CODES
The Fund's reference information listed below will be helpful to you when you contact the Fund to purchase shares, check daily NAV or obtain additional information.
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FUND NAME TICKER SYMBOL CUSIP FUND CODE
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FMC Select Fund FMSLX 00758M758 207
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HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-877-FMC-4099 (1-877-362-4099).
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
BY MAIL
To redeem shares by mail, you may contact the Fund directly at: FMC Select Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: FMC Select Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) and must designate any special capacity in which they are registered.
If you would like to close your account, or have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, if you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee. In addition, you must provide us the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to ensure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-877-362-4099 for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
SYSTEMATIC WITHDRAWAL PLAN
If you have at least $25,000 in your account, you may use the systematic withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual or annual automatic withdrawals of at least $100 from the Fund. The proceeds of each withdrawal will be mailed to you by check or, if you have a checking or savings account with a bank, electronically transferred to your account.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be sent to your bank account via wire (which may be subject to a fee) or ACH, or sent to you by check. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in liquid securities with a market value equal to the redemption price (redemption in-kind). The Fund may also redeem in-kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $10,000 because of redemptions, the Fund may redeem your shares. The Fund will provide you at least 30 days' written notice to allow you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission (the "SEC"). More information about this is in the Statement of Additional Information.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred as a result of following telephone instructions that it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because the Fund may invest in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). This type of arbitrage may dilute the value of the Fund's shares if the price of the Fund's foreign securities do not reflect their fair value. The Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred. However, because fair value pricing involves judgments which are inherently subjective, the use of fair value pricing may not always eliminate the risk of price arbitrage.
The Fund's service providers will take steps reasonably designed to detect and deter excessive trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board of Trustees. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts known to be under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than two "round trips" into or out of the Fund per month. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight both the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligations. Documents provided in connection with your application will be used solely to establish and verify your identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the
application, your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and may be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted
an anti-money laundering compliance program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities. In this
regard, the Fund reserves the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of the Fund or in cases where the Fund is requested or compelled to do
so by governmental or law enforcement authorities. If your account is closed
at the request of governmental or law enforcement authorities, you may not
receive proceeds of a redemption if the Fund is required to withhold such
proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to distribute its net investment income quarterly and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distributions.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the dates of the distributions. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that may affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains) other than distributions of qualified dividend income are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the cost basis reporting law applies to
them.
To the extent the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. The Fund may elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
MORE INFORMATION ABOUT TAXES IS AVAILABLE IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-877-FMC-4099 (1-877-362-4099).
FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR FMC SELECT FUND
FOR THE YEARS ENDED OCTOBER 31,
2012 2011 2010 2009 2008
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NET ASSET VALUE, BEGINNING OF YEAR $20.15 $19.06 $16.94 $16.03 $24.09
------ ------ ------ ------ ------
Net Investment Income(1) 0.13 0.13 0.17 0.16 0.08
Realized and Unrealized Gain (Loss)
on Investments 2.63 1.17 2.04 0.92 (7.63)
------ ------ ------ ------ ------
Total from Operations 2.76 1.30 2.21 1.08 (7.55)
------ ------ ------ ------ ------
Dividends from Net Investment
Income (0.13) (0.21) (0.09) (0.16)(3) (0.09)
Distributions from Realized Gains -- -- -- (0.01) (0.42)
------ ------ ------ ------ ------
Total Dividends and Distributions (0.13) (0.21) (0.09) (0.17) (0.51)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $22.78 $20.15 $19.06 $16.94 $16.03
====== ====== ====== ====== ======
TOTAL RETURN(2) 13.72% 6.78% 13.09% 6.92% (31.94%)
Net Assets, End of Year (000) $221,170 $193,663 $191,427 $179,761 $191,141
Ratio of Expenses to Average Net Assets 1.01% 1.01% 1.01% 1.04% 0.99%
Ratio of Net Investment Income to
Average Net Assets 0.60% 0.64% 0.93% 1.05% 0.39%
Portfolio Turnover Rate 14% 26% 50% 19% 17%
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(1) Per share calculations were performed using average shares for the year.
(2) Total returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or upon the redemption of Fund shares.
(3) Includes return of capital of less than $0.01.
Amounts designated as "--" are $0.
THE ADVISORS' INNER CIRCLE FUND
FMC SELECT FUND
INVESTMENT ADVISER
First Manhattan Co.
437 Madison Avenue
New York, New York 10022-7001
Effective March 25, 2013:
399 Park Avenue
New York, New York 10022-7001
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pennsylvania 19103-2921
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the FMC Select Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-877-FMC-4099 (1-877-362-4099)
BY MAIL: Write to us at:
FMC Select Fund
c/o The Advisors' Inner Circle Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.firstmanhattan.com (Prospectus, Annual and Semi-Annual Reports and Schedule of Investments only)
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
FMC-PS-001-1200
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
FMC STRATEGIC VALUE FUND
TICKER SYMBOL: FMSVX
INVESTMENT ADVISER:
FIRST MANHATTAN CO.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FMC STRATEGIC FUND (THE "FUND"), PLEASE SEE:
PAGE
FUND SUMMARY ..................................................... 1
INVESTMENT OBJECTIVE ........................................ 1
FUND FEES AND EXPENSES ...................................... 1
PRINCIPAL INVESTMENT STRATEGY ............................... 1
PRINCIPAL RISKS OF INVESTING IN THE FUND .................... 2
PERFORMANCE INFORMATION ..................................... 3
INVESTMENT ADVISER .......................................... 3
PORTFOLIO MANAGERS .......................................... 4
PURCHASE AND SALE OF FUND SHARES ............................ 4
TAX INFORMATION ............................................. 4
MORE INFORMATION ABOUT RISK ...................................... 5
MORE INFORMATION ABOUT FUND INVESTMENTS .......................... 5
INFORMATION ABOUT PORTFOLIO HOLDINGS ............................. 6
INVESTMENT ADVISER ............................................... 6
PORTFOLIO MANAGERS ............................................... 6
PURCHASING AND SELLING FUND SHARES ............................... 7
OTHER POLICIES ...................................................12
DIVIDENDS AND DISTRIBUTIONS ......................................14
TAXES ............................................................15
FINANCIAL HIGHLIGHTS .............................................16
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................Back Cover
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FMC STRATEGIC VALUE FUND
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
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Management Fees 1.00%
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Other Expenses 0.21%
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Total Annual Fund Operating Expenses 1.21%
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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 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. Although your actual costs might be different, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$123 $384 $665 $1,466
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys or sells securities (or "turns over" its portfolio). A higher portfolio turnover rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 8% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
The Fund invests primarily in common stocks of U.S. companies with small to medium market capitalizations (between $250 million and $5 billion) that First Manhattan Co. ("FMC" or the "Adviser") believes are selling at a market price below their true value and offer the potential to increase in value. The Fund will generally invest in equity securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). The Adviser expects that the Fund's investments in foreign companies will normally represent less than 20% of the Fund's assets.
In selecting investments for the Fund, the Adviser focuses on companies in industries and sectors about which the Adviser believes it has a substantial understanding. The Adviser also seeks to invest Fund assets in securities of companies where the Adviser has identified a catalyst which could have a significant positive impact on the market price of the company's stock. The Fund intends to buy and hold securities of companies for the long-term, and seeks to limit portfolio turnover. The Fund may sell a security, however, if the security achieves a designated price target or there is a fundamental change in a company's outlook.
PRINCIPAL RISKS OF INVESTING IN THE FUND
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not ensured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK - Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate significantly from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund. This risk is greater for small- and medium-sized companies, which tend to be more vulnerable to adverse developments than larger companies.
FOREIGN COMPANY RISK -- Investing in foreign companies, whether through investments made in foreign markets or made through purchasing ADRs, which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies (other than ADRs) are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can have a negative impact on the decision to invest in such securities. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or the security may be valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
SMALL- AND MEDIUM- CAPITALIZATION RISK -- The smaller capitalization companies that the Fund typically invests in may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these smaller capitalization companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, smaller capitalization stocks may be more volatile than larger capitalization stocks. These securities may be traded over the counter or listed on an exchange.
The Fund is also subject to the risk that the small and medium capitalization value stocks in its portfolio may perform differently than the assets held by other funds which target a specific equity market segment or that invest in other asset classes.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-877-362-4099.
2003 29.26%
2004 19.68%
2005 11.39%
2006 23.22%
2007 (2.48)%
2008 (36.97)%
2009 48.88%
2010 18.04%
2011 (8.55)%
2012 13.59%
BEST QUARTER WORST QUARTER
28.68% (29.16)%
(06/30/2009) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown may not be relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts ("IRAs").
FMC STRATEGIC VALUE FUND 1 YEAR 5 YEARS 10 YEARS ------------------------------------------------------------------------------------------------------ FUND RETURNS BEFORE TAXES 13.59% 2.85% 9.07% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 13.56% 2.78% 8.65% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 8.83% 2.43% 7.98% RUSSELL 2000 VALUE INDEX RETURNS (REFLECTS NO DEDUCTION FOR FEES, EXPENSES, OR TAXES) 18.05% 3.55% 9.50% |
INVESTMENT ADVISER
First Manhattan Co.
PORTFOLIO MANAGERS
Edward I. Lefferman, CFA, Senior Managing Director and Portfolio Manager, has managed the Fund since its inception in 1998 and co-managed the Fund since 2012.
Paul E. Patrick, Managing Director and Portfolio Manager, has co-managed the Fund since 2012.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase made through an IRA, you must invest at least $10,000. Your subsequent investments in the Fund must be made in amounts of at least $1,000.
The Fund may accept investments of smaller amounts in its sole discretion. In addition, these minimum purchase requirements may be reduced by the Fund's distributor or for investors who purchase shares of the Fund through omnibus accounts maintained by registered broker-dealers who have executed sub-distribution agreements with the distributor, including the Adviser.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange ("NYSE") is open for business (a "Business Day") by contacting the Fund directly by mail or telephone at 1-877-FMC-4099 (1-877-362-4099).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on, among other factors, how widely the Fund diversifies its holdings, the size of the single security, and the amount of the change in value.
EQUITY RISK - Equity securities include publicly and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of the equity securities in which a mutual fund invests will cause the Fund's net asset value per share ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN SECURITY RISK -- Investments in securities of foreign companies, including direct investments as well as ADRs, can be more volatile than investments in U.S. companies. Diplomatic, political, and/or economic developments, including nationalization or appropriation, could affect investments in securities of foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers may be subject to different accounting, auditing, and financial standards than the financial statements of U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less publicly available information about foreign issuers than about many U.S. issuers. Transaction costs relating to securities purchased or sold in non-U.S. markets are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, any non-recovered portion will reduce the net income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or
liquidity purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for capital appreciation.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategy. These investments and strategies, as well as those described in this prospectus, are described in detail in the Statement of Additional Information (for information on how to obtain a copy of the Statement of Additional Information see the back cover of this prospectus).
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the Statement of Additional Information.
INVESTMENT ADVISER
FMC serves as the investment adviser to the Fund. The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees supervises the Adviser and establishes policies that the Adviser must follow in performing its management activities.
FMC's principal place of business is located at 437 Madison Avenue, New York, NY 10022-7001. Effective March 25, 2013, the principal place of business will be 399 Park Avenue, New York, NY 10022-7001. FMC has provided professional investment advisory services to individuals, partnerships, trusts, pension and employee benefit plans and other institutions since its founding in 1964. Because of the amount of their direct and indirect ownership of the Adviser's outstanding ownership interests, Mr. David S. Gottesman and Mr. Robert W. Gottesman are deemed to control the Adviser. As of December 31, 2012, FMC had approximately $13 billion in assets under management. For its services to the Fund, FMC is entitled to an investment advisory fee which is calculated daily and paid monthly, at an annual rate of 1.00% based on the average daily net assets of the Fund. FMC has voluntarily agreed to reduce fees and reimburse expenses to the extent necessary to keep total annual Fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses) from exceeding 1.30% of the Fund's average daily net assets. The Adviser may discontinue all or a portion of its fee reductions or expense reimbursements at any time. For the fiscal year ended October 31, 2012, FMC received advisory fees of 1.00% of the Fund's average daily net assets.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
Edward I. Lefferman, CFA is a Senior Managing Director and portfolio manager with the Adviser. He has been with the Adviser since 1984 and has managed the Fund since it commenced operations in 1998 and co-managed the Fund since 2012. Mr. Lefferman has more than 43 years
of investment experience. Prior to joining the Adviser, Mr. Lefferman served as a senior research analyst at Lehman Brothers.
Paul E. Patrick is a Managing Director and portfolio manager with the Adviser. Mr. Patrick's primary duties include portfolio management and research, and he has more than 16 years of experience in the investment management business. He has been with the Adviser since 1999 and has co-managed the Fund since 2012. Mr. Patrick holds a B.A. degree from Rutgers University and an M.B.A. from Rutgers Graduate School of Management. Mr. Patrick also is a Certified Public Accountant. Prior to joining the Adviser, Mr. Patrick worked for Ernst & Young LLP and served as a research analyst at Prudential Securities.
The Fund's Statement of Additional Information provides additional information about the portfolio manager's compensation, other accounts managed, and ownership of Fund shares.
PURCHASING AND SELLING FUND SHARES
This section explains how you may purchase and sell (sometimes called "redeem") shares of the Fund.
The Fund's shares are intended to be held by individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in an application. If you need an application or have questions, please call 1-877-FMC-4099 (1-877-362-4099).
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
BY MAIL
REGULAR MAIL ADDRESS
FMC Strategic Value Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
FMC Strategic Value Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-877-FMC-4099 (1-877-362-4099) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
FMC Funds
DDA Account #987060187
Ref: account number/account name
You may also buy shares through accounts with brokers and other institutions that are authorized to place trades in Fund shares for their customers, including FMC. If you invest through an authorized institution, you will have to follow its procedures, which may be different from the procedures for investing directly. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund. In general, you will also have to address your correspondence or questions regarding the Fund to your broker or institution.
The Fund reserves the right to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
GENERAL INFORMATION
You may purchase shares on any Business Day. Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed.
The price per share will be the net asset value per share next determined after the Fund receives your purchase order.
The Fund calculates NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your order in good form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.) before the close of trading on the NYSE that day. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Board. Pursuant to policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than what the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information as related to the securities.
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $25. To cancel or change a plan, write to the Fund at: FMC Strategic Value Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: FMC Strategic Value Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
FUND CODES
The Fund's reference information listed below will be helpful to you when you contact the Fund to purchase shares, check daily NAV or obtain additional information.
-------------------------------------------------------------------------------- FUND NAME TICKER SYMBOL CUSIP FUND CODE -------------------------------------------------------------------------------- FMC Strategic Value Fund FMSVX 00758M642 248 -------------------------------------------------------------------------------- |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-877-FMC-4099 (1-877-362-4099).
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
BY MAIL
To redeem shares by mail, you may contact the Fund directly at: FMC Strategic
Value Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address:
FMC Strategic Value Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas
City, MO 64105). Please send a letter to the Fund signed by all registered
parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) and must designate any special capacity in which they are registered.
If you would like to close your account, or have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, if you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee. In addition, you must provide us the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to ensure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may
not require additional documentation. Please contact Shareholder Services at 1-877-FMC-4099 (1-877-362-4099) for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
SYSTEMATIC WITHDRAWAL PLAN
If you have at least $25,000 in your account, you may use the systematic withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual or annual automatic withdrawals of at least $100 from the Fund. The proceeds of each withdrawal will be mailed to you by check or, if you have a checking or savings account with a bank, electronically transferred to your account.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be sent to your bank account via wire (which may be subject to a fee) or ACH, or sent to you by check. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in liquid securities with a market value equal to the redemption price (redemption in-kind). The Fund may also redeem in-kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $10,000 because of redemptions, the Fund may redeem your shares. The Fund will provide you at least 30 days' written notice to allow you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission (the "SEC"). More information about this is in the Statement of Additional Information.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred as
a result of following telephone instructions that it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
Because the Fund may invest in small- or mid-cap securities that often may trade in lower volumes, frequent trading by certain shareholders may dilute the value of Fund shares held by other shareholders. In addition, because frequent trading may cause the Fund to attempt to maintain higher cash positions, changes to the Fund's holdings in response to excessive trading may impact the market prices of such relatively thinly traded securities held by the Fund.
In addition, because the Fund may invest in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). This type of arbitrage may dilute the value of the Fund's shares if the price of the Fund's foreign securities do not reflect their fair value. The Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred. However, because fair value pricing involves judgments which are inherently subjective, the use of fair value pricing may not always eliminate the risk of price arbitrage.
The Fund's service providers will take steps reasonably designed to detect and deter excessive trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board of Trustees. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts known to be under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than two "round trips" into or out of the Fund per month. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight both the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligations. Documents provided in connection with your application will be used solely to establish and verify your identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the application, your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and may be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted
an anti-money laundering compliance program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities. In this
regard, the Fund reserves the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of the Fund or in cases where the Fund is requested or compelled to do
so by governmental or law enforcement authorities. If your account is closed
at the request of governmental or law enforcement authorities, you may not
receive proceeds of a redemption if the Fund is required to withhold such
proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to distribute its net investment income quarterly and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distributions.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the dates of the distributions. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that may affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains) other than distributions of qualified dividend income are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the new cost basis reporting law applies
to them.
To the extent the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. The Fund may elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
MORE INFORMATION ABOUT TAXES IS AVAILABLE IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-877-FMC-4099 (1-877-362-4099).
FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR FMC STRATEGIC VALUE FUND
FOR THE YEARS ENDED OCTOBER 31,
2012 2011 2010 2009 2008
----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $21.66 $21.31 $17.73 $14.98 $25.15
------ ------ ------ ------ ------
Net Investment Income (Loss)(1) (0.02) 0.06 -- 0.01 0.05
Realized and Unrealized Gain (Loss) on
Investments 1.45 0.48 3.59 2.79 (8.75)
Total from Operations 1.43 0.54 3.59 2.80 (8.70)
Dividends from Net Investment Income (0.02) (0.07) (0.01) (0.01) (0.07)
Distributions from Net Realized Gains (0.10) (0.12) -- (0.02) (1.40)
Return of Capital --(3) -- -- (0.02) --
------ ------ ------ ------ ------
Total Dividends and Distributions (0.12) (0.19) (0.01) (0.05) (1.47)
====== ====== ====== ====== ======
NET ASSET VALUE, END OF YEAR $22.97 $21.66 $21.31 $17.73 $14.98
====== ====== ====== ====== ======
TOTAL RETURN(2) 6.69% 2.47% 20.27% 18.84% (36.30%)
Net Assets, End of Year (000) $166,706 $185,490 $188,051 $169,650 $165,210
Ratio of Expenses to Average Net Assets 1.21% 1.21% 1.21% 1.24% 1.18%
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.09)% 0.24% 0.02% 0.04% 0.25%
Portfolio Turnover Rate 8% 6% 21% 11% 30%
|
(1) Per share calculations were performed using average shares for the year.
(2) Total returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or upon the redemption of Fund shares.
(3) Includes return of capital of less than $0.01.
Amounts designated as "-" are either $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
FMC STRATEGIC VALUE FUND
INVESTMENT ADVISER
First Manhattan Co.
437 Madison Avenue
New York, New York 10022-7001
Effective March 25, 2013:
399 Park Avenue
New York, New York 10022-7001
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pennsylvania 19103-2921
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the FMC Strategic Value Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-877-FMC-4099 (1-877-362-4099)
BY MAIL: Write to us at:
FMC Strategic Value Fund
c/o The Advisors' Inner Circle Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.firstmanhattan.com (Prospectus, Annual and Semi-Annual Reports and Schedule of Investments only)
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
FMC-PS-002-1200
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
HAVERFORD QUALITY GROWTH STOCK FUND
TICKER SYMBOL: HAVGX
INVESTMENT ADVISER:
HAVERFORD FINANCIAL SERVICES, INC.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
This prospectus has been arranged into different sections so that you can easily review this important information. For detailed information about the Fund, please see:
PAGE
FUND SUMMARY ........................................................ 1
INVESTMENT OBJECTIVE ........................................... 1
FUND FEES AND EXPENSES ......................................... 1
PRINCIPAL INVESTMENT STRATEGY .................................. 2
PRINCIPAL RISKS ................................................ 2
PERFORMANCE INFORMATION ........................................ 3
INVESTMENT ADVISER ............................................. 3
PORTFOLIO MANAGERS ............................................. 4
PURCHASE AND SALE OF FUND SHARES ............................... 4
TAX INFORMATION ................................................ 4
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES ................................................. 4
MORE INFORMATION ABOUT FUND INVESTMENTS ............................. 6
MORE INFORMATION ABOUT RISK ......................................... 6
INFORMATION ABOUT PORTFOLIO HOLDINGS ................................ 7
INVESTMENT ADVISER .................................................. 7
PORTFOLIO MANAGERS .................................................. 7
HISTORICAL PERFORMANCE DATA OF THE ADVISER .......................... 8
PURCHASING AND SELLING FUND SHARES .................................. 9
OTHER POLICIES ...................................................... 14
SHAREHOLDER SERVICING ARRANGEMENTS .................................. 16
PAYMENTS TO FINANCIAL INTERMEDIARIES ................................ 16
DIVIDENDS AND DISTRIBUTIONS ......................................... 17
TAXES ............................................................... 17
FINANCIAL HIGHLIGHTS ................................................ 19
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................... Back Cover
|
HAVERFORD QUALITY GROWTH STOCK FUND
INVESTMENT OBJECTIVE
The Haverford Quality Growth Fund's (the "Fund") investment objective is long-term growth of capital.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE
OF THE VALUE OF YOUR INVESTMENT)
Management Fees ...........................................................0.60%
Other Expenses ............................................................0.32%
-----
Total Annual Fund Operating Expenses ......................................0.92%
-----
Plus Management Fees Recovered ............................................0.08%
-----
Total Annual Fund Operating Expenses Plus Management Fees
Recovered(1) ..............................................................1.00%
|
(1) Haverford Financial Services, Inc. ("Haverford" or the "Adviser") has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's average daily net assets until February 28, 2014. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three- year period during which this agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$102 $318 $552 $1,225
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's
performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 26% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
Under normal circumstances, the Fund seeks to achieve its investment objective
by investing at least 80% of its net assets, plus the amount of any borrowings
for investment purposes, in equity securities. This investment policy may be
changed by the Fund upon 60 days' prior notice to shareholders. The Fund
focuses on U.S. listed common stocks issued by companies with large market
capitalizations (greater than $10 billion) that Haverford Financial Services,
Inc. believes are quality companies with stock that offer the potential for
future price appreciation. The Adviser considers quality growth companies to:
have a history of predictable and consistent earnings growth; have regular,
growing dividend payments; and be industry leaders in their respective
categories. After screening companies based on these criteria, the Adviser
invests in companies that it believes offer exceptional financial strength,
industry position, franchise recognition, and consistent and predictable growth
in earnings and dividends. Using this strategy, the Fund will ordinarily expect
to hold stocks of 25 to 35 different companies operating in 15 to 20 different
industries.
The Fund seeks to buy and hold its securities for the long term and seeks to keep portfolio turnover to a minimum. However, the Adviser may sell a security for the following reasons: in response to deterioration in a company's business prospects, performance, or financial strength; when it becomes over-valued or comprises too large of a position in the Fund's portfolio; or when better opportunities are available among similar companies.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
Although the Fund is diversified, its investment strategy often results in a relatively focused portfolio of stocks of companies that it believes hold the most growth potential. As a result, poor performance or adverse economic events affecting one or more of these companies could have a greater impact on the Fund than it would on another mutual fund with a broader range of investments.
The Fund is also subject to the risk that large-cap growth stocks may underperform other equity market segments or the equity market as a whole.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.haverfordfunds.com or by calling 1-866-301-7212.
2005 0.07%
2006 10.86%
2007 4.01%
2008 (29.59)%
2009 16.43%
2010 12.44%
2011 1.14%
2012 9.05%
BEST QUARTER WORST QUARTER
14.19% (17.37)%
(06/30/2009) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
SINCE
INCEPTION
1 YEAR 5 YEARS (06/30/04)
Fund Returns Before Taxes 9.05% 0.33% 2.27%
Fund Returns After Taxes on Distributions 8.79% 0.11% 2.02%
Fund Returns After Taxes on Distributions and Sale of 6.22% 0.25% 1.92%
Fund Shares
S&P 500 Index (reflects no deduction for fees, 16.00% 1.66% 4.82%
expenses or taxes)
|
INVESTMENT ADVISER
Haverford Financial Services, Inc.
PORTFOLIO MANAGERS
Joseph J. McLaughlin, Jr., Chairman, Chief Executive Officer, President and Member of the Investment Selection Committee, Executive Committee and Board of Directors, has managed the Fund since 2004.
Binney H.C. Wietlisbach, Executive Vice President and Member of the Investment Selection Committee, Executive Committee and Board of Directors, has managed the Fund since 2004.
George W. Connell, Vice Chairman, and Member of the Board of Directors, has managed the Fund since 2004.
Henry B. Smith, Vice President, Chief Investment Officer and Chairperson of the Investment Selection Committee, has managed the Fund since 2004.
John H. Donaldson, Vice President, Director of Fixed Income and Member of the Investment Selection Committee, has managed the Fund since 2009.
David Brune, Vice President and Member of the Investment Selection Committee, has managed the Fund since 2004.
Timothy A. Hoyle, Vice President and Member of the Investment Selection Committee, has managed the Fund since 2009.
Jeffrey M. Bagley, Vice President and Member of the Investment Selection Committee, has managed the Fund since 2010.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $2,500. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-866-301-7212.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT FUND INVESTMENTS
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. The Fund has adopted a non-fundamental policy to invest, under normal circumstances, at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities. This non-fundamental policy may be changed upon 60 days' written notice to shareholders. Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, shares of American Depositary Receipts, as well as instruments that attempt to track the price movement of equity indices. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategy. These investments and strategies, as well as those described in this prospectus, are described in detail in the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that the Fund will achieve its investment goal.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objectives. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for growth of capital.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk, and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the Fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
INVESTMENT ADVISER
Haverford Financial Services, Inc., founded in 2003, serves as Adviser to the Fund. The Adviser's principal place of business is located at Three Radnor Corporate Center, Suite 450, Radnor, PA 19087-4546. The Adviser is an affiliate of The Haverford Trust Company ("Haverford Trust"). Founded in 1979, Haverford Trust offers investment management, trust and estate services, and private banking. As of December 31, 2012, the Adviser had approximately $256 million in assets under management. The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
For its services to the Fund, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.60%, based on the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired Fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's average daily net assets until February 28, 2014. In addition, if at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the total annual Fund operating expenses (not including excluded expenses) and the expense cap, to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. For the fiscal year ended October 31, 2012, the Fund paid 0.60% in advisory fees to the Adviser. A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement is available in the Fund's Annual Report to Shareholders dated October 31, 2012, which covers the period from November 1, 2011 to October 31, 2012.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals who are jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Joseph J. McLaughlin, Jr., Chairman, Chief Executive Officer, President and Member of the Investment Selection Committee and Board of Directors, joined Haverford in 2003 and has over 31 years of investment experience. Mr. McLaughlin received a B.S. degree from St. Joseph's University.
Binney H.C. Wietlisbach, Executive Vice President and Member of the Investment Selection Committee and Board of Directors, joined Haverford in 2003 and has over 26 years of investment experience. Ms. Wietlisbach received a B.S. degree from Penn State University.
George W. Connell, Vice Chairman, and Member of the Board of Directors, founded Haverford in 2003 and has over 53 years of investment experience. Mr. Connell received a B.S. degree from the University of Pennsylvania, Wharton School.
Henry B. Smith, Vice President, Chief Investment Officer and Chairperson of the Investment Selection Committee, joined Haverford in 2003 and has over 28 years of investment experience. Mr. Smith received a B.A. degree from Franklin & Marshall College.
John H. Donaldson, Vice President, Director of Fixed Income and Member of the Investment Selection Committee, joined Haverford in 2008 and has over 32 years of investment experience. Prior to joining Haverford, Mr. Donaldson was Assistant Vice President and Portfolio Manager at Penn Mutual Life Insurance Co., Managing Director at Logan Capital Management, and Director at 1838 Investment Advisors LLC. Mr. Donaldson received a B.A. degree from the University of Pennsylvania.
David Brune, Vice President and Member of the Investment Selection Committee, joined Haverford in 2004 and has over 22 years of investment experience. Prior to joining Haverford, Mr. Brune was a Vice President for PNC Advisors. Mr. Brune holds a Chartered Financial Analyst designation and received a B.S. degree from the University of Delaware.
Timothy A. Hoyle, Vice President and Member of the Investment Selection Committee, joined Haverford in 2003 and has 12 years of investment experience. Mr. Hoyle holds a Chartered Financial Analyst designation and received a B.S. from Drexel University.
Jeffrey M. Bagley, Vice President and Member of the Investment Selection Committee, joined Haverford in 2010 and has over 21 years of investment experience. Prior to joining Haverford, Mr. Bagley was Senior Vice President and Portfolio Manager for Davidson Trust Company from July 2008 to January 2010, Senior Investment Analyst at The Vanguard Group from June 2007 to June 2008, and Portfolio Manager and Research Analyst at McCabe Capital Managers, Ltd., from December 1998 to May 2007. Mr. Bagley holds a Chartered Financial Analyst designation and received an M.B.A. from Fordham University and a B.S. from the State University of New York -- Oneonta.
HISTORICAL PERFORMANCE DATA OF THE ADVISER
The following table represents the performance information for all the private accounts managed by Haverford Trust with investment objectives, policies and strategies that are substantially similar to those of the Fund, as well as a comparison to the Fund's performance benchmark. These private accounts were managed by the same team of investment professionals that currently manage the investments of the Fund. These similarly managed private accounts are referred to as Haverford Trust's "Quality Equity Composite."
Haverford Trust has prepared and presented its performance results in compliance with the performance presentation standards of Global Investment Performance Standards (GIPS). The manner in which the performance was calculated for the Quality Equity Composite differs from the SEC-standardized method of calculating performance for mutual funds. The performance of the Quality Equity Composite (net of fees) reflects Haverford Trust's applicable account fees and expenses, however the Fund's fees and expenses are generally expected to be higher than those of the accounts included in the Quality Equity Composite. If the Fund's fees and expenses had been imposed on the accounts included in the Quality Equity Composite, the performance shown below would have been lower. For example, the Quality Equity Composite does not reflect
custody fees or other expenses, normally paid by mutual funds. Further, the accounts included in the Quality Equity Composite were not subject to the investment limitations, diversification requirements and other legal and tax restrictions that are applicable to the Fund. If these limitations and restrictions were imposed on the accounts included in the Quality Equity Composite, it could have adversely affected their performance.
THE INFORMATION IN THE TABLE DOES NOT REPRESENT THE HISTORICAL PERFORMANCE OF
THE FUND. IT SHOWS THE PERFORMANCE OF SIMILAR ACCOUNTS MANAGED BY THE ADVISER.
THE PERFORMANCE OF THE QUALITY EQUITY COMPOSITE IS NO GUARANTEE OF THE FUTURE
PERFORMANCE OF THE FUND.
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN FOR
THE PERIODS ENDED DECEMBER 31, 2012
--------------------------------------------------------------------------------
COMPOSITE/BENCHMARK 1 YEAR 5 YEAR 10 YEAR SINCE INCEPTION(1)
--------------------------------------------------------------------------------
Quality Equity Composite
(gross of fees) 9.62% 1.89% 5.04% 12.38%
--------------------------------------------------------------------------------
Quality Equity Composite
(net of fees) 8.98% 1.28% 4.42% 11.73%
--------------------------------------------------------------------------------
S&P 500 Index(2) 16.00% 1.66% 7.10% 11.41%
--------------------------------------------------------------------------------
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(1) Inception date is 1/1/1979.
(2) The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") shares of the Fund.
The Fund is for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund through its transfer agent, complete and send in the application. If you need an application or have questions, please call 1-866-301-7212.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
You may also buy shares through accounts with brokers and other institutions that are authorized to place trades in Fund shares for their customers. If you invest through an authorized institution, you will have to follow its procedures, which may be different from the procedures for investing directly. Your broker or institution may charge a fee for its services, in addition to the fees
charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution.
The Fund reserves the right to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
REGULAR MAIL ADDRESS
Haverford Quality Growth Stock Fund
P.O. Box 219745
Kansas City, MO 64121-9745
EXPRESS MAIL ADDRESS
Haverford Quality Growth Stock Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-866-301-7212 for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA #101000695
The Haverford Quality Growth Stock Fund
DDA Acct. #9870523965
Ref: fund name/account number/account name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $25. To cancel or change a plan, write to the Fund at: Haverford Quality Growth Stock Fund, P.O. Box 219745, Kansas City, MO 64121-9745 (Express Mail Address: Haverford Quality Growth Stock Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange ("NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed.
The Fund's price per share will be the net asset value per share ("NAV") next determined after the Fund receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal
trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current
Business Day's NAV, the Fund must receive your order in proper form before 4:00
p.m., Eastern Time, that day. If the NYSE closes early -- such as on days in
advance of certain generally observed holidays -- the Fund reserves the right
to calculate NAV as of the earlier closing time. The Fund will not accept
orders that request a particular day or price for the transaction or any other
special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
MINIMUM PURCHASES
You can open an account (including an individual retirement account ("IRA")) with a minimum initial investment of $2,500. There is no minimum for subsequent investments. The Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
The Fund's reference information, which is listed below, will be helpful to you when you contact the Fund to purchase shares, check daily NAV, or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
Haverford Quality Growth Stock Fund HAVGX 0075W0866 1225
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-866-301-7212.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
If you would like to have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-866-301-7212 for more information.
The sale price of each share will be the next NAV determined after the Fund (or an authorized broker) receives your request.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution. To participate in this service you must complete the appropriate sections of the account application and mail it to the Fund.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the Fund receives your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $2,500 because of redemptions, you may be required to sell your shares. The Fund will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers
and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than four (4) "round trips" into or out of the Fund per calendar year. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information
concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form or upon receipt of all identifying information required on the application, your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services or; (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. "Financial intermediaries" include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (E.G., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent
permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income quarterly and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains and set at a maximum tax rate for individuals at 20% (lower rates apply to individuals in lower tax brackets).
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the new cost basis reporting law applies
to them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-866-301-7212.
FINANCIAL HIGHLIGHTS
HAVERFORD QUALITY GROWTH STOCK FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
YEAR ENDED OCTOBER 31, 2012 2011 2010 2009 2008
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $9.71 $9.38 $8.35 $8.07 $11.75
Income (Loss) from Investment Operations:
Net Investment Income(1) 0.17 0.13 0.13 0.14 0.13
Net Realized and Unrealized Gain (Loss) 0.68 0.33 1.02 0.28 (3.49)
---- ---- ---- ---- ----
Total from Investment Operations 0.85 0.46 1.15 0.42 (3.36)
---- ---- ---- ---- ----
Dividends and Distributions:
Net Investment Income (0.16) (0.13) (0.12) (0.14) (0.12)
Net Realized Gains -- -- -- -- (0.20)
---- ---- ---- ---- ----
Total Dividends and Distributions (0.16) (0.13) (0.12) (0.14) (0.32)
---- ---- ---- ---- ----
Net Asset Value, End of Year $10.40 $9.71 $9.38 $8.35 $8.07
===== ==== ==== ==== ====
TOTAL RETURN(**) 8.79% 4.86%* 13.87%* 5.40%* (29.25)%*
===== ==== ===== ==== =====
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (Thousands) $101,716 $80,054 $49,156 $20,366 $14,503
Ratio of Expenses to Average Net Assets (including
waivers, reimbursements, recaptures, and fees paid
indirectly)(2) 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Expenses to Average Net Assets
(Excluding Waivers, Reimbursement and Fees Paid
Indirectly) 0.92% 1.00% 1.44% 2.45% 1.97%
Ratio of Net Investment Income to Average Net Assets 1.65% 1.33% 1.43% 1.81% 1.22%
Portfolio Turnover Rate 26% 17% 28% 23% 30%
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(1) Per share data calculated using the average shares method.
(2) The Ratio of Net Expenses to Average Net Assets includes the effects of fees paid indirectly. If these expense offsets were excluded, the ratios would have been 1.00%, 1.00%, 1.00%, 1.00% and 1.02% for the years ended October 31, 2012, 2011, 2010, 2009 and 2008, respectively.
* Total return would have been lower had certain expenses not been waived and assumed by the Adviser during the period.
** Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
Amounts designated as "--" are $0.
THE ADVISORS' INNER CIRCLE FUND
HAVERFORD QUALITY GROWTH STOCK FUND
INVESTMENT ADVISER
Haverford Financial Services, Inc.
Three Radnor Corporate Center
Suite 450
Radnor, PA 19087-4546
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
MORE INFORMATION ABOUT THE FUND IS AVAILABLE, WITHOUT CHARGE, THROUGH THE FOLLOWING:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Haverford Quality Growth Stock Fund and The Advisors' Inner Circle Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-866-301-7212
BY MAIL: Haverford Quality Growth Stock Fund
P.O. Box 219745
Kansas City, MO 64121-9745
BY INTERNET: www.haverfordfunds.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
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Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
HIM-PS-001-1000
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
ICM SMALL COMPANY PORTFOLIO
INSTITUTIONAL CLASS SHARES PROSPECTUS
TICKER SYMBOL: ICSCX
INVESTMENT ADVISER:
INVESTMENT COUNSELORS OF MARYLAND, LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
ICM SMALL COMPANY PORTFOLIO ................................... 1
INVESTMENT OBJECTIVE ..................................... 1
FUND FEES AND EXPENSES ................................... 1
PRINCIPAL INVESTMENT STRATEGY ............................ 1
PRINCIPAL RISKS .......................................... 2
PERFORMANCE INFORMATION .................................. 3
INVESTMENT ADVISER ....................................... 4
PORTFOLIO MANAGERS ....................................... 4
PURCHASE AND SALE OF FUND SHARES ......................... 4
TAX INFORMATION .......................................... 4
PAYMENTS TO BROKER-DEALERS ...............................
AND OTHER FINANCIAL INTERMEDIARIES ..................... 4
INVESTING WITH THE FUND ....................................... 5
BUYING SHARES ............................................ 5
REDEEMING SHARES ......................................... 6
TRANSACTION POLICIES ..................................... 8
ACCOUNT POLICIES ......................................... 10
ADDITIONAL INFORMATION ABOUT THE FUND ......................... 14
OTHER INVESTMENT PRACTICES AND STRATEGIES ................ 14
INVESTMENT MANAGEMENT .................................... 15
SHAREHOLDER SERVICING ARRANGEMENTS ....................... 16
PAYMENTS TO FINANCIAL INTERMEDIARIES ..................... 16
FINANCIAL HIGHLIGHTS .......................................... 18
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ................. BACK COVER
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ICM SMALL COMPANY PORTFOLIO |
INVESTMENT OBJECTIVE
The ICM Small Company Portfolio (the "Fund") seeks maximum, long-term total return, consistent with reasonable risk to principal, by investing primarily in common stocks of smaller companies measured in terms of revenues and assets and, more importantly, in terms of market capitalization.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.70% -------------------------------------------------------------------------------- Other Expenses 0.22% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses(1) 0.93% |
(1) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund and exclude Acquired Fund Fees and Expenses.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund to 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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 19% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
Under normal circumstances, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, in common stocks of companies that have market capitalizations that are under $2 billion at the time of purchase. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund may invest in equity securities
listed on a national securities exchange or traded in the over-the-counter markets. The Fund invests primarily in common stocks, but it may also invest in other types of equity securities, including real estate investment trusts ("REITs") and American Depository Receipts ("ADRs").
In selecting investments for the Fund, Investment Counselors of Maryland, LLC ("ICM" or the "Adviser") typically looks to invest in companies with leading market share positions, shareholder oriented managements, and strong balance sheet and cash flow ratios. Usually, the shares of the companies the Adviser buys are selling at a price to earnings ratio below the average price to earnings ratio of the stocks that comprise the Russell 2000 Index. In addition, the companies selected by the Adviser usually have higher returns on equity and capital than the average company in the Russell 2000 Index. Using screening parameters such as price to earnings ratios, relative return on equity, and other financial ratios, the Adviser screens the Fund's universe of potential investments to identify potentially undervalued securities. The Adviser further narrows the list of potential investments through traditional fundamental security analysis, which may include interviews with company management and a review of the assessments and opinions of outside analysts and consultants. Securities are sold when the Adviser believes the shares have become relatively overvalued or it finds more attractive alternatives. The Adviser generally will not sell a security merely due to market appreciation outside the Fund's target capitalization range if it believes the company has growth potential.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its goal. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. The Fund's shares are not bank deposits and are not guaranteed, endorsed or insured by any financial institution, government authority or the Federal Deposit Insurance Corporation.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
rising interest rates or competition overbuilding; zoning changes; and losses
from casualty or condemnation. REITs typically incur fees that are separate
from those of the Fund. Accordingly, the Fund's shareholders will indirectly
bear a proportionate share of the REITs' operating expenses, in addition to
paying Fund expenses. REIT operating expenses are not reflected in the fee
table and example in this prospectus.
FOREIGN SECURITIES RISK -- The Fund's investments in ADRs are subject to foreign securities risk. ADRs are certificates evidencing ownership of shares of a foreign issuer that are issued by depositary banks and generally trade on an established market, in the United States or elsewhere. Although ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies, they continue to be subject to many of the risks associated with investing directly in foreign securities.
Foreign securities, especially those of companies in emerging markets, can be riskier and more volatile than domestic securities. Adverse political and economic developments or changes in the value of foreign
currency can make it harder for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly.
SMALL-CAPITALIZATION COMPANY RISK -- The small-capitalization companies in which the Fund will invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.icomd.com or by calling 1-866-234-5426.
2003 35.31% 2004 20.70% 2005 5.22% 2006 19.22% 2007 3.35% 2008 (35.11)% 2009 34.46% 2010 22.73% 2011 (4.85)% 2012 16.93% |
During the periods shown in the chart, the highest return for a quarter was
28.17% (quarter ended 06/30/2009) and the lowest return for a quarter was
(28.74)% (quarter ended 12/31/2008).
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
ICM SMALL COMPANY PORTFOLIO 1 YEAR 5 YEARS 10 YEARS ----------------------------------------------------------------------------------------------------------- Fund Return Before Taxes 16.93% 3.57% 9.69% ----------------------------------------------------------------------------------------------------------- Fund Return After Taxes on Distributions 15.72% 2.59% 8.48% ----------------------------------------------------------------------------------------------------------- Fund Return After Taxes on Distributions and Sale of Fund Shares 12.54% 2.82% 8.35% ----------------------------------------------------------------------------------------------------------- Russell 2000 Value Index (reflects no deduction for fees, expenses 18.05% 3.55% 9.50% or taxes) |
INVESTMENT ADVISER
Investment Counselors of Maryland, LLC
PORTFOLIO MANAGERS
William V. Heaphy, CFA, Principal, has managed the Fund since 1999.
Simeon F. Wooten III, CFA, Principal, has managed the Fund since 1998.
Gary J. Merwitz, Principal, has managed the Fund since 2004.
Robert F. Jacapraro, CFA, Principal, has managed the Fund since 2005.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $2,500,000. Subsequent investments must be at least $1,000.
You may sell your shares via mail, telephone or Automated Clearing House (subject to certain account minimums) on each day the NYSE is open for business (a "Business Day").
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
INVESTING WITH THE FUND
BUYING SHARES
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest by Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund name.
REGULAR MAIL ADDRESS
ICM Small Company Portfolio
P.O. Box 219009
Kansas City, Missouri 64121-9009
EXPRESS MAIL ADDRESS
ICM Small Company Portfolio
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, Missouri 64105
BY WIRE
To open an account by wire, call 1-866-234-5426 for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA# 101000695
The ICM Small Company Portfolio
DDA Acct. # 9871063178
Ref: account number/account name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. Purchases can be made monthly, quarterly, semi-annually, or annually in amounts of at least $100 to meet the minimum investment amount. To cancel or change a plan, write to the Fund at: ICM Small Company Portfolio, P.O. Box 219009, Kansas City, Missouri 64121 (Express Mail Address: ICM Small Company Portfolio, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, Missouri 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
MINIMUM INVESTMENTS
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $2,500,000. Subsequent investments must be at least $1,000. The Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
The Fund's reference information, which is listed below, will be helpful to you when you contact the Fund to purchase shares, check daily net asset value per share ("NAV") or obtain additional information.
TICKER SYMBOL CUSIP FUND CODE
----------------------------------------------
ICSCX 00758M220 1229
REDEEMING SHARES
|
PAYMENT OF REDEMPTION PROCEEDS
Redemption proceeds can be mailed to your account address, sent to your bank by ACH transfer or wired to your bank account (provided that your bank information is already on file). The Fund will pay for all shares redeemed within seven days after it receives a redemption request in proper form, meaning that it is complete, contains all necessary information, and has all supporting documentation (such as proper signature guarantees, IRA rollover forms, etc.).
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. Please contact Shareholder Services at 1-866-234-5426 for more information. The Fund participates in the Paperless Legal Program. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation.
If you redeem shares that were purchased by check or through ACH, you will not receive your redemption proceeds until the check has cleared or the ACH transaction has been completed, which may take up to 15 days from the purchase date.
BY MAIL
You may contact the Fund directly by mail at: ICM Small Company Portfolio, P.O. Box 219009, Kansas City, Missouri 64121 (Express Mail Address: ICM Small Company Portfolio, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, Missouri 64105). Send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered share owner(s) must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
Certain shareholders may need to include additional documents or provide a signature guarantee to redeem shares.
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire or ACH redemption privileges) by completing the appropriate sections of the account application.
Call 1-866-234-5426 to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank by either Fed wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Fund.
REDEMPTIONS IN-KIND
Under certain conditions and at the Fund's discretion, you may pay for shares of the Fund with securities instead of cash. In addition, the Fund may pay all or part of your redemption proceeds (in excess of $250,000) with securities instead of cash. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
TRANSACTION POLICIES
CALCULATING YOUR SHARE PRICE
You may buy or sell shares of the Fund on any Business Day at a price equal to its NAV next computed after it, or an authorized institution, receives and accepts your order. The Fund calculates NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund or an authorized institution must receive your order in good form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.) before the close of trading on the NYSE that day. Otherwise, you will receive the NAV that is calculated at the close of trading on the following Business Day. If the NYSE closes early -- such as on days in advance of certain generally observed holidays -- the Fund will calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or other special conditions. Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays.
NAV for one Fund share is the value of that share's portion of all of the net assets of the Fund. In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board of Trustees (the "Board"). Pursuant to the policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value - for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
RIGHTS RESERVED BY THE FUND
PURCHASES
At any time and without notice, the Fund may:
o Stop offering shares;
o Reject any purchase order; or
o Bar an investor engaged in a pattern of excessive trading from buying shares. (Excessive trading can hurt performance by disrupting management and increasing expenses). The
Fund will consider various factors in determining whether an investor has engaged in excessive trading. These factors include, but are not limited to, the investor's historic trading patterns, the number of transactions, the size of the transactions, the time between transactions and the percentage of the investor's account involved in each transaction. For more information about the Fund's policies on excessive trading, please see "Excessive Trading Policies and Procedures."
REDEMPTIONS
At any time and without notice, the Fund may change or eliminate any of the redemption methods described above, except redemption by mail. The Fund may suspend your right to redeem if:
o Trading on the NYSE is restricted or halted; or
o The U. S. Securities and Exchange Commission ("SEC") allows the Fund to delay redemptions.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes on Distributions."
ACCOUNT POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
Because the Fund invests in small-capitalization securities that often may trade in lower volumes, frequent trading by certain shareholders may dilute the value of Fund shares held by other shareholders. In addition, because frequent trading may cause the Fund to attempt to maintain higher cash positions, changes to the Fund's holdings in response to frequent trading may impact the market prices of such relatively thinly traded securities held by the Fund.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than two (2) "round trips" into or out of the Fund per quarter (90-day period). If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the application, your investment will be received and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted an
Anti-Money Laundering Compliance Program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities. In
this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of the Fund or in cases when the Fund is requested or compelled to do
so by governmental or law enforcement authority. If your account is closed at
the request of governmental or law enforcement authority, you may not receive
proceeds of the redemption if the Fund is required to withhold such proceeds.
SMALL ACCOUNTS
The Fund may redeem your shares without your permission if the value of your account falls below 50% of the required minimum initial investment. This provision does not apply:
o To retirement accounts and certain other accounts; or
o When the value of your account falls because of market fluctuations and not your redemptions.
The Fund will provide you at least 30 days' written notice to allow you time to add to your account and avoid the sale of your shares.
DIVIDENDS AND DISTRIBUTIONS
Normally, the Fund distributes its net investment income quarterly and its net capital gains at least once a year. The Fund will automatically reinvest dividends and distributions in additional shares of the Fund, unless you elect on your account application to receive them in cash.
FEDERAL TAXES
The following is a summary of the federal income tax consequences of investing in the Fund. This summary does not apply to shares held in an individual retirement account or other tax-qualified plan, which are not subject to current tax. Transactions relating to shares held in such accounts may, however, be taxable at some time in the future. You should always consult your tax advisor for specific guidance regarding the federal, state and local tax effects of your investment in the Fund.
TAXES ON DISTRIBUTIONS
The Fund will distribute substantially all of its net investment income and its net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state, and local taxation, depending upon your tax situation. Income distributions, including distributions of net short-term capital gains but excluding distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Long-term capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains. Once a year the Fund will send you a statement showing the types and total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the purchase price would reflect the amount of the upcoming distribution. In this case, you would be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of your investment. This is known as "buying a dividend" and should be avoided by taxable investors. Call 1-866-234-5426 to find out when the Fund expects to make a distribution to shareholders.
Each sale of shares of the Fund may be a taxable event. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. A sale may result in a capital gain or loss to you. The gain or loss generally will be treated as short term if you held the shares 12 months or less, long term if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
More information about taxes is in the Statement of Additional Information ("SAI").
ADDITIONAL INFORMATION ABOUT THE FUND
OTHER INVESTMENT PRACTICES AND STRATEGIES
The Fund's investment objective is to seek maximum long-term total return, consistent with reasonable risk to principal, by investing primarily in common stocks of smaller companies measured in terms of revenues and assets and, more importantly, in terms of market capitalization. The Fund may change its investment objective without shareholder approval.
In addition to its principal investment strategies, the Fund may use the investment strategies described below. The Fund may also employ investment practices that this prospectus does not describe, such as participating in repurchase agreements, when-issued and forward commitment transactions, lending of securities, borrowing and other techniques. For more information concerning these and any of the Fund's other investment practices and their risks, you should read the SAI.
DERIVATIVES
The Fund may invest in forward foreign currency exchange contracts, futures, options and swaps to protect its investments against changes resulting from market conditions (a practice called "hedging"), to reduce transaction costs or to manage cash flows. Forward foreign currency exchange contracts, futures, options and swaps are called derivatives because their value is based on an underlying asset or economic factor. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its objectives with derivatives. Successful use of a derivative depends on the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
SHORT-TERM INVESTING
The investments and strategies described in this prospectus are those that the Fund uses under normal circumstances. During unusual economic, market, political or other circumstances, the Fund may invest up to 100% of its assets in short-term, high quality debt instruments, such as U.S. government securities. These instruments would not ordinarily be consistent with the Fund's principal investment strategies, and may prevent the Fund from achieving its investment objective. The Fund will use a temporary strategy if the Adviser believes that pursuing the Fund's investment objective will subject it to a significant risk of loss. The Fund has a policy requiring it to invest at least 80% of its net assets, plus any borrowings for investment purposes, in particular types of securities as described in the Fund's principal investment strategy, and will not change this policy without 60 days' prior written notice to shareholders. In addition to the temporary defensive measures discussed above, the Fund may also temporarily deviate from this 80% policy in other limited, appropriate circumstances, such as if the Fund experiences large cash inflows or redemptions.
When the Adviser pursues a temporary defensive strategy, the Fund may not profit from favorable developments that it would have otherwise profited from if it were pursuing its normal strategies.
INFORMATION ABOUT PORTFOLIO HOLDINGS
The Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and
the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://aicfundholdings.com/icm. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund. Please consult the Fund's SAI for a full description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
Certain portfolio holdings information for the Fund is available on the Fund's website - www.icomd.com - by clicking on the "ICM Small Company Portfolio" section of the homepage. A complete list of portfolio holdings for the Fund as of the end of the most recently completed calendar quarter is found under the "Quarterly Reports" section. The portfolio holdings information available on the Fund's website includes an alphabetical list of the securities owned by the Fund, but does not include the percentage of the Fund's overall portfolio represented by a particular security. The portfolio holdings information on the Fund's website is generally made available within fifteen days after the close of the most recently completed calendar quarter and will remain available until the information is updated following the close of the next quarter.
INVESTMENT MANAGEMENT
INVESTMENT ADVISER
Investment Counselors of Maryland, LLC, a Delaware limited liability company located at 803 Cathedral Street, Baltimore, Maryland 21201, serves as the Fund's investment adviser. The Adviser manages and supervises the investment of the Fund's assets on a discretionary basis, subject to oversight by the Board. For its services, the Fund pays the Adviser a management fee equal to 0.70% of the Fund's average daily net assets. As of December 31, 2012, the Adviser had approximately $2.1 billion in assets under management. The Adviser is owned in part by Investment Counselors of Maryland, Inc. (the "Former Adviser") and ICM Management LLC, a company wholly-owned by seven officers of the Adviser. Old Mutual (US) Holdings Inc., through its ownership of the Former Adviser, retains an ownership interest in the Adviser.
Old Mutual (US) Holdings Inc. is a wholly-owned subsidiary of OM Group (UK) Limited which is a subsidiary of Old Mutual plc, a financial services company based in the United Kingdom. The Adviser continued the business of the Former Adviser. The Adviser and the Former Adviser have provided investment management services to corporations, foundations, endowments, pension and profit sharing plans, trusts, estates and other institutions and individuals since 1972.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals. The following portfolio managers are jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
Mr. William V. Heaphy, CFA and Principal, joined ICM in 1994 and has over 18 years of investment experience. Mr. Heaphy earned his B.S. degree from Lehigh University in 1989 and his law degree from the University of Maryland in 1993.
Mr. Simeon F. Wooten III, CFA and Principal, joined ICM in 1998 and has over 33 years of investment experience. Mr. Wooten earned his B.S. degree from the Wharton School of the University of Pennsylvania in 1975.
Mr. Gary J. Merwitz, Principal, joined ICM in 2004 and has over 16 years of investment experience. Mr. Merwitz earned his B.S. degree in accounting at the University of Maryland in 1992 and an M.B.A. from the Fuqua School of Business in 1999.
Mr. Robert F. Jacapraro, CFA, Principal, joined ICM in 2005 and has over 18 years of investment experience. Mr. Jacapraro earned his B.S. degree from State University of New York at Stony Brook in 1990.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. "Financial intermediaries" include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and FINRA rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to
financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the NAV or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm whose report, along with the Fund's financial statements, are included in the Fund's Annual Report. The report of PricewaterhouseCoopers LLP, along with the Fund's financial statements and related notes, appears in the Annual Report that accompanies the Statement of Additional Information. You can obtain the Annual Report, which contains more performance information, at no charge by calling 1-866-234-5426. For the fiscal year ending October 31, 2013, Deloitte & Touche LLP serves as the independent registered public accounting firm for the Fund.
YEARS ENDED OCTOBER 31, 2012 2011 2010 2009 2008
----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $28.61 $27.10 $22.38 $23.24 $41.21
------ ------ ------ ------ ------
Income from Investment Operations:
Net Investment Income (Loss) (1) 0.09 0.05 0.07 0.06 0.14
Net Realized and Unrealized Gain
(Loss) 2.81 1.53 4.76 1.93 (12.66)
---- ---- ---- ---- -----
Total from Operations 2.90 1.58 4.83 1.99 (12.52)
---- ---- ---- ---- -----
Dividends and Distributions:
Net Investment Income (0.05) (0.07) (0.11) (0.10) (0.17)
Net Realized Gain (2.62) -- -- (2.75) (5.28)
---- ---- ---- ---- ----
Total Dividends and
Distributions (2.67) (0.07) (0.11) (2.85) (5.45)
---- ---- ---- ---- ----
Net Asset Value, End of Year $28.84 $28.61 $27.10 $22.38 $23.24
===== ===== ===== ===== =====
Total Return(2) 11.54% 5.83% 21.60% 11.92% (34.34)%
===== ==== ===== ===== =====
Ratios and Supplemental Data
Net Assets, End of Year
(Thousands) $1,181,670 $1,235,797 $1,309,074 $1,200,420 $1,084,555
Ratio of Expenses to Average Net
Assets(3) 0.92% 0.92% 0.92% 0.89% 0.87%
Ratio of Net Investment Income
to Average Net Assets 0.33% 0.18% 0.27% 0.31% 0.44%
Portfolio Turnover Rate 19% 30% 24% 33% 29%
|
(1) Per share calculations were performed using average shares for the year.
(2) Returns shown do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of shares.
(3) The Ratio of Expenses to Average Net Assets excludes the effect of fees paid indirectly. If these expense offsets were included, the ratio would have been 0.92%, 0.92%, 0.92%, 0.89% and 0.87%, respectively.
Amounts designated as "--" are either $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
ICM SMALL COMPANY PORTFOLIO
Investors who are interested in receiving more information about the Fund should read the Fund's Annual and Semi-Annual Reports and the Fund's SAI. The Annual and Semi-Annual Reports of the Fund provide additional information about its investments. In the Annual Report, you will also find a discussion of the market conditions and investment strategies that significantly affected the performance of the Fund during the last fiscal year. The SAI contains additional detailed information about the Fund and is incorporated by reference into (is legally part of) this prospectus.
Investors can receive free copies of the SAI, shareholder reports and other information about the Fund at www.icomd.com. Investors can also receive these documents, as well as make shareholder inquiries, by writing to or calling:
ICM Small Company Portfolio P.O. Box 219009 Kansas City, MO 64121 866-234-5426
You can review and copy information about the Fund (including the SAI and Annual and Semi-Annual Reports) at the U.S. Securities and Exchange Commission's Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room by calling the U.S. Securities and Exchange Commission at 202-551-8090. Reports and other information about the Fund are available on the EDGAR Database on the U.S. Securities and Exchange Commission's Internet site at: http://www.sec.gov. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the U.S. Securities and Exchange Commission's Public Reference Section, Washington, D.C. 20549-1520.
THE TRUST'S INVESTMENT COMPANY ACT OF 1940 FILE NUMBER IS 811-06400.
ICM-PS-001-1200
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
LOOMIS SAYLES FULL DISCRETION INSTITUTIONAL SECURITIZED FUND
INSTITUTIONAL CLASS SHARES
INVESTMENT ADVISER:
LOOMIS, SAYLES & COMPANY, L.P.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
LOOMIS SAYLES FULL DISCRETION INSTITUTIONAL
SECURITIZED FUND ................................................ 1
FUND INVESTMENT OBJECTIVE .................................. 1
FUND FEES AND EXPENSES ..................................... 1
PRINCIPAL INVESTMENT STRATEGIES ............................ 2
PRINCIPAL RISKS ............................................ 3
PERFORMANCE INFORMATION .................................... 7
INVESTMENT ADVISER ......................................... 8
PORTFOLIO MANAGERS ......................................... 8
PURCHASE AND SALE OF FUND SHARES ........................... 8
TAX INFORMATION ............................................ 9
MORE INFORMATION ABOUT RISK ..................................... 9
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE
AND INVESTMENTS ............................................ 10
INFORMATION ABOUT PORTFOLIO HOLDINGS ............................ 11
INVESTMENT ADVISER .............................................. 11
PORTFOLIO MANAGERS .............................................. 12
PURCHASING AND SELLING FUND SHARES .............................. 12
OTHER POLICIES .................................................. 15
DIVIDENDS AND DISTRIBUTIONS ..................................... 17
TAXES ........................................................... 18
FINANCIAL HIGHLIGHTS ............................................ 19
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ............ Back Cover
|
LOOMIS SAYLES FULL DISCRETION INSTITUTIONAL SECURITIZED FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Loomis Sayles Full Discretion Institutional Securitized Fund (the "Fund") is to provide current income and the potential for total return.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Class Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees(1) 0.00% -------------------------------------------------------------------------------- Other Expenses 0.33% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.33% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.13)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 0.20% Reductions and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) The Fund does not pay a management fee. Shares of the Fund are only available to institutional advisory clients of Loomis, Sayles & Company L.P. (the "Adviser"), the Fund's Adviser. The institutional advisory clients of the Adviser pay the Adviser or its affiliates a fee for their investment advisory services.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses ("excluded expenses") from exceeding 0.20% of the Fund's Institutional Class Shares' average daily net assets. This Agreement may only be terminated by the Board. Prior to October 31, 2012, the Adviser had contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements (not including excluded expenses) from exceeding 0.10% of the Fund's Institutional Class Shares' average daily net assets.
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 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 (including capped expenses for the period described in the fee table) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
---------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------- $20 $64 $113 $255 ---------------------------------------------- |
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from December 15, 2011 (commencement of Fund operations) to October 31, 2012, the Fund's portfolio turnover rate was 56% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in mortgage-backed and other asset-backed securities. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund primarily invests in asset-backed securities, commercial mortgage-backed securities, agency mortgage-backed securities and nonagency residential mortgage-backed securities, which are not issued, guaranteed, or backed by the U.S. government or its agencies or instrumentalities. The Fund may invest in both fixed-rate and adjustable rate securities.
The securities the Fund invests in may be issued by U.S. or non-U.S. issuers, including corporations, partnerships and trusts, and governments, including their agencies, instrumentalities and sponsored entities. There is no limit to the amount of Fund assets which may be invested in non-U.S. issuers. Securities issued by non-U.S. issuers must be U.S. dollar denominated. The Fund may invest in securities of any maturity.
In addition to direct investments in securitized assets, the Fund may also invest in structured notes, which are instruments that are expected to provide economic exposure equivalent to securitized assets in which the Fund may invest directly. These investments are taken into account when determining compliance with the Fund's 80% investment policy described above. The Fund may invest up to 20% of its assets, based on market value, in structured notes. The Fund may also invest up 10% of its assets in cash and cash equivalents, including commercial paper, repurchase agreements and short-term fixed income instruments.
The average duration and dollar weighted average maturity of the Fund will vary depending on the Adviser's strategy for the Fund and its analysis of market and economic conditions.
The Fund may invest without limit in securities of any credit quality, including securities that are rated below investment grade ("high yield" or "junk" bonds) and those in default, but seeks to maintain a minimum dollar weighted average portfolio quality equivalent to B- or higher as determined at the time of purchase. The Fund uses the highest rating assigned by Standard & Poor's Rating Services, Moody's Investors Service, Inc. or Fitch, Inc. If none of those ratings agencies assign ratings to a particular security or issuer, the Fund uses the highest rating assigned by any other nationally recognized statistical rating organization ("NRSRO"). If an issuer or security is not rated by an NRSRO, the Adviser will use its internal rating to determine credit quality. The Fund may continue to hold securities that are downgraded in credit rating subsequent to their purchase if the Adviser believes it would be advantageous to do so.
The portfolio management team will seek to identify and purchase securitized assets that offer a high level of income and/or capital appreciation potential. The return potential and relative attractiveness of each security will be assessed on a potential loss-adjusted basis, with particular emphasis on scenario
analysis aimed at assessing the risk-return profile of each security. The credit rating assigned by a nationally recognized rating agency will not be a key consideration in the security selection process, except for the need to maintain the minimum rating requirement of the Fund.
The Adviser has full discretion in determining which investments to make and pursues a strategy of investing in securitized assets unconstrained with respect to sectors and ratings. In purchasing securities for the Fund, the Adviser uses a fundamental, top down approach to evaluate each sector in the securitized market, and then determines the sector allocation within each sector and the capital structure allocations for the Fund's portfolio. The Adviser utilizes a bottom up approach to the individual security selection process, aimed at assigning an independent credit rating to a security and determining its risk/return profile. In evaluating a security, the Adviser utilizes a mix of third party and proprietary research models to generate performance expectations for the collateral backing the security (e.g., pooled mortgages in a mortgage-backed security) and the risks associated with such collateral. Qualitative factors such as the originator of the collateral, the servicer of the pool of assets and other key corporate connections of the security are also evaluated. The Adviser then compares the collateral performance expectations with the security's structure to determine its ability to make interest and principal payments to its holders, and stress-tests the security across a broad range of scenarios to determine an internal credit rating and a risk/return profile for a security.
The Adviser may sell a security when there is a change in the relative valuation of a security, the Adviser's assessment of a particular sector, and/or the Adviser's analysis of the credit or risk/return of a security.
The Fund has adopted a policy to concentrate its investments (invest at least 25% of its assets) in the asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities group of industries. The Fund is non-diversified and may hold a relatively small number of securities issued by a limited number of issuers. Due to its investment strategies, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities than a fund with a buy and hold strategy.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
INTEREST RATE RISK. As with most funds that invest in fixed income securities, changes in interest rates are one of the most important factors that could affect the value of your investment. Rising interest rates tend to cause the prices of fixed income securities (especially those with longer maturities and durations) and the Fund's share price to fall.
A related risk is basis risk, which is the risk that a change in prevailing interest rates will change the price of a company's bearing liabilities disproportionately to the price of interest-bearing assets. This would have the effect of increasing liabilities and decreasing assets, resulting in a loss.
CREDIT RISK. The credit rating or financial condition of an issuer may affect the value of a fixed income debt security. Generally, the lower the quality rating of a security, the greater the perceived risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults or becomes unable to honor its financial obligations, the security may lose some or all of its value. The issuer of an investment-grade security is considered by the ratings agency to be more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal.
CONCENTRATION RISK. Due to the Fund's concentration in the asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities group of industries, events that affect an industry or industries within this group will have a greater effect on the Fund than they would on a fund that is more widely diversified among a number of unrelated industries. While the Fund will invest more than 25% of its assets in, collectively, the asset-backed, commercial mortgage-backed and residential mortgage-backed securities industries, it is expected that the Fund's investments in any one or more of these industries may, from time to time, be significantly greater than 25%.
INFLATION/DEFLATION RISK. The value of assets or income from investments may be worth less in the future as inflation decreases the present value of future payments. Conversely, prices throughout the economy may decline over time due to deflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund's portfolio.
RATING AGENCIES RISK. Ratings are not an absolute standard of quality, but rather general indicators that reflect only the view of the originating rating agencies from which an explanation of the significance of such ratings may be obtained. There is no assurance that a particular rating will continue for any given period of time or that any such rating will not be revised downward or withdrawn entirely if, in the judgment of the agency establishing the rating, circumstances so warrant. A downward revision or withdrawal of such ratings, or either of them, may have an effect on the liquidity or market price of the securities in which the Fund invests. The ratings of securitized assets may not adequately reflect the credit risk of those assets due to their structure. Rating agencies may fail to make timely changes in credit ratings and an issuer's current financial condition may be better or worse than a rating indicates. In addition, rating agencies are subject to an inherent conflict of interest because they are often compensated by the same issuers whose securities they grade.
HIGH YIELD BOND RISK. High yield, or "junk," bonds are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds are considered to carry a greater degree of risk and are considered to be less likely to make payments of interest and principal. Some may even be in default. Market developments and the financial and business conditions of the corporation issuing these securities generally influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the high yield bond market may make it more difficult to dispose of high yield bonds and may cause the Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value high yield bonds accurately.
Generally, the lower rated the security, as determined by rating agencies, the more vulnerable the security is to nonpayment. Securities rated below "B" are often dependent upon favorable financial and business conditions to meet their financial obligations, or may lack the capacity to make payments regardless of financial and business conditions. Default becomes more likely over the long or short term the lower rated the security.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK. The Fund may invest in both residential and commercial mortgage-backed securities. A mortgage-backed security represents an interest in a pool of assets such as mortgage loans and matures when all the mortgages in the pool mature or are prepaid. While mortgage-backed securities do have fixed maturities, their expected durations may vary when interest rates rise or fall. Because the timing and speed of principal payments may vary, the cash flow on mortgage-backed securities is irregular. The value of mortgage-backed securities generally is more
sensitive to changes in interest rates than other types of fixed-income securities. Rising interest rates tend to extend the maturities of mortgage-backed securities, causing the securities to exhibit additional volatility and their value to decrease more significantly. This is known as extension risk. In addition, mortgage-backed securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of the Fund because the Fund will have to reinvest that money at the lower prevailing interest rates. While residential mortgagors in the United States have the option to pay more principal than required at each payment interval, commercial mortgages are often set for a fixed term and therefore experience a lower degree of prepayment risk.
The Fund may invest in residential mortgage-backed securities that represent interests in pools of adjustable rate mortgages (ARMs), including payment option ARMs. Payment option ARMs give the borrower the option to pay less than the interest only amount, resulting in an increase in the principal balance of a loan as interest owed is added to the principal (known as "negative amortization payments"). While such instruments permit the borrower to avoid paying currently a portion of the interest accruing on the instrument and make the instrument more affordable to the borrower in the short term, they increase the risk that the borrower will be unable to make the resulting higher payment or payments that become due at the maturity of the loan.
The Fund may invest a substantial amount of its assets in privately issued mortgage-backed securities that are not issued, guaranteed, or backed by the U.S. Government or its agencies or instrumentalities and may bear a greater risk of nonpayment than securities that are backed by the U.S. Treasury.
An asset-backed security is a security backed by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Asset-backed securities are subject to risks similar to those associated with mortgage-backed securities, including extension and prepayment risks, as well as additional risks associated with the nature of the assets and the servicing of those assets. Some asset-backed securities present credit risks that are not presented by mortgage-backed securities. This is because some asset-backed securities generally do not have the benefit of a security interest in collateral that is comparable in quality to mortgage assets. Other asset-backed securities, such as credit card receivables, may not have the benefit of an underlying physical asset or security interest in collateral at all. If the issuer of an asset-backed security defaults on its payment obligations, there is the possibility that, in some cases, the Fund will be unable to possess and sell the underlying collateral and that the Fund's recoveries on repossessed collateral may not be available to support payments on the security. In the event of a default, the Fund may suffer a loss if it cannot sell collateral quickly and receive the amount it is owed. The value of the collateral may also be insufficient to cover the principal amount.
During periods of declining asset value, difficult or frozen credit markets, interest rate changes, or deteriorating economic conditions, mortgage-backed and asset-backed securities may decline in value, face valuation difficulties, become more volatile and/or become illiquid. Additionally, the value of these securities may fluctuate in response to market's perception of the credit worthiness of the issuers. Mortgage-backed and asset-backed securities are subject to the risk that an issuer will fail to make timely payments of interest or principal, or will default on payments. Such a risk is generally higher in the case of mortgage-backed securities that include so-called 'sub-prime' or "Alt-A" loans, which are loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their loans. There is also a risk that the value of the underlying asset (E.G., a home) securing an obligation may not be sufficient to cover the amount of the obligation. Residential mortgage-backed securities in which the Fund may invest may have a loan to value ratio which exceeds 100%, meaning that the mortgage amount is greater than the appraised value of the underlying property. Certain commercial mortgage-backed securities may be backed by pools of mortgages of properties that have special purposes, which may be difficult to sell or liquidate.
CREDIT CRISIS LIQUIDITY RISK. Certain types of credit instruments, such as investments in high-yield bonds, debt issued in leveraged buyout transactions (acquisition of a company using a substantial amount of debt and loans), mortgage- and asset-backed securities, and short-term asset-backed commercial paper, became very illiquid in the latter half of 2007. General market uncertainty and consequent re-pricing of risk led to market imbalances of sellers and buyers, which in turn resulted in significant valuation uncertainties in mortgage and credit-related securities and other instruments. These conditions resulted, and in many cases continue to result in, greater volatility, less liquidity, widening credit spreads and a lack of price transparency, with many instruments remaining illiquid and of uncertain value. Such market conditions, and the above factors, may make valuation uncertain and/or result in sudden and significant valuation declines.
STRUCTURED NOTES RISK. Structured notes are debt obligations issued by industrial corporations, financial institutions or governmental or international agencies that obligate the issuer to pay amounts of principal or interest that are determined by reference to changes in some external factor or factors, or may vary from the stated rate because of changes in these factors. Investment in structured notes involves certain risks, including the risk that the issuer may be unable or unwilling to satisfy its obligations to pay principal or interest, which are separate from the risk that the note's reference instruments may move in a manner that is disadvantageous to the holder of the note. Structured notes, which are often illiquid, are also subject to additional risk such as market risk, liquidity risk and interest rate risk. The terms of certain structured notes may provide that a decline in the reference instrument may result in the interest rate or principal amount being reduced to zero. Structured notes may be more volatile than the underlying reference instruments or traditional debt instruments. In addition, structured notes may charge fees and administrative expenses.
A credit linked note is a type of structured note whose value is linked to an underlying reference asset. Credit linked notes typically provide periodic payments of interest as well as payment of principal upon maturity, the value of which is tied to the underlying reference asset. Like structured notes generally, investments in credit-linked notes are subject to the risk of loss of the principal investment and/or periodic interest payments expected to be received from an investment in a credit-linked note in the event that one or more of the underlying obligations of a note default or otherwise become non-performing. To the extent the Fund invests in a credit-linked note that represents an interest in a single issuer or limited number of issuers, a credit event with respect to that issuer or limited number of issuers presents a greater risk of loss to the Fund than if the credit-linked note represented an interest in underlying obligations of multiple issuers.
U.S. GOVERNMENT SECURITIES RISK. Although the Fund's U.S. Government securities
are considered to be among the safest investments, they are not guaranteed
against price movements due to changing interest rates. Some obligations
issued or guaranteed by U.S. Government agencies and instrumentalities,
including, for example, Ginnie Mae pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury. Other obligations issued by or
guaranteed by federal agencies, such as those securities issued by Fannie Mae,
are supported by the discretionary authority of the U.S. government to purchase
certain obligations of the federal agency, while other obligations issued by or
guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury.
While the U.S. Government provides financial support to such U.S.
Government-sponsored federal agencies, no assurance can be given that the U.S.
Government will always do so, since the U.S. Government is not so obligated by
law.
AGENCY SECURITIES RISK. Certain obligations issued by U.S. government sponsored agencies are backed solely by that agency's own resources. As a result, investments in securities issued by the government sponsored agencies that are not backed by the U.S. Treasury are subject to higher credit risk than those that are.
FOREIGN SECURITY RISK. Investing in securities of foreign issuers and governments poses additional risks since political and economic events unique to a country or region will affect foreign securities markets and their issuers. Political events (civil unrest, national elections, changes in political conditions and foreign relations, imposition of exchange controls and repatriation restrictions), social and economic events (labor strikes, rising inflation) and natural disasters occurring in a country where the Fund invests could cause the Fund's investments in that country to experience gains or losses. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States.
PORTFOLIO TURNOVER RISK. The Fund may buy and sell investments frequently. Such a strategy often involves higher expenses, including brokerage commissions, and may increase the amount of capital gains (in particular, short term gains) realized by the Fund. Shareholders may pay tax more frequently on capital gains and will indirectly incur additional expenses related to a fund with a higher portfolio turnover.
LIQUIDITY RISK. Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing the Fund from selling these illiquid securities at an advantageous price or at the time desired. A lack of liquidity also may cause the value of investments to decline. Illiquid investments also may be difficult to value.
NON-DIVERSIFICATION RISK. Because the Fund is not diversified, it may invest a greater percentage of its assets in a particular issuer than a diversified fund, which may cause the value of its shares to be more sensitive to changes in the market value of a single issuer than a diversified mutual fund.
STATE-SPECIFIC RISK. While the Fund does not expect to invest in single state pools of mortgages, underlying properties of mortgages of certain states may represent a significant percentage of the underlying mortgages in which the Fund invests as a whole. When the Fund invests in this manner, it is subject to the risk that the economy of the states in which it invests, and the value of properties within the states, may decline. Investing significantly in securities whose values are economically tied to a single state means that the Fund is more exposed to negative political or economic events affecting that state than a fund that invests more widely. Certain states have experienced significant declines in property values in recent years.
It is anticipated that the Fund will invest more than 25% of its assets in mortgage-backed securities with underlying properties in California. Investing in such a manner subjects the Fund to economic conditions and government policies within California. As a result, the Fund may be more susceptible to factors that adversely affect the California property, housing and mortgage markets than a mutual fund that does not have a great concentration in California.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund by showing how the Fund's average annual total returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling 1-800-343-2029.
2012 26.14%
BEST QUARTER WORST QUARTER 9.79% 1.81% (09/30/2012) (06/30/2012) |
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
LOOMIS SAYLES FULL DISCRETION INSTITUTIONAL 1 YEAR SINCE INCEPTION SECURITIZED FUND INSTITUTIONAL CLASS (12/15/2011)(*) ---------------------------------------------------------------------------------------------------------- FUND RETURN BEFORE TAXES 26.14% 25.60% FUND RETURN AFTER TAXES ON DISTRIBUTIONS 21.98% 21.53% FUND RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND 17.10% 19.45% SHARES BofA MERRILL LYNCH US ABS & CMBS INDEX (REFLECTS NO 6.38% 6.38% DEDUCTION FOR FEES, EXPENSES, OR TAXES) |
* Index return shown from December 31, 2011.
INVESTMENT ADVISER
Loomis, Sayles & Company, L.P. ("Loomis Sayles")
PORTFOLIO MANAGERS
Mr. Alessandro Pagani, CFA, Vice President and Senior Securitized Asset Strategist, has managed the Fund since its inception.
Mr. Stephen L'Heureux, CFA, Vice President and Senior Securitized Asset Analyst, has managed the Fund since its inception.
Mr. Dmitri Rabin, CFA, Vice President and Senior Securitized Asset Analyst, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
There is no minimum initial investment to purchase shares of the Fund for the first time. There is also no minimum for subsequent investments. The Fund reserves the right to create investment minimums at its sole discretion.
Shares of the Fund are offered exclusively to institutional advisory clients of the Adviser or its affiliates. Shares normally can be redeemed only by contacting your client service manager or calling 1-800-343-2029.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goals. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which it trades. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
CREDIT RISK. Credit risk involves the risk that an issuer or guarantor of a fixed-income security, or the counterparty to an over-the-counter transaction, may be unable or unwilling to make timely payments of interest or principal or to otherwise honor its obligations. The Fund may be subject to credit risk to the extent that it invests in fixed-income securities or is a party to over-the-counter transactions. A fund that invests in lower-rated fixed-income securities ("junk bonds") is subject to greater credit risk (because such securities are subject to a greater risk of default) and market risk than a fund that invests in higher-quality fixed-income securities. Lower rated fixed-income securities are considered predominantly speculative with respect to the ability of the issuer to make timely principal and interest payments. A fund that invests in fixed-income securities issued in connection with corporate restructurings by highly-leveraged issuers or in fixed-income securities that are not current in the payment of interest or principal (i.e., in default) will be subject to greater credit risk. A fund that invests in non-U.S. securities is subject to increased credit risk, for example, because of the difficulties of requiring non-U.S. entities to honor their contractual commitments and because financial reporting and other standards are often less robust in foreign countries.
HIGH YIELD ("JUNK") BOND RISK. High yield, or "junk," bonds involve greater risks of default or downgrade and are more volatile than investment grade securities. High yield bonds involve greater risk of price declines than investment grade securities due to actual or perceived changes in an issuer's creditworthiness. In addition, issuers of high yield bonds may be more susceptible than other issuers to economic downturns. High yield bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the security. The volatility of high yield bonds is even greater since the prospects for repayment of principal and interest of many of these securities is speculative. Some may even be in default. As an incentive to invest in these risky securities, they tend to offer higher returns.
INTEREST RATE RISK. Changes in interest rates will affect the value of the Fund's investments in fixed-income securities, such as bonds, notes, asset-backed securities and other income producing securities. Fixed-income securities are obligations of the issuer to make payments of principal and/or interest on future dates. Increases in interest rates may cause the value of the Fund's investments to decline. Even
funds that generally invest a significant portion of their assets in high quality fixed-income securities are subject to interest rate risk. Interest rate risk is greater for funds, such as the Fund, that generally invest a significant portion of their respective assets in lower rated fixed-income securities or comparable unrated securities (commonly known as "junk bonds"). The Fund will be subject to increased interest rate risk to the extent that they invest in fixed-income securities with longer maturities or durations, as compared to if they invested in fixed-income securities with shorter maturities or durations. Interest rate risk is compounded for funds that invest a significant portion of their assets in mortgage-related or other asset-backed securities because the value of mortgage-related securities and asset-backed securities generally is more sensitive to changes in interest rates than other types of fixed-income securities. When interest rates rise, the maturities of mortgage-related and asset-backed securities tend to lengthen, and the value of the securities decreases more significantly. In addition, these types of securities are subject to the risk of prepayment when interest rates fall, which generally results in lower returns because funds that hold these types of securities must reinvest assets previously invested in these types of securities in fixed-income securities with lower interest rates. The Fund also faces increased interest rate risk when it invests in interest-only securities or fixed-income securities paying no current interest, such as zero-coupon securities, principal-only securities and fixed-income securities paying non-cash interest in the form of other fixed-income securities.
MORTGAGE-BACKED SECURITIES RISK. Mortgage-backed securities differ from traditional fixed-income securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans generally may be prepaid at any time. As a result, if the Fund purchases these assets at a premium, a faster than expected prepayment rate will reduce yield to maturity and a slower-than-expected prepayment rate will increase yield to maturity. If the Fund purchases mortgage-related securities at a discount, faster-than-expected prepayments will increase and slower-than-expected prepayments will reduce, yield to maturity. Prepayments and resulting amounts available for reinvestment by the Fund, are likely to be greater during a period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates. Accelerated prepayments on securities purchased at a premium may result in a loss of principal if the premium has not been fully amortized at the time of prepayment. These securities will decrease in value as a result of increases in interest rates generally, and they are likely to appreciate less than other fixed-income securities when interest rates decline because of the risk of prepayments.
The value of some mortgage-backed securities in which the Fund invests may be particularly sensitive to changes in prevailing interest rates, and the ability of the Fund to successfully utilize these instruments may depend in part upon the ability of the Adviser to forecast interest rates and other economic factors correctly. The risk of non-payment is greater for mortgage-related securities that are backed by mortgage pools that contain "subprime" or "Alt-A" loans (loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their loans), but a level of risk exists for all loans. Market factors adversely affecting mortgage loan repayments may include a general economic turndown, high unemployment, a general slowdown in the real estate market, a drop in the market prices of real estate or an increase in interest rates resulting in higher mortgage payments by holders of adjustable-rate mortgages. The market for mortgage-backed securities (and other asset-backed securities) has experienced high volatility and a lack of liquidity. As a result, the value of many of these securities has significantly declined. There can be no assurance that these markets will become more liquid or less volatile, and it is possible that the value of these securities could decline further.
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE AND INVESTMENTS
The investment objective of the Fund is to provide current income and the potential for total return. The investment objective of the Fund may be changed without shareholder approval.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in short-term, liquid, high-grade debt instruments, which may include U.S. government securities, bank deposits, money market instruments and other short-term debt instruments, including notes and bonds, or the Fund may hold its assets in cash. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will only do so if the Adviser believes that the risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategies and principal risks, and the Fund will normally invest in the types of securities and other investments described in this prospectus. In addition to the securities and other investments described in this prospectus, the Fund also may invest to a lesser extent in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus).
The Fund may receive instruments not contemplated herein through the conversion or exchange of an investment or as a result of the reorganization or bankruptcy of the issuer of an otherwise permissible investment and may create wholly- or substantially owned entities to hold such instruments. The Adviser may hold or dispose of these investments at its discretion.
Of course, there is no guarantee that the Fund will achieve its investment goals.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio securities is available in the SAI.
INVESTMENT ADVISER
Loomis, Sayles & Company, L.P., a Delaware limited partnership, serves as the investment adviser to the Fund. The Adviser's principal place of business is located at One Financial Center, Boston, Massachusetts 02111-2621. As of December 31, 2012, the Adviser had approximately $186.1 billion in assets under management. Loomis Sayles was founded in 1926. Loomis Sayles is a subsidiary of Natixis US, which is part of Natixis Global Asset Management.
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
An investor in the Fund will pay a fee to the Adviser or its affiliates under a separate client agreement for advisory services. The Fund does not pay the Adviser for investment advisory services, but does pay other expenses of the Fund such as administration fees, custody fees and general operating expenses. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep total annual Fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 0.20% of the Fund's average daily net assets.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement is available in the Fund's Semi-Annual Report dated April 30, 2012, which covers the period from December 15, 2011 (commencement of Fund operations) to April 30, 2012.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals. The following portfolio managers are jointly and primarily responsible for the day-to-day management of the Fund.
Alessandro Pagani, CFA, Vice President and Senior Securitized Asset Strategist, joined the Adviser in 2008 and has 15 years of investment management experience. He is a co-manager of the Loomis Sayles Securitized Asset Fund and the Loomis Sayles Securitized Asset Credit Trust. Mr. Pagani leads the Securitized Asset Sector Team for the Loomis Sayles fixed income group and is responsible for developing research and investment strategies for mortgage pass-through, asset-backed and commercial mortgage securities across all Loomis Sayles fixed income products. Prior to joining the Adviser, Mr. Pagani was co-head of global research and credit with Cambridge Place Investment Management, a specialty manager of credit sensitive structured securities. Mr. Pagani also worked as director of asset-backed securities research at Banc One Capital Markets. He earned a doctoral degree in Economics and Commerce from the University of Brescia in Italy.
Stephen L'Heureux, CFA, Vice President and Senior Securitized Asset Analyst, joined the Adviser in 2008 and has 27 years of investment management experience. Mr. L'Heureux specializes in commercial real estate and CMBS analysis. Prior to joining the Adviser, Mr. L'Heureux was a senior credit analyst for US commercial real estate, ABS and CMBS at Cambridge Place Investment Management. Previously, Mr. L'Heureux worked for 10 years at AEW Capital Management, where he was a portfolio manager specializing in structured debt. Mr. L'Heureux also spent three years at Hancock Real Estate Advisors supporting direct equity real estate investment programs and five years building econometric models of the nation's real estate markets for DRI/FW Dodge. He earned a B.A. from McGill University and an M.A. from the University of Toronto.
Dmitri Rabin, CFA, Vice President and Senior Securitized Asset Analyst, joined the Adviser in 2008 and has 6 years of investment management experience. Mr. Rabin specializes in non-agency RMBS analysis. Prior to joining the Adviser, Mr. Rabin worked as a long-short equity analyst for global financials and fund macro strategy at Pine Cobble Capital. He also worked as an associate analyst at Cambridge Place Investment Management and as project leader at Boston Consulting Group. Mr. Rabin earned a B.A. from Amherst College and an M.B.A. from the Massachusetts Institute of Technology.
The Fund's SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Institutional Class Shares of the Fund. Institutional Class Shares are for individual and institutional investors.
HOW TO PURCHASE FUND SHARES
Shares of the Fund are offered exclusively to institutional advisory clients of the Adviser or its affiliates.
Additional shares can be purchased if authorized by the Adviser and payment must be wired in federal funds to the Fund's transfer agent, Boston Financial Data Services, Inc. (the "Transfer Agent") except when shares are purchased in exchange for securities acceptable to the Fund.
Purchases of Fund shares will normally be made only in full shares, but may be made in fractional shares under certain circumstances. Certificates for shares will not be issued. The payment for shares to be purchased shall be wired to the Transfer Agent.
The Fund reserves the right to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. The Fund's price per share will be the net asset value per share ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund or authorized institution must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund. In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Fund's Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
When valuing fixed income securities with remaining maturities of more than 60 days, the Fund uses the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security, securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Fund uses the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
With respect to any non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, or securities market movements in the United States, or other relevant information as related to the securities.
Securities, options, futures contracts and other assets for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
MINIMUM PURCHASES
There is no minimum initial investment to purchase shares of the Fund for the first time. There is also no minimum for subsequent investments. The Fund reserves the right to create investment minimums at its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase Institutional Class Shares of the Fund, check daily NAV or obtain additional information.
FUND NAME CUSIP FUND CODE Loomis Sayles Full Discretion Institutional 00769G774 3456 Securitized Fund |
HOW TO SELL YOUR FUND SHARES
Shares normally can be redeemed only by contacting your client service manager or calling 1-800-343-2029.
The sale price will be the NAV next determined after the Fund receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the Fund receives your request. Redemption proceeds will be sent by wire only.
REDEMPTIONS IN KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold. The Fund agrees to redeem shares solely in cash up to the lesser of $250,000 or 1% of the Fund's net assets during any 90-day period for any one registered investment adviser.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More information about this is in the SAI.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs. However, the Fund is also mindful that shareholders may have valid reasons for periodically purchasing and redeeming fund shares.
Because the Fund is designed to be a component of a separate institutional advisory client account that also invests in individual securities and other investments, its shares may be purchased or redeemed on a frequent basis for rebalancing purposes, to invest new monies, or to accommodate reductions in account size. The Fund is managed in a manner that is consistent with its role in the separate institutional advisory account. Because all purchase and redemption orders are initiated by the Adviser, separate institutional advisory account clients are not in a position to effect purchase or redemption orders and are, therefore, unable to directly trade in shares of the Fund.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control.
The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur.
In addition, because the Fund may invest in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of the Fund's shares if the prices of the Fund's foreign securities do not reflect their fair value. Although the Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. In accordance with Rule 22c-2 under the Investment Company Act of 1940, as amended, the Fund has entered into information sharing agreements with certain financial intermediaries. Under these agreements, a financial intermediary is obligated to: (1) enforce during the term of the agreement, the Fund's, or in certain instances, the financial intermediary's market-timing policy; (2) furnish the Fund, upon its request, with information regarding customer trading activities in shares of the Fund; and (3) enforce the Fund's, or in certain instances, the financial intermediary's market-timing policy with respect to customers identified by the Fund as having engaged in market timing. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the next-determined NAV.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted
an anti-money laundering compliance program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities. In
this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of the Fund or in cases when the Fund is requested or compelled to do
so by governmental or law enforcement authority. If your account is closed at
the request of governmental or law enforcement authority, you may not receive
proceeds of the redemption if the Fund is required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income, if any, at least monthly and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. Dividends and distributions are generally taxable to you whether you receive them in the form of cash or in additional Fund shares. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and
distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, depending upon your tax situation. Distributions you receive from the Fund may be taxable whether or not you reinvest them. Income distributions, other than distributions of qualified dividend income, and distributions of short-term capital gains are generally taxable at ordinary income tax rates. Distributions of long-term capital gains and distributions of qualified dividend income are generally taxable at the rates applicable to long-term capital gains at a maximum rate of 20% (lower rates apply to individuals in lower tax brackets).
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of Fund shares).
Each sale of Fund shares may be a taxable event. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. The gain or loss on the sale of Fund shares generally will be treated as a short term capital gain or loss if you held the shares for 12 months or less or a long term capital gain or loss if you held the shares for longer.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the first-in, first-out method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the cost basis reporting law applies to them.
Because the Fund may invest in foreign securities it may be subject to foreign withholding taxes with respect to dividends or interest that the Fund receives from sources in foreign countries. The Fund may be able to make an election to pass along a tax credit for foreign income taxes it pays. The Fund will notify you if it makes this decision.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The information is intended to help you understand the Fund's financial performance for the period since the Fund's commencement of operations on December 15, 2011 through the most recent fiscal year end. Some of this information reflects financial information for a single Fund share. The total return in the table represents the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm whose report, along with the Fund's financial statements, is included in the Fund's 2012 Annual Report. You can obtain the Annual Report, which contains more performance information, at no charge by calling 1-800-343-2029.
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LOOMIS SAYLES FULL DISCRETION INSTITUTIONAL SECURITIZED FUND PERIOD ENDED OCTOBER 31,
INSTITUTIONAL CLASS 2012(*)
----------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
Income from Investment Operations:
Net Investment Income(a) $0.92
Net Realized and Unrealized Gain $1.41
-----
Total from Investment Operations $2.33
-----
Dividends from Net Investment Income $(0.72)
----
Distributions from Net Realized Capital Gains $ --
----
Total Distributions $(0.72)
----
Net Asset Value, End of Period $11.61
=====
Total Return(b) 24.02%
=====
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $225,938
Ratio of Expenses to Average Net Assets(c)(d) 0.10%
Ratio of Expenses to Average Net Assets (excluding waiver and
reimbursements)(d) 0.33%
Ratio of Net Investment Income to Average Net Assets(d) 9.52%
Portfolio Turnover Rate 56%
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* The Fund commenced operations on December 15, 2011.
(a) Per share net investment income has been calculated using the average shares outstanding during the period.
(b) Had certain expenses not been waived/reimbursed during the period, total returns would have been lower. Periods less than one year are not annualized.
(c) The investment adviser agreed to waive its fees and/or reimburse a portion of the Fund's expenses during the period. Without this waiver/reimbursement, expenses would have been higher.
(d) Computed on an annual basis for periods less than one year.
Amount designated as "--" is $0.
THE ADVISORS' INNER CIRCLE FUND
LOOMIS SAYLES FULL DISCRETION INSTITUTIONAL
SECURITIZED FUND
INVESTMENT ADVISER
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts 02111-2621
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
MORE INFORMATION ABOUT THE FUND IS AVAILABLE, WITHOUT CHARGE, THROUGH THE FOLLOWING:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Loomis Sayles Full Discretion Institutional Securitized Fund and The Advisors' Inner Circle Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-800-343-2029
BY MAIL: Loomis Sayles Full Discretion Institutional Securitized Fund
c/o Boston Financial Data Services, Inc.
P.O. Box 8530
Boston, Massachusetts 02266-8530
BY INTERNET: The Fund does not have a website, but you can obtain the SAI,
Annual or Semi-Annual Report by mail or telephone.
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
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Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov.
THE ADVISORS' INNER CIRCLE FUND'S INVESTMENT COMPANY ACT REGISTRATION NUMBER IS
811-06400.
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
LSV CONSERVATIVE CORE EQUITY FUND
TICKER SYMBOL: LSVPX
INVESTMENT ADVISER:
LSV ASSET MANAGEMENT
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
FUND SUMMARY ......................................................1
INVESTMENT OBJECTIVE .........................................1
FUND FEES AND EXPENSES .......................................1
PRINCIPAL INVESTMENT STRATEGIES ..............................2
PRINCIPAL RISKS ..............................................2
PERFORMANCE INFORMATION ......................................3
INVESTMENT ADVISER ...........................................3
PORTFOLIO MANAGERS ...........................................4
PURCHASE AND SALE OF FUND SHARES .............................4
TAX INFORMATION ..............................................4
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES .............................................4
MORE INFORMATION ABOUT RISK .......................................5
MORE INFORMATION ABOUT FUND INVESTMENTS ...........................5
INFORMATION ABOUT PORTFOLIO HOLDINGS ..............................5
MORE INFORMATION ABOUT THE INVESTMENT ADVISER .....................6
PORTFOLIO MANAGERS ................................................6
RELATED PERFORMANCE DATA OF THE ADVISER ...........................6
PURCHASING AND SELLING FUND SHARES ................................9
OTHER POLICIES ....................................................13
SHAREHOLDER SERVICING ARRANGEMENTS ................................15
PAYMENTS TO FINANCIAL INTERMEDIARIES ..............................16
DIVIDENDS AND DISTRIBUTIONS .......................................16
TAXES .............................................................17
FINANCIAL HIGHLIGHTS ..............................................18
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND .....................Back Cover
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LSV CONSERVATIVE CORE EQUITY FUND
INVESTMENT OBJECTIVE
The LSV Conservative Core Equity Fund's (the "Fund") investment objective is long-term growth of capital.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ....................................................... 0.38%
Other Expenses ........................................................ 0.25%
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Total Annual Fund Operating Expenses .................................. 0.63%
Less Fee Waivers ...................................................... (0.28)%
-----
Total Annual Fund Operating Expenses After Fee Waivers(1) ............. 0.35%
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(1) LSV Asset Management (the "Adviser") has contractually agreed to waive fees and expenses in order to keep Total Annual Fund Operating Expenses After Fee Waivers (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.35% of the Fund's average daily net assets until February 28, 2014. This Agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$36 $173 $323 $760
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 18% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The LSV Conservative Core Equity Fund invests primarily in equity securities. In selecting securities for the Fund, LSV Asset Management ("LSV" or the "Adviser") focuses on medium to large U.S. companies (i.e., those with market capitalizations of $1 billion or more at the time of purchase) whose securities, in the Adviser's opinion, are out-of-favor (undervalued) in the marketplace. The Adviser believes that these out-of-favor securities will produce superior future returns if their future growth exceeds the market's low expectations. The Fund expects to remain as fully invested in the above securities as practicable, but in any case, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, will be invested in equity securities. This investment policy can be changed by the Fund upon 60 days' prior notice to shareholders.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices.
The Adviser's investment strategy uses a quantitative investment model to make investment decisions for the Fund. The investment model ranks securities based on fundamental measures of value (such as the price-to-earnings ratio) and recent indicators of recovery (such as recent price appreciation). The investment model selects stocks to buy from the higher-ranked stocks and selects stocks to sell from those whose rankings have decreased. The Adviser manages the Fund conservatively relative to its benchmark, the S&P 500 Index. The Fund is expected to experience a low level of portfolio turnover.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund. Although the Fund is managed conservatively relative to its index, the Fund will be subject to the same degree of volatility as its index, which has been high at times over historical periods.
The medium-capitalization companies in which the Fund may invest in may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these medium-sized companies may pose additional risks, including liquidity risk, because these companies may have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, medium-capitalization stocks may be more volatile than those of larger companies. These securities may be traded over the counter or listed on an exchange.
The Fund is also subject to the risk that medium- to large-capitalization equity value securities may underperform other segments of the equity market or the equity market as a whole.
The Fund pursues a "value style" of investing. Value investing focuses on companies whose stock appears undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1 year, 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-888-FUND-LSV.
2008 (36.37)%
2009 25.41%
2010 14.46%
2011 (0.64)%
2012 15.88%
BEST QUARTER WORST QUARTER
17.44% (20.48)%
(06/30/2009) (12/31/2008)
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
LSV CONSERVATIVE CORE EQUITY FUND 1 YEAR 5 YEARS SINCE INCEPTION (5/21/2007) ----------------------------------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 15.88% 1.01% (0.41)% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 15.01% 0.60% (0.80)% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND 11.46% 0.80% (0.41)% SALE OF FUND SHARES S&P 500 INDEX RETURN (REFLECTS NO DEDUCTION FOR 16.00% 1.66% 0.93%(1) FEES, EXPENSES, OR TAXES) |
(1) Index return is shown from 05/31/2007.
INVESTMENT ADVISER
LSV Asset Management
PORTFOLIO MANAGERS
Josef Lakonishok, CEO, CIO, and Partner, has managed the Fund since 2007.
Menno Vermeulen, CFA, Partner, has managed the Fund since 2007.
Puneet Mansharamani, CFA, Partner, has managed the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the Fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objectives. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for total return or capital growth.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Statement of Additional Information ("SAI")(for information on how to obtain a copy of the SAI see the back cover of this prospectus). For liquidity purposes, the Fund may invest a portion of its assets in cash, money market instruments or equity index futures contracts. However, the Fund intends to remain as fully invested as practicable regardless of market conditions. Of course, the Fund cannot guarantee that it will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
Formed in 1994, LSV Asset Management is a quantitative value equity manager providing active asset management for institutional clients through the application of proprietary models. As of December 31, 2012, LSV had approximately $65 billion in assets under management. The Adviser's principal place of business is located at 155 North Wacker Drive, Suite 4600, Chicago, IL 60606.
For its services to the Fund, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.38%, based on the average daily net assets of the Fund. The Adviser has contractually agreed to waive fees and expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.35% of the Fund's average daily net assets until February 28, 2014. For the fiscal year ended October 31, 2012, the Fund paid 0.10% of its average daily net assets in advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals who are jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Josef Lakonishok has served as CEO, CIO, Partner and portfolio manager for LSV since its founding in 1994. He has more than 36 years of investment and research experience.
Menno Vermeulen, CFA, has served as a portfolio manager for LSV since 1995 and a Partner since 1998. He has more than 21 years of investment and research experience.
Puneet Mansharamani, CFA, has served as a Partner and portfolio manager since 2006. He has more than 14 years of investment experience.
RELATED PERFORMANCE DATA OF THE ADVISER
The following tables give the related performance of all the actual, fee-paying separate accounts (each, an "Account"), referred to as a "Composite," managed by the Adviser that have investment objectives, policies and strategies substantially similar to those of the Fund. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. Performance is historical and does not represent the future performance of the Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs from that of registered mutual funds such as the Fund. If the performance was calculated in accordance with SEC standardized performance methodology, the performance results may have been different. The Adviser claims compliance with the Global Investment Performance Standards (GIPS[R]) and has prepared and presented the following in compliance with the GIPS[R] standards. The policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. All returns presented were calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of investment management fees, brokerage commissions, execution costs, sales loads and account fees paid by the Accounts included in the Composite, without taking into account federal or state income taxes. Custodial fees, if any, were not included in the calculations. Securities are valued as of trade-date. Each Account in the Composite was under management by the Adviser for the entire reporting period in which the Account was included. The currency used to express performance in the Composite is stated in U.S. dollars. Performance results are presented both net of fees and gross of fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular Account. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The Accounts that are included in the Composite are not subject to the same type of expenses to which the Fund is subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the Accounts in the Composite were subject to the same fees and expenses or federal securities and tax laws as the Fund's.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Fund. THE PERFORMANCE DATA SHOWN BELOW SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE INFORMATION. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
THE FOLLOWING DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND.
PERFORMANCE INFORMATION FOR THE ADVISER'S SUBSTANTIALLY SIMILAR COMPOSITE(1)
(July 1, 2001 through December 31, 2012)
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TOTAL
TOTAL PRE- ASSETS AT
TOTAL PRE- TAX RETURN S&P NUMBER END OF
TAX RETURN (GROSS OF 500 OF PERIOD
YEAR (NET OF FEES) FEES) INDEX(2) PORTFOLIOS (IN MILLIONS)
------------------------------------------------------------------------------------
2012 15.91% 16.25% 16.00% Five $361
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2011 0.36% 0.66% 2.12% Five $431
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2010 13.99% 14.32% 15.05% Seven $536
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2009 26.60% 26.98% 26.46% Seven $408
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2008 -36.88% -36.68% -36.99% Eight $328
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2007 1.36% 1.66% 5.51% Eight $508
------------------------------------------------------------------------------------
Five or
2006 19.91% 20.26% 15.81% fewer $58
------------------------------------------------------------------------------------
Five or
2005 6.72% 7.04% 4.91% fewer $12
------------------------------------------------------------------------------------
Five or
2004 11.30% 11.63% 10.86% fewer $11
------------------------------------------------------------------------------------
Five or
2003 29.19% 29.57% 28.68% fewer $10
------------------------------------------------------------------------------------
Five or
2002 -21.02% -20.78% -22.11% fewer $8
------------------------------------------------------------------------------------
Five or
2001(3) -4.48% -4.34% -5.56% fewer $10
------------------------------------------------------------------------------------
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AVERAGE ANNUAL TOTAL RETURNS (AS OF 12/31/12)
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ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
TIME PERIOD NET OF FEES GROSS OF FEES S&P 500 INDEX(2)
--------------------------------------------------------------------------------
1 Year 15.91% 16.25% 16.00%
--------------------------------------------------------------------------------
3 Years 9.86% 10.19% 10.87%
--------------------------------------------------------------------------------
5 Years 1.17% 1.47% 1.66%
--------------------------------------------------------------------------------
10 Years 7.05% 7.37% 7.10%
--------------------------------------------------------------------------------
Since Inception(3) 3.53% 3.84% 3.35%
--------------------------------------------------------------------------------
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(1) Returns include the reinvestment of all income. Net results are calculated using the highest non- performance-based management fee in the Adviser's standard fee schedule, which is applicable to the majority of the Accounts included in the Composite. Returns are based on fully discretionary accounts under management, including, for certain time periods, those accounts no longer with the Adviser.
(2) The S&P 500 Index is an unmanaged index containing common stocks of 500 industrial, transportation, utility, and financial companies, regarded as generally representative of the U.S. stock market. The Index return reflects the reinvestment of income dividends and capital gain distributions, if any, but does not reflect fees, taxes, brokerage commissions, or other expenses of investing.
(3) Inception date of the Composite is July 1, 2001.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") shares of the Fund.
The Fund is for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-888-FUND-LSV.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
You may also buy shares through accounts with brokers and other institutions that are authorized to place trades in Fund shares for their customers. If you invest through an authorized institution, you will have to follow its procedures, which may be different from the procedures for investing directly. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "LSV Conservative Core Equity Fund."
REGULAR MAIL ADDRESS
LSV Conservative Core Equity Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
LSV Conservative Core Equity Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-888-FUND-LSV (1-888-386-3578) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
LSV Conservative Core Equity Fund
DDA Account #9870523965
Ref: Fund name/account name/account number
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $25. To cancel or change a plan, write to the Fund at: LSV Conservative Core Equity Fund, P.O. Box 219009, Kansas City, Missouri 64121-9009, (Express Mail Address: LSV Conservative Core Equity Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The price per share will be the NAV next determined after the Fund receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
MINIMUM PURCHASES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments. The Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase shares, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
LSV Conservative Core Equity Fund LSVPX 0075W0668 1501
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
If you would like to have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-887-FUND-LSV for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be sent to your bank account via wire (may be subject to a $10 fee) or ACH, or sent to you by check. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $100,000, you may transfer as little as $100 per month from your account to another financial institution. To participate in this service you must complete the appropriate sections of the account application and mail it to the Fund.
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in
kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
Because the Fund may invest in mid-cap securities that often may trade in lower volumes, frequent trading by certain shareholders may dilute the value of Fund shares held by other shareholders. In addition, because frequent trading may cause the Fund to attempt to maintain higher cash positions, changes to the Fund's holdings in response to frequent trading may impact the market prices of such relatively thinly traded securities held by the Fund.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than four (4) "round trips" into or out of the Fund per calendar year. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Adviser compensates financial intermediaries for providing a variety of services to shareholders. Financial intermediaries may include unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries are paid for providing these services.
The Adviser pays financial intermediaries a fee that is based on the number of the intermediary's accounts that hold shares of the Fund. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees; they are paid by the Adviser, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser makes payments to certain unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (E.G., individual or group annuity) programs. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year based on the number of accounts holding shares of the Fund and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains of 20%.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short--term capital gain or loss if you held the shares for 12 months or less or a long--term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013 provides that U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the cost basis reporting law applies to
them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-888-FUND-LSV.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FOR THE YEARS ENDED OCTOBER 31,
REALIZED
AND
NET ASSET UNREALIZED DIVIDENDS
VALUE NET GAINS FROM NET TOTAL NET ASSET
BEGINNING INVESTMENT (LOSSES) ON TOTAL FROM INVESTMENT DIVIDENDS AND VALUE END TOTAL
OF YEAR INCOME(2) INVESTMENTS OPERATIONS INCOME DISTRIBUTIONS OF YEAR RETURN(1)
----------------------------------------------------------------------------------------------------------
LSV CONSERVATIVE CORE EQUITY FUND
2012 $7.72 $0.17 $0.98 $1.15 $(0.15) $(0.15) $8.72 15.16%
2011 7.46 0.22 0.14 0.36 (0.10) (0.10) 7.72 4.74
2010 6.61 0.14 0.85 0.99 (0.14) (0.14) 7.46 15.06
2009 6.09 0.15 0.58 0.73 (0.21) (0.21) 6.61 12.58
2008 9.84 0.20 (3.87) (3.67) (0.08) (0.08) 6.09 (37.56)
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RATIO OF RATIO OF
RATIO OF EXPENSES NET
NET ASSETS EXPENSES TO AVERAGE INVESTMENT
END OF TO NET ASSETS INCOME TO PORTFOLIO
YEAR AVERAGE (EXCLUDING AVERAGE TURNOVER
(000) NET ASSETS WAIVERS) NET ASSETS RATE
------------------------------------------------------------------------------
2012 $15,086 0.35% 0.63% 2.10% 18%
2011 52,428 0.35 0.58 1.76 23
2010 30,213 0.35 0.68 1.98 29
2009 27,454 0.35 0.73 2.53 44
2008 28,568 0.35 0.64 2.31 35
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(1) Total Return shown does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total Return would have been lower had the Adviser not waived a portion of its fee.
(2) Per share calculations were performed using average shares for the period.
THE ADVISORS' INNER CIRCLE FUND
LSV CONSERVATIVE CORE EQUITY FUND
INVESTMENT ADVISER
LSV Asset Management
155 North Wacker Drive, Suite 4600
Chicago, Illinois 60606
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Trust and the LSV Conservative Core Equity Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-888-FUND-LSV (1-888-386-3578)
BY MAIL: LSV Conservative Core Equity Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.lsvasset.com
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FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
LSV-PS-003-0700
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
LSV CONSERVATIVE VALUE EQUITY FUND
TICKER SYMBOL: LSVVX
INVESTMENT ADVISER:
LSV ASSET MANAGEMENT
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
FUND SUMMARY ......................................................1
INVESTMENT OBJECTIVE .........................................1
FUND FEES AND EXPENSES .......................................1
PRINCIPAL INVESTMENT STRATEGIES ..............................2
PRINCIPAL RISKS ..............................................2
PERFORMANCE INFORMATION ......................................3
INVESTMENT ADVISER ...........................................4
PORTFOLIO MANAGERS ...........................................4
PURCHASE AND SALE OF FUND SHARES .............................4
TAX INFORMATION ..............................................4
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES .............................................4
MORE INFORMATION ABOUT RISK .......................................5
MORE INFORMATION ABOUT FUND INVESTMENTS ...........................5
INFORMATION ABOUT PORTFOLIO HOLDINGS ..............................5
MORE INFORMATION ABOUT THE INVESTMENT ADVISER .....................6
PORTFOLIO MANAGERS ................................................6
RELATED PERFORMANCE DATA OF THE ADVISER ...........................6
PURCHASING AND SELLING FUND SHARES ................................8
OTHER POLICIES ....................................................13
SHAREHOLDER SERVICING ARRANGEMENTS ................................15
PAYMENTS TO FINANCIAL INTERMEDIARIES ..............................16
DIVIDENDS AND DISTRIBUTIONS .......................................16
TAXES .............................................................16
FINANCIAL HIGHLIGHTS ..............................................18
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND .....................Back Cover
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LSV CONSERVATIVE VALUE EQUITY FUND
INVESTMENT OBJECTIVE
The LSV Conservative Value Equity Fund's (the "Fund") investment objective is long-term growth of capital.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees .........................................................0.38%
Other Expenses ..........................................................0.15%
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Total Annual Fund Operating Expenses ....................................0.53%
Less Fee Waivers .......................................................(0.18)%
-----
Total Annual Fund Operating Expenses After Fee Waivers(1) ...............0.35%
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(1) LSV Asset Management (the "Adviser") has contractually agreed to waive fees and expenses in order to keep Total Annual Fund Operating Expenses After Fee Waivers (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.35% of the Fund's average daily net assets until February 28, 2014. This Agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$36 $152 $278 $648
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 12% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The LSV Conservative Value Equity Fund invests primarily in equity securities. In selecting securities for the Fund, LSV Asset Management ("LSV" or the "Adviser") focuses on medium to large U.S. companies (i.e., those with market capitalizations of $1 billion or more at the time of purchase) whose securities, in the Adviser's opinion, are out-of-favor (undervalued) in the marketplace. The Adviser believes that these out-of-favor securities will produce superior future returns if their future growth exceeds the market's low expectations. The Fund expects to remain as fully invested in the above securities as practicable, but in any case, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, will be invested in equity securities. This investment policy can be changed by the Fund upon 60 days' prior notice to shareholders.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices.
The Adviser's investment strategy uses a quantitative investment model to make investment decisions for the Fund. The investment model ranks securities based on fundamental measures of value (such as the price-to-earnings ratio) and recent indicators of recovery (such as recent price appreciation). The investment model selects stocks to buy from the higher-ranked stocks and selects stocks to sell from those whose rankings have decreased. The Adviser manages the Fund conservatively relative to its benchmark, the Russell 1000 Value Index. The Fund is expected to experience a low level of portfolio turnover.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund. Although the Fund is managed conservatively relative to its index, the Fund will be subject to the same degree of volatility as its index, which has been high at times over historical periods.
The medium-capitalization companies in which the Fund may invest in may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these medium-sized companies may pose additional risks, including liquidity risk, because these companies may have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, medium-capitalization stocks may be more volatile than those of larger companies. These securities may be traded over the counter or listed on an exchange.
The Fund is also subject to the risk that medium- to large-capitalization equity value securities may underperform other segments of the equity market or the equity market as a whole.
The Fund pursues a "value style" of investing. Value investing focuses on companies whose stock appears undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1 year, 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-888-FUND-LSV.
2008 (36.79)%
2009 19.20%
2010 13.68%
2011 (1.48)%
2012 16.97%
BEST QUARTER WORST QUARTER
17.50% (20.84)%
(06/30/2009) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Returns after taxes on distributions and sale of Fund shares may be higher than before tax returns when a net capital loss occurs upon the redemption of Fund shares.
LSV CONSERVATIVE VALUE EQUITY FUND 1 YEAR 5 YEARS SINCE INCEPTION (3/30/2007) -------------------------------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 16.97% (0.26)% (0.98)% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 16.50% (0.64)% (1.33)% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND 11.64% (0.28)% (0.88)% SALE OF FUND SHARES RUSSELL 1000 VALUE INDEX RETURN (REFLECTS NO 17.51% 0.59% 0.27%(1) DEDUCTION FOR FEES, EXPENSES, OR TAXES) |
(1) Index return is shown from 03/31/2007.
INVESTMENT ADVISER
LSV Asset Management
PORTFOLIO MANAGERS
Josef Lakonishok, CEO, CIO, and Partner, has managed the Fund since 2007.
Menno Vermeulen, CFA, Partner, has managed the Fund since 2007.
Puneet Mansharamani, CFA, Partner, has managed the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the Fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objectives. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for total return or capital growth.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI, see the back cover of this prospectus). For liquidity purposes, the Fund may invest a portion of its assets in cash, money market instruments or equity index futures contracts. However, the Fund intends to remain as fully invested as practicable regardless of market conditions. Of course, the Fund cannot guarantee that it will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
Formed in 1994, LSV Asset Management is a quantitative value equity manager providing active asset management for institutional clients through the application of proprietary models. As of December 31, 2012, LSV had approximately $65 billion in assets under management. The Adviser's principal place of business is located at 155 North Wacker Drive, Suite 4600, Chicago, IL 60606.
For its services to the Fund, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.38%, based on the average daily net assets of the Fund. The Adviser has contractually agreed to waive fees and expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.35% of the Fund's average daily net assets until February 28, 2014. For the fiscal year ended October 31, 2012, the Fund paid 0.22% of its average daily net assets, in advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 through April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals each of whom is jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Josef Lakonishok has served as CEO, CIO, Partner and portfolio manager for LSV since its founding in 1994. He has more than 36 years of investment and research experience.
Menno Vermeulen, CFA, has served as a portfolio manager for LSV since 1995 and a Partner since 1998. He has more than 21 years of investment and research experience.
Puneet Mansharamani, CFA, has served as a Partner and portfolio manager since 2006. He has more than 14 years of investment experience.
RELATED PERFORMANCE DATA OF THE ADVISER
The following tables give the related performance of all the actual, fee-paying separate accounts (each, an "Account"), referred to as a "Composite," managed by the Adviser that have investment objectives, policies and strategies substantially similar to those of the Fund. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. Performance is historical and does not represent the future performance of the Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs from that of registered mutual funds such as the Fund. If the performance was calculated in accordance with SEC standardized performance methodology, the performance results may have been different. The Adviser claims compliance with the Global Investment Performance Standards (GIPS[R]) and has prepared and presented the following in compliance with the GIPS[R] standards. The policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. All returns presented were calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of investment management fees, brokerage commissions, execution costs, sales loads and account fees paid by the Accounts included in the Composite, without taking into account federal or state income taxes. Custodial fees, if any, were not included in the calculations. Securities are valued as of trade-date. Each Account in the Composite was under management by the Adviser for the entire reporting period in which the Account was included. The currency used to express performance in the Composite is stated in U.S. dollars. Performance results are presented both net of fees and gross of fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular Account. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The Accounts that are included in the Composite are not subject to the same type of expenses to which the Fund is subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the Accounts in the Composite were subject to the same fees and expenses or federal securities and tax laws as the Fund's.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Fund. THE PERFORMANCE DATA SHOWN BELOW SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE INFORMATION. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
THE FOLLOWING DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND.
PERFORMANCE INFORMATION FOR THE ADVISER'S SUBSTANTIALLY SIMILAR COMPOSITE(1)
(July 1, 2001 through December 31, 2012)
--------------------------------------------------------------------------------
TOTAL
TOTAL PRE- RUSSELL ASSETS AT
TOTAL PRE- TAX RETURN 1000 NUMBER END OF
TAX RETURN (GROSS OF VALUE OF PERIOD
YEAR (NET OF FEES) FEES) INDEX(2) PORTFOLIOS ($ MILLIONS)
--------------------------------------------------------------------------------
2012 16.75% 17.09% 17.51% Two $ 176
--------------------------------------------------------------------------------
2011 -0.66% -0.36% 0.39% Six $1,197
--------------------------------------------------------------------------------
2010 14.28% 14.62% 15.51% Nine $1,591
--------------------------------------------------------------------------------
2009 20.00% 20.35% 19.69% Nine $1,483
--------------------------------------------------------------------------------
2008 -36.77% -36.57% -0.12% Nine $1,151
--------------------------------------------------------------------------------
2007 -1.93% -1.63% -0.17% Eleven $2,274
--------------------------------------------------------------------------------
2006 22.96% 23.32% 22.21% Six $2,029
--------------------------------------------------------------------------------
Five or
2005 8.91% 9.24% 7.04% fewer $1,837
--------------------------------------------------------------------------------
Five or
2004 16.87% 17.22% 16.49% fewer $1,551
--------------------------------------------------------------------------------
Five or
2003 29.88% 30.26% 30.03% fewer $1,567
--------------------------------------------------------------------------------
Five or
2002 -11.14% -10.87% -15.52% fewer $9
--------------------------------------------------------------------------------
Five or
2001(3) -2.39% -2.24% -4.39% fewer $10
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF 12/31/12)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
RUSSELL 1000 VALUE
TIME PERIOD NET OF FEES GROSS OF FEES INDEX(2)
--------------------------------------------------------------------------------
1 Year 16.75% 17.09% 17.51%
--------------------------------------------------------------------------------
3 Years 9.85% 10.17% 10.86%
--------------------------------------------------------------------------------
5 Years 0.11% 0.41% 0.59%
--------------------------------------------------------------------------------
10 Years 7.20% 7.52% 7.37%
--------------------------------------------------------------------------------
Since Inception(3) 4.93% 5.24% 4.43%
--------------------------------------------------------------------------------
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(1) Returns include the reinvestment of all income. Net results are calculated using the highest non- performance-based management fee in the Adviser's standard fee schedule, which is applicable to the majority of the Accounts included in the Composite. Returns are based on fully discretionary accounts under management, including, for certain time periods, those accounts no longer with the Adviser.
(2) The Russell 1000 Value Index is a widely-recognized, capitalization-weighted (companies with larger market capitalizations have more influence than those with smaller market capitalizations) index of U.S. companies with lower expected growth values and price-to-book ratios.
(3) Inception date of the Composite is July 1, 2001.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") shares of the Fund.
The Fund is for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-888-FUND-LSV.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
You may also buy shares through accounts with brokers and other institutions that are authorized to place trades in Fund shares for their customers. If you invest through an authorized institution, you will have to follow its procedures, which may be different from the procedures for investing directly. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "LSV Conservative Value Equity Fund."
REGULAR MAIL ADDRESS
LSV Conservative Value Equity Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
LSV Conservative Value Equity Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-888-FUND-LSV (1-888-386-3578) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
LSV Conservative Value Equity Fund
DDA Account #9870523965
Ref: Fund name/account name/account number
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $25. To cancel or change a plan, write to the Fund at: LSV Conservative Value Equity Fund, P.O. Box 219009, Kansas City, Missouri 64121-9009, (Express Mail Address: LSV Conservative Value Equity Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The price per share will be the NAV next determined after the Fund receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
MINIMUM PURCHASES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments. The Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase shares, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
LSV Conservative Value Equity Fund LSVVX 0075W0676 1502
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
If you would like to have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-888-FUND-LSV for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be sent to your bank account via wire (may be subject to a $10 fee) or ACH, or sent to you by check. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $100,000, you may transfer as little as $100 per month from your account to another financial institution. To participate in this service you must complete the appropriate sections of the account application and mail it to the Fund.
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
Because the Fund may invest in mid-cap securities that often may trade in lower volumes, frequent trading by certain shareholders may dilute the value of Fund shares held by other shareholders. In addition, because frequent trading may cause the Fund to attempt to maintain higher cash positions, changes to the Fund's holdings in response to frequent trading may impact the market prices of such relatively thinly traded securities held by the Fund.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than four (4) "round trips" into or out of the Fund per calendar year. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an
amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Adviser compensates financial intermediaries for providing a variety of services to shareholders. Financial intermediaries may include unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries are paid for providing these services.
The Adviser pays financial intermediaries a fee that is based on the number of the intermediary's accounts that hold shares of the Fund. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and
other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees; they are paid by the Adviser, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser makes payments to certain unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year based on the number of accounts holding shares of the Fund and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in
additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains of 20%.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short--term capital gain or loss if you held the shares for 12 months or less or a long--term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013 provides that U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the cost basis reporting law applies to
them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-888-FUND-LSV.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FOR THE YEARS ENDED OCTOBER 31,
REALIZED
AND NET
NET ASSET UNREALIZED DIVIDENDS DISTRIBUTIONS TOTAL ASSET
VALUE NET GAINS FROM NET FROM DIVIDENDS VALUE
BEGINNING INVESTMENT (LOSSES) ON TOTAL FROM INVESTMENT REALIZED AND END TOTAL
OF YEAR INCOME(2) INVESTMENTS OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN(1)
---------------------------------------------------------------------------------------------------------------------------
LSV CONSERVATIVE VALUE EQUITY FUND
2012 $7.30 $0.18 $0.95 $1.13 $(0.17) $ -- $(0.17) $8.26 15.80%
2011 7.20 0.10 0.15 0.25 (0.15) -- (0.15) 7.30 3.44
2010 6.47 0.14 0.74 0.88 (0.15) -- (0.15) 7.20 13.76
2009 6.25 0.17 0.26 0.43 (0.21) -- (0.21) 6.47 7.32
2008 10.27 0.26 (4.19) (3.93) (0.08) (0.01) (0.09) 6.25 (38.54)
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RATIO OF RATIO OF
NET EXPENSES NET
ASSETS RATIO OF TO AVERAGE INVESTMENT
END OF EXPENSES NET ASSETS INCOME TO PORTFOLIO
YEAR TO AVERAGE (EXCLUDING AVERAGE TURNOVER
(000) NET ASSETS WAIVERS) NET ASSETS RATE
-------------------------------------------------------------------------
LSV CONSERVATIVE VALUE EQUITY FUND
2012 $124,774 0.35% 0.53% 2.34% 12%
2011 166,944 0.35 0.50 2.00 16
2010 198,616 0.35 0.49 2.05 31
2009 172,255 0.35 0.52 2.91 37
2008 164,476 0.35 0.50 2.89 21
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(1) Total Return shown does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total Return would have been lower had the Adviser not waived a portion of its fee.
(2) Per share calculations were performed using average shares for the period.
Amounts designated as "--" are $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
LSV CONSERVATIVE VALUE EQUITY FUND
INVESTMENT ADVISER
LSV Asset Management
155 North Wacker Drive, Suite 4600
Chicago, Illinois 60606
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Trust and the LSV Conservative Value Equity Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-888-FUND-LSV (1-888-386-3578)
BY MAIL: LSV Conservative Value Equity Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.lsvasset.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
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as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
LSV-PS-002-0700
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
LSV SMALL CAP VALUE FUND
TICKER SYMBOL: LSVQX
INVESTMENT ADVISER:
LSV ASSET MANAGEMENT
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
FUND SUMMARY ........................................................ 1
INVESTMENT OBJECTIVE ........................................... 1
FUND FEES AND EXPENSES ......................................... 1
PRINCIPAL INVESTMENT STRATEGIES ................................ 2
PRINCIPAL RISKS ................................................ 2
PERFORMANCE INFORMATION ........................................ 3
INVESTMENT ADVISER ............................................. 3
PORTFOLIO MANAGERS ............................................. 3
PURCHASE AND SALE OF FUND SHARES ............................... 3
TAX INFORMATION ................................................ 4
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES ............................................... 4
MORE INFORMATION ABOUT RISK ......................................... 5
MORE INFORMATION ABOUT FUND INVESTMENTS ............................. 5
INFORMATION ABOUT PORTFOLIO HOLDINGS ................................ 5
MORE INFORMATION ABOUT THE INVESTMENT ADVISER ....................... 6
PORTFOLIO MANAGERS .................................................. 6
RELATED PERFORMANCE DATA OF THE ADVISER ............................. 6
PURCHASING AND SELLING FUND SHARES .................................. 8
OTHER POLICIES ......................................................13
SHAREHOLDER SERVICING ARRANGEMENTS ..................................15
PAYMENTS TO FINANCIAL INTERMEDIARIES ................................16
DIVIDENDS AND DISTRIBUTIONS .........................................16
TAXES ...............................................................16
FINANCIAL HIGHLIGHTS ................................................18
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND .......................Back Cover
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LSV SMALL CAP VALUE FUND
INVESTMENT OBJECTIVE
The LSV Small Cap Value Fund's (the "Fund") investment objective is long-term growth of capital.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ....................................................... 0.70%
Other Expenses(1) ..................................................... 0.52%
-----
Total Annual Fund Operating Expenses .................................. 1.22%
Less Fee Waivers ...................................................... (0.37)%
-----
Total Annual Fund Operating Expenses After Fee Waivers(2) ............. 0.85%
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(1) Other Expenses are based on estimated amounts for the current fiscal year.
(2) LSV Asset Management (the "Adviser") has contractually agreed to waive fees and expenses in order to keep Total Annual Fund Operating Expenses After Fee Waivers (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.85% of the Fund's average daily net assets until February 28, 2014. This Agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS
$87 $351
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the LSV Small Cap Value Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small-capitalization companies. This investment policy can be changed by the Fund upon 60 days' prior notice to shareholders. For purposes of this policy, a small-capitalization company is a company with a market capitalization of less than $2.5 billion, or the highest market capitalization in the Russell 2000[R] Value Index, whichever is greater, at the time of initial purchase. The Fund may also invest, to a lesser extent, in equity securities of companies with larger market capitalizations.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices.
In selecting securities for the Fund, LSV Asset Management ("LSV" or the "Adviser") focuses on U.S. companies whose securities, in the Adviser's opinion, are out-of-favor (undervalued) in the marketplace at the time of purchase, but show signs of recent improvement. The Adviser believes that these out-of-favor securities will produce superior future returns if their future growth exceeds the market's low expectations.
The Adviser uses a quantitative investment model to make investment decisions for the Fund. The investment model ranks securities based on fundamental measures of value (such as the price-to-earnings ratio) and indicators of near-term appreciation potential (such as recent price appreciation). The investment model selects stocks to buy from the higher-ranked stocks and selects stocks to sell from those whose rankings have decreased, subject to overall risk controls.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
Small-capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, small-sized companies may pose additional risk, including liquidity risks, because these companies tend to have limited operating histories, product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small-capitalization stocks may be more
volatile than those of larger companies. These securities may be traded over the counter or listed on an exchange.
The Fund is also subject to the risk that small-capitalization equity securities may underperform other segments of the equity market or the equity market as a whole.
The Fund pursues a "value style" of investing. Value investing focuses on companies whose stock appears undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
PERFORMANCE INFORMATION
The Fund is new, and therefore has no performance history. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
LSV Asset Management
PORTFOLIO MANAGERS
Josef Lakonishok, CEO, CIO, and Partner, has managed the Fund since its inception.
Menno Vermeulen, CFA, Partner, has managed the Fund since its inception.
Puneet Mansharamani, CFA, Partner, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the Fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objectives. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for total return or capital growth.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI, see the back cover of this prospectus). For liquidity purposes, the Fund may invest a portion of its assets in cash, money market instruments or equity index futures contracts. However, the Fund intends to remain as fully invested as practicable regardless of market conditions. Of course, the Fund cannot guarantee that it will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Advisors' Inner Circle Fund's Board of Trustees (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
Formed in 1994, LSV Asset Management is a quantitative value equity manager providing active asset management for institutional clients through the application of proprietary models. As of December 31, 2012, LSV had approximately $65 billion in assets under management. The Adviser's principal place of business is located at 155 North Wacker Drive, Suite 4600, Chicago, IL 60606.
For its services to the Fund, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.70%, based on the average daily net assets of the Fund. The Adviser has contractually agreed to waive fees and expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.85% of the Fund's average daily net assets until February 28, 2014.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals each of whom is jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Josef Lakonishok has served as CEO, CIO, Partner and portfolio manager for LSV since its founding in 1994. He has more than 36 years of investment and research experience.
Menno Vermeulen, CFA, has served as a portfolio manager for LSV since 1995 and a Partner since 1998. He has more than 21 years of investment and research experience.
Puneet Mansharamani, CFA, has served as a Partner and portfolio manager since 2006. He has more than 13 years of investment experience.
RELATED PERFORMANCE DATA OF THE ADVISER
The following tables give the related performance of all the actual, fee-paying separate accounts (each, an "Account"), referred to as a "Composite," managed by the Adviser that have investment objectives, policies and strategies substantially similar to those of the Fund. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. Performance is historical and does not represent the future performance of the Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs from that of registered mutual funds such as the Fund. If the performance was calculated in accordance with SEC standardized performance methodology, the performance results may have been different. The Adviser claims compliance with the Global Investment Performance Standards (GIPS[R]) and has prepared and presented the following in compliance with the GIPS[R] standards. The policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. All returns presented were calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of investment management fees, brokerage commissions, execution costs, sales loads and account fees paid by the Accounts included in the Composite, without taking into account federal or state income taxes. Custodial fees, if any, were not included in the calculations. Securities are valued as of trade-date. Each Account in the Composite was under management by the Adviser for the entire reporting period in which the Account was included. The currency used to express performance in the Composite is stated in U.S. dollars. Performance results are presented both net of fees and gross of fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular Account. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The Accounts that are included in the Composite are not subject to the same type of expenses to which the Fund is subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the Accounts in the Composite were subject to the same fees and expenses or federal securities and tax laws as the Fund.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Fund. THE PERFORMANCE DATA SHOWN BELOW SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE INFORMATION. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
THE FOLLOWING DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND
PERFORMANCE INFORMATION FOR THE ADVISER'S SUBSTANTIALLY SIMILAR COMPOSITE(1)
(February 1, 1997 through December 31, 2012)
--------------------------------------------------------------------------------
TOTAL
TOTAL PRE- RUSSELL ASSETS AT
TOTAL PRE- TAX RETURN 2000 NUMBER END OF
TAX RETURN (GROSS OF VALUE OF PERIOD
YEAR (NET OF FEES) FEES) INDEX(2) PORTFOLIOS ($ MILLIONS)
--------------------------------------------------------------------------------
2012 15.96% 16.82% 18.05% 34 $1,730
--------------------------------------------------------------------------------
2011 -2.55% -1.81% -5.50% 34 $1,421
--------------------------------------------------------------------------------
2010 26.56% 27.49% 24.51% 32 $1,370
--------------------------------------------------------------------------------
2009 32.85% 33.83% 20.55% 31 $1,233
--------------------------------------------------------------------------------
2008 -32.04% -31.51% -28.93% 31 $1,015
--------------------------------------------------------------------------------
2007 -13.59% -12.93% -9.77% 31 $1,967
--------------------------------------------------------------------------------
2006 18.80% 19.68% 23.48% 32 $2,639
--------------------------------------------------------------------------------
2005 5.27% 6.06% 4.70% 35 $2,595
--------------------------------------------------------------------------------
2004 21.28% 22.18% 22.25% 34 $2,528
--------------------------------------------------------------------------------
2003 47.40% 48.47% 46.02% 34 $2,371
--------------------------------------------------------------------------------
2002 -1.45% -0.71% -11.42% 31 $1,548
--------------------------------------------------------------------------------
2001 19.12% 20.00% 14.02% 27 $1,476
--------------------------------------------------------------------------------
2000 26.10% 26.94% 22.82% 26 $967
--------------------------------------------------------------------------------
1999 -5.93% -5.21% -1.49% 26 $898
--------------------------------------------------------------------------------
1998 -0.78% -0.03% -6.45% 25 $859
--------------------------------------------------------------------------------
1997(3) 36.94% 37.86% 29.79% 8 $225
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL PRE-TAX RETURNS (AS OF 12/31/12)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
RUSSELL 2000 VALUE
TIME PERIOD NET OF FEES GROSS OF FEE INDEX(2)
--------------------------------------------------------------------------------
1 Year 15.96% 16.82% 18.05%
--------------------------------------------------------------------------------
3 Years 12.67% 13.51% 11.58%
--------------------------------------------------------------------------------
5 Years 5.24% 6.03% 3.54%
--------------------------------------------------------------------------------
10 Years 9.57% 10.39% 9.50%
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Since Inception(3) 10.24% 11.06% 8.52%
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(1) Returns include the reinvestment of all income. Net results are calculated using the highest non- performance-based management fee in the Adviser's standard fee schedule, which is applicable to the majority of the Accounts included in the Composite. Returns are based on fully discretionary accounts under management, including, for certain time periods, those accounts no longer with the Adviser.
(2) The Russell 2000 Value Index is a widely-recognized, capitalization-weighted (companies with larger market capitalizations have more influence than those with smaller market capitalizations) index of small-cap U.S. companies with lower expected growth values and price-to-book ratios.
(3) Inception date of the Composite is February 1, 1997.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") shares of the Fund.
The Fund is for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-888-FUND-LSV.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
You may also buy shares through accounts with brokers and other institutions that are authorized to place trades in Fund shares for their customers. If you invest through an authorized institution, you will have to follow its procedures, which may be different from the procedures for investing directly. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "LSV Small Cap Value Fund."
REGULAR MAIL ADDRESS
LSV Small Cap Value Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
LSV Small Cap Value Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-888-FUND-LSV (1-888-386-3578) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
LSV Small Cap Value Fund
DDA Account #9870523965
Ref: Fund name/account name/account number
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $25. To cancel or change a plan, write to the Fund at: LSV Small Cap Value Fund, P.O. Box 219009, Kansas City, Missouri 64121-9009, (Express Mail Address: LSV Small Cap Value Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The price per share will be the NAV next determined after the Fund receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in
the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
MINIMUM PURCHASES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. The Fund may accept investments of smaller amounts in its sole discretion. There is no minimum for subsequent investments.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase shares, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
LSV Small Cap Value Fund LSVQX 00769G535 1504
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
If you would like to have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature
guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-888-FUND-LSV for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be sent to your bank account via wire (may be subject to a $10 fee) or ACH, or sent to you by check. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $100,000, you may transfer as little as $100 per month from your account to another financial institution. To participate in this service you must complete the appropriate sections of the account application and mail it to the Fund.
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
Because the Fund invests in small-cap securities that often may trade in lower volumes, frequent trading by certain shareholders may dilute the value of Fund shares held by other shareholders. In addition, because frequent trading may cause the Fund to attempt to maintain higher cash positions, changes to the Fund's holdings in response to frequent trading may impact the market prices of such relatively thinly traded securities held by the Fund.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than four (4) "round trips" into or out of the Fund per calendar year. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within
a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Adviser compensates financial intermediaries for providing a variety of services to shareholders. Financial intermediaries may include unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries are paid for providing these services.
The Adviser pays financial intermediaries a fee that is based on the number of the intermediary's accounts that hold shares of the Fund. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees; they are paid by the Adviser, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser makes payments to certain unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year based on the number of accounts holding shares of the Fund and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains of 20%.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the cost basis reporting law applies to
them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
Because the Fund has not commenced operations as of the date of this prospectus, financial highlights are not available.
THE ADVISORS' INNER CIRCLE FUND
LSV SMALL CAP VALUE FUND
INVESTMENT ADVISER
LSV Asset Management
155 North Wacker Drive, Suite 4600
Chicago, Illinois 60606
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Advisors' Inner Circle Fund and the LSV Small Cap Value Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-888-FUND-LSV (1-888-386-3578)
BY MAIL: LSV Small Cap Value Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.lsvasset.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
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as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
LSV-PS-006-0100
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
LSV VALUE EQUITY FUND
TICKER SYMBOL: LSVEX
INVESTMENT ADVISER:
LSV ASSET MANAGEMENT
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
FUND SUMMARY .........................................................1
INVESTMENT OBJECTIVE ............................................1
FUND FEES AND EXPENSES ..........................................1
PRINCIPAL INVESTMENT STRATEGIES .................................1
PRINCIPAL RISKS .................................................2
PERFORMANCE INFORMATION .........................................3
INVESTMENT ADVISER ..............................................3
PORTFOLIO MANAGERS ..............................................4
PURCHASE AND SALE OF FUND SHARES ................................4
TAX INFORMATION .................................................4
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES ................................................4
MORE INFORMATION ABOUT RISK ..........................................5
MORE INFORMATION ABOUT FUND INVESTMENTS ..............................5
INFORMATION ABOUT PORTFOLIO HOLDINGS .................................5
MORE INFORMATION ABOUT THE INVESTMENT ADVISER ........................6
PORTFOLIO MANAGERS ...................................................6
PURCHASING AND SELLING FUND SHARES ...................................6
OTHER POLICIES .......................................................11
SHAREHOLDER SERVICING ARRANGEMENTS ...................................13
PAYMENTS TO FINANCIAL INTERMEDIARIES .................................14
DIVIDENDS AND DISTRIBUTIONS ..........................................14
TAXES ................................................................14
FINANCIAL HIGHLIGHTS .................................................16
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ........................Back Cover
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LSV VALUE EQUITY FUND
INVESTMENT OBJECTIVE
The LSV Value Equity Fund's (the "Fund") investment objective is long-term growth of capital.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ........................................................0.55%
Other Expenses .........................................................0.11%
----
Total Annual Fund Operating Expenses ...................................0.66%
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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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$67 $211 $368 $822
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 10% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The LSV Value Equity Fund invests primarily in equity securities. In selecting securities for the Fund, LSV Asset Management ("LSV" or the "Adviser") focuses on medium to large U.S. companies (i.e., those with market capitalizations of $1 billion or more at the time of purchase) whose securities, in the Adviser's opinion, are out-of-favor (undervalued) in the marketplace at the time of purchase and have potential for near-term appreciation. The Fund may also invest, to a lesser extent, in common stocks of such undervalued companies with small market
capitalizations (between $500 million and $1 billion). The Adviser believes that these out-of-favor securities will produce superior future returns if their future growth exceeds the market's low expectations. The Fund expects to remain as fully invested in the above securities as practicable, but in any case, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, will be invested in equity securities. This investment policy can be changed by the Fund upon 60 days' prior notice to shareholders.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, as well as instruments that attempt to track the price movement of equity indices.
The Adviser uses a strictly quantitative investment model to make investment decisions for the Fund. The investment model ranks securities based on fundamental measures of value (such as the price-to-earnings ratio) and indicators of near-term appreciation potential (such as recent price appreciation). The investment model selects stocks to buy from the higher-ranked stocks and selects stocks to sell from those whose rankings have decreased. This investment strategy seeks to control overall portfolio risk while seeking to maximize the expected return. The Fund is expected to experience a low level of portfolio turnover.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
The medium- and smaller-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these medium- and small-sized companies may pose additional risk including liquidity risks, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, medium- and small-capitalization stocks may be more volatile than those of larger companies. These securities may be traded over the counter or listed on an exchange.
The Fund is also subject to the risk that small- to large-capitalization equity value securities may underperform other segments of the equity market or the equity market as a whole.
The Fund pursues a "value style" of investing. Value investing focuses on companies whose stock appears undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong, the Fund could suffer losses or
produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5, and 10 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-888-FUND-LSV.
2003 34.68%
2004 18.66%
2005 10.53%
2006 21.93%
2007 (2.73)%
2008 (39.21)%
2009 23.53%
2010 13.25%
2011 (1.90)%
2012 20.31%
BEST QUARTER WORST QUARTER
19.09% (23.06)%
(06/30/2003) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
LSV VALUE EQUITY FUND 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION (3/31/1999) ------------------------------------------------------------------------------------------------------------------ FUND RETURNS BEFORE TAXES 20.31% 0.08% 7.72% 6.07% FUND RETURNS AFTER TAXES ON 19.93% (0.28)% 7.20% 5.54% DISTRIBUTIONS FUND RETURNS AFTER TAXES ON 13.70% 0.00% 6.76% 5.22% DISTRIBUTIONS AND SALE OF FUND SHARES RUSSELL 1000 VALUE INDEX RETURN (REFLECTS 17.51% 0.59% 7.38% 4.54% NO DEDUCTION FOR FEES, EXPENSES, OR TAXES) |
INVESTMENT ADVISER
LSV Asset Management
PORTFOLIO MANAGERS
Josef Lakonishok, CEO, CIO, and Partner, has managed the Fund since 1999.
Menno Vermeulen, CFA, Partner, has managed the Fund since 1999.
Puneet Mansharamani, CFA, Partner, has managed the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the Fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objectives. The Fund will only make temporary defensive investments if the Adviser believes that the risk of loss outweighs the opportunity for total return or capital growth.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI, see the back cover of this prospectus). For liquidity purposes, the Fund may invest a portion of its assets in cash, money market instruments or equity index futures contracts. However, the Fund intends to remain as fully invested as practicable regardless of market conditions. Of course, the Fund cannot guarantee that it will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
Formed in 1994, LSV Asset Management is a quantitative value equity manager providing active asset management for institutional clients through the application of proprietary models. As of December 31, 2012, LSV had approximately $65 billion in assets under management. The Adviser's principal place of business is located at 155 North Wacker Drive, Suite 4600, Chicago, IL 60606.
For its services to the Fund, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.55%, based on the average daily net assets of the Fund.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals each of whom is jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Josef Lakonishok has served as CEO, CIO, Partner and portfolio manager for LSV since its founding in 1994. He has more than 36 years of investment and research experience.
Menno Vermeulen, CFA, has served as a portfolio manager for LSV since 1995 and a Partner since 1998. He has more than 21 years of investment and research experience.
Puneet Mansharamani, CFA, has served as a Partner and portfolio manager since 2006. He has more than 14 years of investment experience.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") shares of the Fund.
The Fund is for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-888-FUND-LSV.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
You may also buy shares through accounts with brokers and other institutions that are authorized to place trades in Fund shares for their customers. If you invest through an authorized institution, you will have to follow its procedures, which may be different from the procedures for investing directly. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "LSV Value Equity Fund."
REGULAR MAIL ADDRESS
LSV Value Equity Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
LSV Value Equity Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-888-FUND-LSV (1-888-386-3578) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
LSV Value Equity Fund
DDA Account #9870523965
Ref: Fund name/account name/account number
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $25. To cancel or change a plan, write to the Fund at: LSV Value Equity Fund, P.O. Box 219009, Kansas City, Missouri 64121-9009, (Express Mail Address: LSV Value Equity Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The price per share will be the NAV next determined after the Fund receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in
the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
MINIMUM PURCHASES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. The Fund may accept investments of smaller amounts in its sole discretion. There is no minimum for subsequent investments.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase shares, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
LSV Value Equity Fund LSVEX 00758M634 1500
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-888-FUND-LSV.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
If you would like to have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature
guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-888-FUND-LSV for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be sent to your bank account via wire (may be subject to a $10 fee) or ACH, or sent to you by check. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $100,000, you may transfer as little as $100 per month from your account to another financial institution. To participate in this service you must complete the appropriate sections of the account application and mail it to the Fund.
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short-term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs.
Because the Fund may invest in small- or mid-cap securities that often may trade in lower volumes, frequent trading by certain shareholders may dilute the value of Fund shares held by other shareholders. In addition, because frequent trading may cause the Fund to attempt to maintain higher cash positions, changes to the Fund's holdings in response to frequent trading may impact the market prices of such relatively thinly traded securities held by the Fund.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than four (4) "round trips" into or out of the Fund per calendar year. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within
a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Adviser compensates financial intermediaries for providing a variety of services to shareholders. Financial intermediaries may include unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries are paid for providing these services.
The Adviser pays financial intermediaries a fee that is based on the number of the intermediary's accounts that hold shares of the Fund. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees; they are paid by the Adviser, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser makes payments to certain unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (E.G., individual or group annuity) programs. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year based on the number of accounts holding shares of the Fund and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains of 20%.
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
the Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, the Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as the default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how the cost basis reporting law applies to
them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. This information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-888-FUND-LSV.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR FOR THE YEARS ENDED OCTOBER 31,
REALIZED
AND
NET ASSET UNREALIZED DIVIDENDS DISTRIBUTIONS TOTAL
VALUE NET GAINS TOTAL FROM NET FROM DIVIDENDS
BEGINNING INVESTMENT (LOSSES) ON FROM INVESTMENT REALIZED AND
OF YEAR INCOME(2) INVESTMENTS OPERATIONS INCOME GAINS DISTRIBUTIONS
----------------------------------------------------------------------------------------------------------
LSV VALUE EQUITY FUND
2012 $13.14 $0.27 $2.00 $2.27 $(0.28) $-- $(0.28)
2011 12.95 0.21 0.19 0.40 (0.21) -- (0.21)
2010 11.66 0.25 1.32 1.57 (0.28) -- (0.28)
2009 10.87 0.26 0.91 1.17 (0.38) -- (0.38)
2008 19.91 0.37 (7.98) (7.61) (0.35) (1.08) (1.43)
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RATIO OF RATIO OF
NET EXPENSES NET
ASSET NET ASSETS TO INVESTMENT
VALUE END OF AVERAGE INCOME TO PORTFOLIO
END TOTAL YEAR NET AVERAGE TURNOVER
OF YEAR RETURN(1) (000) ASSETS NET ASSETS RATE
--------------------------------------------------------------------------------
LSV VALUE EQUITY FUND
2012 $15.13 17.64% $ 993,106 0.66% 1.96% 10%
2011 13.14 3.05 1,448,069 0.64 1.52 19
2010 12.95 13.62 1,807,315 0.63 1.98 24
2009 11.66 11.38 1,592,705 0.65 2.56 27
2008 10.87 (40.90) 1,611,099 0.64 2.38 25
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(1) Total returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
(2) Per share calculations were performed using average shares for the period.
Amounts designated as "--" are $0, or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
LSV VALUE EQUITY FUND
INVESTMENT ADVISER
LSV Asset Management
155 North Wacker Drive, Suite 4600
Chicago, Illinois 60606
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Trust and the LSV Value Equity Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-888-FUND-LSV (1-888-386-3578)
BY MAIL: LSV Value Equity Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: www.lsvasset.com
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FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-06400.
LSV-PS-001-1600
THE ADVISORS' INNER CIRCLE FUND
THE MCKEE INTERNATIONAL EQUITY PORTFOLIO
INSTITUTIONAL CLASS SHARES PROSPECTUS
MARCH 1, 2013
TICKER SYMBOL: MKIEX
INVESTMENT ADVISER:
C.S. MCKEE, L.P.
The U.S. Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
PAGE
FUND SUMMARY ............................................................. 1
INVESTMENT OBJECTIVE ................................................ 1
FUND FEES AND EXPENSES .............................................. 1
PRINCIPAL INVESTMENT STRATEGY ....................................... 2
PRINCIPAL RISKS ..................................................... 2
PERFORMANCE INFORMATION ............................................. 4
INVESTMENT ADVISER .................................................. 4
PORTFOLIO MANAGERS .................................................. 5
PURCHASE AND SALE OF FUND SHARES .................................... 5
TAX INFORMATION ..................................................... 5
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES .................................................... 5
INVESTING WITH THE FUND .................................................. 6
BUYING SHARES ....................................................... 6
REDEEMING SHARES .................................................... 7
TRANSACTION POLICIES ................................................ 9
ACCOUNT POLICIES .................................................... 11
ADDITIONAL INFORMATION ABOUT THE FUND .................................... 16
OTHER INVESTMENT PRACTICES AND STRATEGIES ........................... 16
INVESTMENT MANAGEMENT ............................................... 17
SHAREHOLDER SERVICING ARRANGEMENTS .................................. 17
PAYMENTS TO FINANCIAL INTERMEDIARIES ................................ 18
FINANCIAL HIGHLIGHTS ..................................................... 19
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ..................... BACK COVER
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THE MCKEE INTERNATIONAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The McKee International Equity Portfolio (the "Fund") seeks a superior long-term total return over a market cycle by investing primarily in the equity securities of non-U.S. issuers.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ........................................................ 0.70%
Other Expenses ......................................................... 0.30%
Acquired Fund Fees and Expenses ........................................ 0.01%
-----
Total Annual Fund Operating Expenses(1) ................................ 1.01%
-----
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(1) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
---------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------- $103 $322 $558 $1,236 ---------------------------------------------- |
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 11% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
Under normal circumstances, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of companies located in at least three countries other than the United States. This investment strategy may be changed by the Fund upon 60 days' prior notice to shareholders.
C.S. McKee, L.P.'s (the "Adviser") stock selection process begins by screening a broad universe of companies, located in both developed and emerging markets, to identify potentially undervalued securities with improving fundamentals. Such quantitative screens include price to book value ratios and price/earnings to growth ratios. Stocks in the top 30% of each economic sector (a group of industries used to categorize and divide securities) as determined by the above screens will form the Adviser's focus list. The Adviser looks for companies with strong balance sheets, competent management and comparative business advantages with respect to costs, products and geographical location. Using fundamental security analysis, company management interviews and an assessment of the opinions of street analysts and consultants, the Adviser selects a portfolio of stocks from the focus list with the best combination of value and technical indicators. A stock is generally sold when it falls in the bottom 30% of each economic sector as determined by the above screens.
The Fund is non-diversified and may hold a relatively small number of issues in its portfolio. The Fund will attempt to minimize risk through investment in a range of countries and economic sectors. The Adviser will deliberately allocate the assets of the Fund to most major markets and industries within the Morgan Stanley Capital International EAFE Index. However, the Fund may buy stocks that are not included in countries and industries comprising the Morgan Stanley Capital International EAFE Index. The Fund may invest up to 10% of its assets in emerging market securities. Based on this strategy, the Fund will generally hold more than 50 stocks selected from at least 15 countries.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its objective. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement the Fund's investment strategy properly. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund. This risk is greater for small- and medium-sized companies, which tend to be more vulnerable to adverse developments than larger companies.
Investing in foreign companies, whether through investments made in foreign markets or made through the purchase of American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"), which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. Political events (civil unrest, national elections, changes in political conditions and foreign relations, imposition of exchange controls and repatriation restrictions), social and economic events (labor
strikes, rising inflation) and natural disasters occurring in a country where the Fund invests could cause the Fund's investments in that country to experience gains or losses. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. While ADRs and EDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and EDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. Differences in tax and accounting standards and difficulties in obtaining information about foreign governments or foreign companies may impair investment decisions. In addition, emerging markets securities may be subject to smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, emerging markets governments may have limited ability to raise taxes or authorize appropriations for debt repayment. In addition, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it more difficult for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly.
Because non-U.S. securities are usually denominated in currencies other than the dollar, the value of the Fund's portfolio may be influenced by currency exchange rates and exchange control regulations. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
Undervalued companies may have experienced adverse business developments or other events that have caused their stocks to be out of favor. If the Adviser's assessment of the company is inaccurate, or if the market does not recognize the value of the company, the price of its stock may fail to meet expectations and the Fund's share price may suffer. Value-oriented mutual funds may not perform as well as certain other types of mutual funds using different approaches during periods when value investing is out of favor.
Because the Fund is not diversified, it may invest a greater percentage of its assets in a particular issuer than a diversified fund, which may cause the value of the Fund's shares to be more sensitive to changes in the market value of a single issuer than a diversified mutual fund.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling the Fund at 1-866-625-3346.
TOTAL RETURNS BY CALENDAR YEAR
2003 38.33% 2004 23.11% 2005 10.80% 2006 25.35% 2007 11.44% 2008 (41.20)% 2009 39.65% 2010 7.54% 2011 (15.36)% 2012 19.81% BEST QUARTER WORST QUARTER 30.17% (22.22)% (06/30/2009) (09/30/2011) |
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Returns after taxes on distributions and sale of Fund shares may be higher than before-tax returns when a net capital loss occurs upon the redemption of Fund shares.
1 YEAR 5 YEARS 10 YEARS
---------------------------------------------------------------------------------------------------
Fund Returns Before Taxes 19.81% (2.18)% 8.97%
Fund Returns After Taxes on Distributions 19.79% (2.27)% 8.62%
Fund Returns After Taxes on Distributions and Sale of Fund
Shares 13.56% (1.63)% 8.24%
Morgan Stanley Capital International EAFE Index (reflects
no deduction for fees, expenses or taxes) 17.32% (3.69)% 8.21%
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INVESTMENT ADVISER
C. S. McKee, L.P.
PORTFOLIO MANAGERS
Gregory M. Melvin, Executive Vice President and Chief Investment Officer, has managed the Fund since 2000.
William J. Andrews, Senior Vice President and Portfolio Manager, has managed the Fund since 2000.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time you must invest at least $2,500 ($500 for Individual Retirement Accounts ("IRAs") and $250 for Spousal IRAs). Subsequent investments in the Fund must be at least $100.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-866-625-3346.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
INVESTING WITH THE FUND
BUYING SHARES
Institutional Class Shares are for individual and institutional investors. All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest by Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund name.
REGULAR MAIL ADDRESS
McKee International Equity Portfolio
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
McKee International Equity Portfolio
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-866-625-3346 for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA#: 101000695
The McKee International Equity Portfolio
DDA Acct. # 9871063178
Ref: account number/account name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. Purchases can be made monthly, quarterly, semi-annually, or annually in amounts of at least $100 to meet the minimum investment amount. To cancel or change a plan, write to the Fund at: McKee International Equity Portfolio, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address: McKee International Equity Portfolio, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
MINIMUM INVESTMENTS
To purchase shares of the Fund for the first time, you must invest at least $2,500 ($500 for an IRA and $250 for spousal IRAs). Subsequent investments in the Fund must be at least $100. The Fund reserves the right to waive the minimum initial investment or minimum subsequent investment amounts in its sole discretion.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
FUND CODES
The Fund's reference information, which is listed below, will be helpful to you when you contact the Fund to purchase shares, check daily net asset value per share ("NAV") or obtain additional information.
TICKER SYMBOL CUSIP FUND CODE
------------------------------------------------
MKIEX 00758M188 1230
REDEEMING SHARES
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PAYMENT OF REDEMPTION PROCEEDS
Redemption proceeds can be mailed to your account address, sent to your bank by ACH transfer or wired to your bank account (provided that your bank information is already on file). The Fund will pay for all shares redeemed within seven days after it receives a redemption request in proper form, meaning that it is complete, contains all necessary information, and has all supporting documentation (such as proper Medallion signature guarantees, IRA rollover forms, etc.).
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record
on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-866-625-3346 for more information.
If you redeem shares that were purchased by check or through ACH, you will not receive your redemption proceeds until the check has cleared or the ACH transaction has been completed, which may take up to 15 days from the purchase date.
BY MAIL
You may contact the Fund directly by mail at: McKee International Equity Portfolio, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address: McKee International Equity Portfolio, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered share owner(s) must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
Certain shareholders may need to include additional documents or provide a signature guarantee to redeem shares.
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire redemption privilege) by completing the appropriate sections of the account application.
Call 1-866-625-3346 to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank by either Fed wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Fund.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Federal Taxes."
TRANSACTION POLICIES
CALCULATING YOUR SHARE PRICE
You may buy or sell shares of the Fund on each day the New York Stock Exchange ("NYSE") is open for business (a "Business Day") at a price equal to the Fund's NAV next computed after it, or authorized institution, receives and accepts your order. The Fund calculates NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund or authorized institution must receive your order in good form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.) before the close of trading on the NYSE that day. Otherwise, you will receive the NAV that is calculated at the close of trading on the following Business Day. If the NYSE closes early -- such as on days in advance of certain generally observed holidays -- the Fund will calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions. Shares will not be priced on days the NYSE is closed for trading, including nationally observed holidays.
NAV for one Fund share is the value of that share's portion of all of the net assets of the Fund. In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board of Trustees (the "Board"). Pursuant to the policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information as related to the securities.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries such as brokers
and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 1.00% redemption fee on redemptions of shares that have been held for less than 6 months. The redemption fee is deducted from the Fund's sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that, due to operational requirements, the intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's.
The Fund reserves the right to reduce all or a portion of the redemption fee in
its discretion when it believes such reduction is in the best interests of the
Fund, including with respect to certain categories of redemptions that the Fund
reasonably believes may not raise frequent trading or market timing concerns.
These categories include, but are not limited to, the following: (i)
participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic redemptions; and (v) retirement
loans and withdrawals.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions the Fund reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
RIGHTS RESERVED BY THE FUND
PURCHASES
At any time and without notice, the Fund may:
o Stop offering shares;
o Reject any purchase order; or
o Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and increasing expenses). The Fund will consider various
factors in determining whether an investor has engaged in excessive
trading. These factors include, but are not limited to, the investor's
historic trading patterns, the number of transactions, the size of the
transactions, the time between transactions and the percentage of the
investor's account involved in each transaction. For more information
about the Fund's policies on excessive trading, see "Excessive Trading
Policies and Procedures."
REDEMPTIONS
At any time and without notice, the Fund may change or eliminate any of the redemption methods described above, except redemption by mail. The Fund may suspend your right to redeem if:
o Trading on the NYSE is restricted or halted; or
o The U. S. Securities and Exchange Commission ("SEC") allows the Fund to delay redemptions.
REDEMPTIONS IN-KIND
Under certain conditions and at the Fund's discretion, you may pay for shares of the Fund with securities instead of cash. In addition, the Fund may pay all or part of your redemption proceeds (in excess of $250,000) with securities instead of cash. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
ACCOUNT POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and
out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because the Fund invests in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than a fund investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of the Fund's shares if the price of the Fund's foreign securities do not reflect their fair value. Although the Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage. For more information about how the Fund uses fair value pricing, see "Calculating Your Share Price."
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than two (2) "round trips" into or out of the Fund per month. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 1.00% on redemptions by shareholders of Fund shares held for less than six months (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the application, your investment will be received and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted an
Anti-Money Laundering Compliance Program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities. In
this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of the Fund or in cases when the Fund is requested or compelled to do
so by governmental or law enforcement authority. If your account is closed at
the request of governmental or law enforcement authority, you may not receive
proceeds of the redemption if the Fund is required to withhold such proceeds.
SMALL ACCOUNTS
The Fund may redeem your shares without your permission if the value of your account falls below 50% of the required minimum initial investment. This provision does not apply:
o To retirement accounts and certain other accounts; or
o When the value of your account falls because of market fluctuations
and not your redemptions.
The Fund will provide you at least 30 days' written notice to allow you time to add to your account and avoid the sale of your shares.
DIVIDENDS AND DISTRIBUTIONS
Normally, the Fund distributes its net investment income annually. The Fund will distribute its net capital gains at least once a year. The Fund will automatically reinvest dividends and distributions in additional shares of the Fund, unless you elect on your account application to receive them in cash.
FEDERAL TAXES
The following is a summary of the federal income tax consequences of investing in the Fund. This summary does not apply to shares held in an individual retirement account or other tax-qualified plan, which are not subject to current tax. Transactions relating to shares held in such accounts may, however, be taxable at some time in the future. You should always consult your tax advisor for specific guidance regarding the federal, state and local tax effects of your investment in the Fund.
TAXES ON DISTRIBUTIONS
The Fund will distribute substantially all of its net investment income and its net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state, and local taxation, depending upon your tax situation. Income
distributions, including distributions of net short-term capital gains but excluding distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Long-term capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains. Once a year the Fund will send you a statement showing the types and total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the purchase price would reflect the amount of the upcoming distribution. In this case, you would be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of your investment. This is known as "buying a dividend" and should be avoided by taxable investors. Call 1-866-625-3346 to find out when the Fund expects to make distributions to shareholders.
Each sale of shares of the Fund may be a taxable event. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. A sale may result in a capital gain or loss to you. The gain or loss generally will be treated as short term if you held the shares 12 months or less, long-term if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Because the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. The Fund may elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION
("SAI").
ADDITIONAL INFORMATION ABOUT THE FUND
OTHER INVESTMENT PRACTICES AND STRATEGIES
The Fund's investment objective is to seek a superior long-term total return over a market cycle by investing primarily in the equity securities of non-U.S. issuers. The Fund may change its investment objective without shareholder approval.
In addition to its principal investment strategies, the Fund may use the investment strategies described below. The Fund may also employ investment practices that this prospectus does not describe, such as participating in repurchase agreements, when-issued and forward commitment transactions, lending of securities, borrowing and other techniques. For more information concerning these and any of the Fund's other investment practices and their risks, you should read the SAI.
DERIVATIVES
The Fund may invest in derivatives, a category of investments that includes forward foreign currency exchange contracts, futures, options and swaps to protect its investments against changes resulting from market conditions (a practice called "hedging"), to reduce transaction costs or to manage cash flows. Forward foreign currency exchange contracts, futures and options are called derivatives because their value is based on an underlying asset or economic factor. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its objectives with derivatives. Successful use of a derivative depends on the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
SHORT-TERM INVESTING
The investments and strategies described in this prospectus are those that the Fund uses under normal circumstances. During unusual economic, market, political or other circumstances, the Fund may invest up to 100% of its assets in short-term, high quality debt instruments, such as U.S. government securities. These instruments would not ordinarily be consistent with the Fund's principal investment strategies, and may prevent the Fund from achieving its investment objective. The Fund will use a temporary strategy if the Adviser believes that pursuing the Fund's investment objective will subject it to a significant risk of loss. The Fund has a policy requiring it to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in particular types of securities as described in the Fund's principal investment strategy, and will not change this policy without 60 days' prior written notice to shareholders. In addition to the temporary defensive measures discussed above, the Fund may also temporarily deviate from this 80% policy in other limited, appropriate circumstances, such as if the Fund experiences unusually large cash inflows or redemptions. When the Adviser pursues a temporary defensive strategy, the Fund may not profit from favorable developments that it would have otherwise profited from if it were pursuing its normal strategies.
INFORMATION ABOUT PORTFOLIO HOLDINGS
The Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet
at HTTP://AICFUNDHOLDINGS.COM/MCKEE. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund. Please consult the Fund's SAI for a full description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
INVESTMENT MANAGEMENT
INVESTMENT ADVISER
C.S. McKee, L.P., a Pennsylvania limited partnership located at One Gateway Center, Pittsburgh, Pennsylvania 15222, serves as the Fund's investment adviser. The Adviser manages and supervises the investment of the Fund's assets on a discretionary basis, subject to the oversight of the Board. For its services, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.70%, based on the average daily net assets of the Fund. As of December 31, 2012, the Adviser had approximately $13.5 billion in assets under management. The Adviser was formed by certain officers of the Fund's former adviser, C.S. McKee & Co., Inc. (the "Former Adviser") to purchase the Former Adviser's investment advisory business. The Adviser continued the business of the Former Adviser and the Adviser's acquisition of the Former Adviser did not result in any change in the actual investment management services, administrative functions, supervisory responsibilities or fee arrangements for the Fund. The persons responsible for the day-to-day management of the Fund remained the same. The Former Adviser was an affiliate of Old Mutual (US) Holdings Inc. (formerly, United Asset Management Corporation), but the Adviser is not affiliated with Old Mutual (US) Holdings Inc.
The Adviser and the Former Adviser have provided investment management services to pension and profit sharing plans, trusts and endowments, 401(k) and thrift plans, corporations and other institutions and individuals since 1972.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be found in the Fund's Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
Gregory M. Melvin and William J. Andrews are jointly and primarily responsible for the day-to-day management of the Fund. Mr. Melvin is the Adviser's Chief Investment Officer. He joined the Former Adviser as its Director of Equities in 2000. He also currently owns and serves as President, and previously served as Chief Investment Officer, of Dartmouth Capital. Prior to working at Dartmouth Capital, he spent 15 years at Federated Investors as a Senior Portfolio Manager. Mr. Andrews is a Senior Vice President and portfolio manager of the Fund and is responsible for the Fund's equity investments. He joined the Former Adviser in 1983.
The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. "Financial intermediaries" include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any
similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and FINRA rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the NAV or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm whose report, along with the Fund's financial statements, is included in the Fund's Annual Report. The report of PricewaterhouseCoopers LLP, along with the Fund's financial statements and related notes, appears in the Annual Report that accompanies the Statement of Additional Information. You can obtain the Annual Report, which contains more performance information, at no charge by calling 1-866-625-3346.
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YEARS ENDED OCTOBER 31, 2012 2011 2010 2009 2008
Net Asset Value, Beginning of Year $10.84 $11.99 $11.09 $8.48 $17.97
----- ----- ----- ---- -----
Income (Loss) from Investment Operations:
Net Investment Income* 0.23 0.34 0.20 0.17 0.34
Net Realized and Unrealized Gain (Loss) 0.48 (1.31) 0.90 2.79 (7.83)
---- ---- ---- ---- ----
Total from Investment Operations 0.71 (0.97) 1.10 2.96 (7.49)
---- ---- ---- ---- ----
Redemption Fees** -- -- -- -- --
---- ---- ---- ---- ----
Dividends and Distributions:
Net Investment Income (0.37) (0.18) (0.20) (0.32) (0.31)
---- ---- ---- ---- ----
Capital Gains -- -- -- (0.03) (1.69)
Total Dividends and Distributions (0.37) (0.18) (0.20) (0.35) (2.00)
Net Asset Value, End of Year $11.18 $10.84 $11.99 $11.09 $8.48
===== ===== ===== ===== ====
Total Return+ 7.04% (8.22)% 9.91% 36.34% (46.49)%
===== ===== ===== ===== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $217,407 $218,043 $244,838 $203,107 $160,770
Ratio of Expenses to Average Net Assets(1) 1.00% 0.97% 0.99% 1.01% 1.00%
Ratio of Net Investment Income to
Average Net Assets 2.13% 2.88% 1.79% 1.91% 2.50%
Portfolio Turnover Rate 11% 10% 9% 22% 25%
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* Per share calculations were performed using average shares for the period.
** Amount represents less than $0.01 per share.
+ Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deductions of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares.
(1) The ratio of expenses to average net assets excludes the effects of fees paid indirectly. If these expense offsets were included, the ratio would be equal to the ratio presented.
Amounts designated as "--" are either $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
MCKEE INTERNATIONAL EQUITY PORTFOLIO
Investors who are interested in receiving more information about the Fund should read the Fund's Annual and Semi-Annual Reports and the Fund's SAI. The Annual and Semi-Annual Reports of the Fund provide additional information about its investments. In the Annual Report, you will also find a discussion of the market conditions and investment strategies that significantly affected the performance of the Fund during its last fiscal year. The SAI contains additional detailed information about the Fund and is incorporated by reference into (is legally part of) this prospectus.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-866-625-3346
BY MAIL: McKee International Equity Portfolio
P.O. Box 219009
Kansas City, MO 64121
BY INTERNET: www.csmckee.com
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FROM THE SEC: You can review and copy information about the Fund (including the SAI and the Annual and Semi-Annual Reports) at the U.S. Securities and Exchange Commission's Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room by calling the U.S. Securities and Exchange Commission at 202-551-8090. Reports and other information about the Fund are available on the EDGAR Database on the U.S. Securities and Exchange Commission's Internet site at: HTTP://WWW.SEC.GOV. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following e-mail address: PUBLICINFO@SEC.GOV or by writing the U.S. Securities and Exchange Commission's Public Reference Section, Washington, D.C. 20549-1520.
THE TRUST'S INVESTMENT COMPANY ACT OF 1940 FILE NUMBER IS 811-06400.
CSM-PS-001-1200
THE ADVISORS' INNER CIRCLE FUND
THE RICE HALL JAMES FUNDS
PROSPECTUS
MARCH 1, 2013
RICE HALL JAMES SMALL CAP PORTFOLIO
INSTITUTIONAL CLASS SHARES
TICKER SYMBOL: RHJMX
RICE HALL JAMES MICRO CAP PORTFOLIO
INSTITUTIONAL CLASS SHARES
TICKER SYMBOL: RHJSX
RICE HALL JAMES MID CAP PORTFOLIO
INVESTOR CLASS SHARES
TICKER SYMBOL: RHJVX
INVESTMENT ADVISOR:
RICE HALL JAMES & ASSOCIATES, LLC
The U.S. Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
RICE HALL JAMES SMALL CAP PORTFOLIO FUND SUMMARY ......................... 1
INVESTMENT OBJECTIVE ................................................ 1
FUND FEES AND EXPENSES .............................................. 1
PRINCIPAL INVESTMENT STRATEGIES ..................................... 2
PRINCIPAL RISKS ..................................................... 3
PERFORMANCE INFORMATION ............................................. 3
INVESTMENT ADVISER .................................................. 4
PORTFOLIO MANAGERS .................................................. 4
RICE HALL JAMES MICRO CAP PORTFOLIO FUND SUMMARY ......................... 5
INVESTMENT OBJECTIVE ................................................ 5
FUND FEES AND EXPENSES .............................................. 5
PRINCIPAL INVESTMENT STRATEGIES ..................................... 6
PRINCIPAL RISKS ..................................................... 7
PERFORMANCE INFORMATION ............................................. 7
INVESTMENT ADVISER .................................................. 8
PORTFOLIO MANAGERS .................................................. 8
RICE HALL JAMES MID CAP PORTFOLIO FUND SUMMARY ........................... 9
INVESTMENT OBJECTIVE ................................................ 9
FUND FEES AND EXPENSES .............................................. 9
PRINCIPAL INVESTMENT STRATEGIES ..................................... 10
PRINCIPAL RISKS ..................................................... 11
PERFORMANCE INFORMATION ............................................. 11
INVESTMENT ADVISER .................................................. 12
PORTFOLIO MANAGERS .................................................. 12
SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES,
TAXES AND FINANCIAL INTERMEDIARY COMPENSATION 13
INVESTING WITH THE RICE HALL JAMES FUNDS ................................. 14
BUYING SHARES ....................................................... 14
REDEEMING SHARES .................................................... 15
EXCHANGING SHARES ................................................... 17
TRANSACTION POLICIES ................................................ 17
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ACCOUNT POLICIES ................................................... 20
ADDITIONAL INFORMATION ABOUT THE FUNDS .................................. 24
OTHER INVESTMENT PRACTICES AND STRATEGIES .......................... 24
INVESTMENT MANAGEMENT .............................................. 26
SHAREHOLDER SERVICING ARRANGEMENTS ................................. 27
PAYMENTS TO FINANCIAL INTERMEDIARIES ............................... 27
FINANCIAL HIGHLIGHTS .................................................... 29
RICE HALL JAMES SMALL CAP PORTFOLIO ................................ 30
RICE HALL JAMES MICRO CAP PORTFOLIO ................................ 31
RICE HALL JAMES MID CAP PORTFOLIO .................................. 32
HOW TO OBTAIN MORE INFORMATION ABOUT THE RICE HALL
JAMES FUNDS BACK COVER
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RICE HALL JAMES SMALL CAP PORTFOLIO
INVESTMENT OBJECTIVE
The Rice Hall James Small Cap Portfolio (the "Fund" or the "Small Cap Portfolio") seeks maximum capital appreciation, consistent with reasonable risk to principal, by investing primarily in small market capitalization (small cap) companies.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ..................................................... 0.80%
Other Expenses ...................................................... 0.64%
-----
Acquired Fund Fees and Expenses ..................................... 0.02%
-----
Total Annual Fund Operating Expenses(1) ............................. 1.46%
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(1) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$149 $462 $797 $1,746
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 89% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of small cap companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund focuses on U.S. companies with total market capitalizations (number of shares outstanding multiplied by share price) which, at the time of initial purchase, fall within the range of companies in the Russell 2000 Index at reconstitution each June. Rice Hall James & Associates, LLC ("RHJ" or the "Adviser") believes that there are greater pricing inefficiencies for small cap companies than larger capitalization companies because this range of the market has less analyst coverage.
In making investment decisions for the Fund, the Adviser uses a company-specific approach that focuses on identifying stocks of growth companies that are selling at a discount to those companies' projected earnings growth rates. Specifically, the Adviser will primarily invest the assets of the Fund in companies with price/earnings ratios that are lower than those companies' three- to five- year projected earnings growth rate.
The Adviser seeks to invest in companies undergoing fundamental changes that have yet to be noticed by investors, but that the Adviser believes will ultimately result in increases in revenue growth rates, expanding profit margins and/or increases in earnings growth rates. Such events can include new product introductions or applications, discovery of niche markets, new management, corporate or industry restructures, regulatory change and market expansion. Most importantly, the Fund typically invests in a company only when the Adviser believes that such events will lead to greater investor recognition and higher stock prices within a 12-to 24-month period.
Moreover, the Adviser focuses on securities of companies with the following attributes:
Strong management;
Leading products or services;
Distribution to a large marketplace or growing niche market;
Anticipated above-average revenue and earnings growth rates;
Potential for improvement in profit margins; and
Strong cash flow and/or improving financial position.
The Adviser will not sell a stock simply because it is no longer within the Fund's target capitalization range used by the Adviser for the initial purchase if it believes the company has growth potential. However, it may sell stocks for the following reasons:
The stock reaches the target price set by the Adviser;
The stock falls below the downside price limit set by the Adviser;
The fundamentals of the stock have deteriorated; or
A more attractively valued alternative is available for purchase.
The Adviser expects that cash reserves will normally represent under 20% of the Fund's assets.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its goal. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. A FUND SHARE IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
SMALL-CAPITALIZATION COMPANY RISK -- The small-capitalization companies in which the Fund will invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at HTTP://WWW.RHJFUNDS.COM or by calling 1-866-474-5669. Prior to January 20, 2008, the Fund's investment strategy included investments in equity securities of mid cap companies in addition to investments in equity securities of small cap companies; therefore, the performance shown below for periods prior to January 20, 2008 may have differed had the Fund's current investment strategy been in effect during those periods.
2003 32.51%
2004 8.92%
2005 2.99%
2006 11.66%
2007 8.38%
2008 (38.94)%
2009 37.85%
2010 27.99%
2011 8.81%
2012 11.59%
BEST QUARTER WORST QUARTER
25.20% (25.47)%
(06/30/2009) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts.
1 YEAR 5 YEARS 10 YEARS
---------------------------------------------------------------------------------------
Fund Return Before Taxes 11.59% 5.52% 8.93%
---------------------------------------------------------------------------------------
Fund Return After Taxes on Distributions 11.59% 5.37% 7.96%
---------------------------------------------------------------------------------------
Fund Return After Taxes on Distributions and 7.54% 4.75% 7.65%
Sale of Fund Shares
---------------------------------------------------------------------------------------
Russell 2000 Index (reflects no deduction for 16.35% 3.56% 9.72%
fees, expenses or taxes)
---------------------------------------------------------------------------------------
Russell 2000 Growth Index (reflects no 14.59% 3.49% 9.80%
deduction for fees, expenses or taxes)
---------------------------------------------------------------------------------------
|
INVESTMENT ADVISER
Rice Hall James & Associates, LLC
PORTFOLIO MANAGERS
Thomas W. McDowell, Chief Executive Officer and Chief Investment Officer, has managed the Fund since 1996.
Cara M. Thome, Portfolio Manager/Analyst, has managed the Fund since 2001.
Timothy A. Todaro, CFA, Portfolio Manager/Analyst, has managed the Fund since 1996.
James D. Dickinson, CFA, Portfolio Manager/Analyst, has managed the Fund since 2006.
FOR MORE INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 13 OF THE PROSPECTUS.
RICE HALL JAMES MICRO CAP PORTFOLIO
INVESTMENT OBJECTIVE
The Rice Hall James Micro Cap Portfolio (the "Fund" or the "Micro Cap Portfolio") seeks maximum capital appreciation, consistent with reasonable risk to principal, by investing primarily in small market capitalization companies.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ......................................................... 0.75%
Other Expenses .......................................................... 0.68%
-----
Acquired Fund Fees and Expenses ......................................... 0.02%
-----
Total Annual Fund Operating Expenses(1) ................................. 1.45%
|
(1) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$148 $459 $792 $1,735
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 101% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of small cap companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund focuses on U.S. companies with total market capitalizations (number of shares outstanding multiplied by share price) which, at the time of initial purchase, fall within the range of companies in the Russell Microcap Index at reconstitution each June. In selecting securities for the Fund, Rice Hall James & Associates, LLC ("RHJ" or the "Adviser") emphasizes smaller, emerging companies possessing the potential to become market leaders in their industries.
In making investment decisions for the Fund, the Adviser uses a company-specific approach that focuses on identifying stocks of growth companies that are selling at a discount to those companies' projected earnings growth rates. Specifically, the Adviser will primarily invest the assets of the Fund in companies with price/earnings ratios that are lower than those companies' three- to five- year projected earnings growth rate.
The Adviser seeks to invest in companies undergoing fundamental changes that have yet to be noticed by investors, but that the Adviser believes will ultimately result in increases in revenue growth rates, expanding profit margins and/or increases in earnings growth rates. Such events can include new product introductions or applications, discovery of niche markets, new management, corporate or industry restructures, regulatory change and market expansion. Most importantly, the Fund typically invests in a company only when the Adviser believes that such events will lead to greater investor recognition and higher stock prices within a 12-to 24-month period.
Moreover, the Adviser focuses on securities of companies with the following attributes:
Strong management;
Leading products or services;
Distribution to a large marketplace or growing niche market;
Anticipated above-average revenue and earnings growth rates;
Potential for improvement in profit margins; and
Strong cash flow and/or improving financial position.
The Adviser will not sell a stock simply because it is no longer within the Fund's target capitalization range used by the Adviser for the initial purchase if it believes the company has growth potential. However, it may sell stocks for the following reasons:
The stock reaches the target price set by the Adviser;
The stock falls below the downside price limit set by the Adviser;
The fundamentals of the stock have deteriorated; or
A more attractively valued alternative is available for purchase.
Due to its investment strategy, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities than a Fund with a buy and hold strategy.
The Adviser expects that cash reserves will normally represent under 20% of the Fund's assets.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its goal. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. A FUND SHARE IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
SMALL-CAPITALIZATION COMPANY RISK -- The small-capitalization companies in which the Fund will invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
MICRO-CAPITALIZATION COMPANY RISK -- Micro-capitalization companies may be newly formed or in the early stages of development with limited product lines, markets or financial resources. Therefore, micro-capitalization companies may be less financially secure than large-, mid- and small-capitalization companies and may be more vulnerable to key personnel losses due to reliance on a smaller number of management personnel. In addition, there may be less public information available about these companies. Micro-cap stock prices may be more volatile than large-, mid- and small-capitalization companies and such stocks may be more thinly traded and thus difficult for the Fund to buy and sell in the market.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at HTTP://WWW.RHJFUNDS.COM or by calling 1-866-474-5669.
2003 56.62% 2004 17.00% 2005 7.87% 2006 13.66% 2007 (2.32)% 2008 (39.80)% 2009 29.45% 2010 24.09% 2011 4.43% 2012 11.99%
BEST QUARTER WORST QUARTER 24.98% (26.10)% (06/30/2003) (12/31/2008) |
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts.
1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------------------------------
Fund Return Before Taxes 11.99% 2.49% 9.52%
----------------------------------------------------------------------------------------
Fund Return After Taxes on Distributions 11.99% 2.49% 8.32%
----------------------------------------------------------------------------------------
Fund Return After Taxes on Distributions and 7.79% 2.13% 7.94%
Sale of Fund Shares
----------------------------------------------------------------------------------------
Russell Microcap Index (reflects no deduction 19.75% 1.46% 8.42%
for fees, expenses or taxes)
----------------------------------------------------------------------------------------
Russell Microcap Growth Index (reflects no 15.17% 1.02% 7.87%
deduction for fees, expenses or taxes)
----------------------------------------------------------------------------------------
|
INVESTMENT ADVISER
Rice Hall James & Associates, LLC
PORTFOLIO MANAGERS
Thomas W. McDowell, Chief Executive Officer and Chief Investment Officer, has managed the Fund since 1994.
Cara M. Thome, Portfolio Manager/Analyst, has managed the Fund since 2001.
Timothy A. Todaro, CFA, Portfolio Manager/Analyst, has managed the Fund since 1994.
James D. Dickinson, CFA, Portfolio Manager/Analyst, has managed the Fund since 2006.
FOR MORE INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 13 OF THE PROSPECTUS.
RICE HALL JAMES MID CAP PORTFOLIO
INVESTMENT OBJECTIVE
The Rice Hall James Mid Cap Portfolio (the "Fund" or the "Mid Cap Portfolio") seeks maximum capital appreciation, consistent with reasonable risk to principal, by investing primarily in mid-market capitalization (mid cap) companies.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ....................................................... 0.90%
Distribution and Service (12b-1) Fees ................................. 0.25%
Other Expenses ........................................................ 0.97%
Acquired Fund Fees and Expenses ....................................... 0.02%
------
Total Annual Fund Operating Expenses(1) ............................... 2.14%
------
Less Fee Reductions and/or Expense Reimbursements ..................... (0.72)%
------
Total Annual Fund Operating Expenses After Fee Reductions and/or ...... 1.42%
Expense Reimbursements(1,2)
|
(1) The Total Annual Fund Operating Expenses in this fee table, both before and after fee reductions and/or expense reimbursements, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.40% of the Fund's average daily net assets until February 28, 2014. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$145 $601 $1,083 $2,416
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 60% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of mid cap companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund focuses on U.S. companies with total market capitalizations (number of shares outstanding multiplied by share price) which, at the time of initial purchase, fall within the range of companies in the Russell Midcap Index at reconstitution each June.
In making investment decisions for the Fund, the Adviser uses a company-specific approach that focuses on identifying stocks of growth companies that are selling at a discount to the companies' projected earnings growth rates. Specifically, the Adviser will primarily invest the assets of the Fund in companies with price/earnings ratios that are lower than those companies' three to five year projected earnings growth rate.
The Adviser seeks to invest in companies undergoing fundamental changes that have yet to be noticed by investors, but that the Adviser believes will ultimately result in increases in revenue growth rates, expanding profit margins and/or increases in earnings growth rates. Such events could include new product introductions or applications, discovery of niche markets, new management, corporate or industry restructures, regulatory change and market expansion. Most importantly, the Fund typically invests in a company only when the Adviser believes that such events will lead to greater investor recognition and higher stock prices within a 12-to 24-month period.
Moreover, the Adviser focuses on securities of companies with the following attributes:
Strong management;
Leading products or services;
Distribution to a large marketplace or growing niche market;
Anticipated above-average revenue and earnings growth rates;
Potential for improvement in profit margins; and
Strong cash flow and/or improving financial position.
The Adviser will not sell a stock simply because it is no longer within the Fund's target capitalization range used by the Adviser for the initial purchase if it believes the company has growth potential. However, it may sell stocks for the following reasons:
The stock reaches the target price set by the Adviser;
The stock falls below the downside price limit set by the Adviser;
The fundamentals of the stock have deteriorated; or
A more attractively valued alternative is available for purchase.
The Adviser expects that cash reserves will normally represent under 20% of the Fund's assets.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its goal. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. A FUND SHARE IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
MID-CAPITALIZATION COMPANY RISK -- The mid-capitalization companies the Fund invests in may be more valuable to adverse business or economic events than larger, more established companies. In particular, these medium-sized companies may pose additional risks, including liquidity risk, because these companies may have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, the mid-capitalization stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at HTTP://WWW.RHJFUNDS.COM or by calling 1-866-474-5669.
2005 11.99%
2006 16.11%
2007 10.27%
2008 (38.67)%
2009 33.75%
2010 22.41%
2011 (6.22)%
2012 3.80%
BEST QUARTER WORST QUARTER
18.31% (24.20)%
(06/30/2009) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax deferred arrangements such as 401(k) plans or individual retirement accounts.
Returns after taxes on distributions and sale of Fund shares may be higher than before-tax returns when a net capital loss occurs upon the redemption of Fund shares.
SINCE
INCEPTION
1 YEAR 5 YEARS (7/30/04)
------------------------------------------------------------------------------------------------------
Fund Return Before Taxes 3.80% (0.45)% 5.59%
------------------------------------------------------------------------------------------------------
Fund Return After Taxes on Distributions 3.66% (0.48)% 5.21%
------------------------------------------------------------------------------------------------------
Fund Return After Taxes on Distributions and Sale of Fund 2.66% (0.38)% 4.73%
Shares
------------------------------------------------------------------------------------------------------
Russell Midcap Index (reflects no deduction for fees, 17.28% 3.57% 8.08%
expenses or taxes)
------------------------------------------------------------------------------------------------------
Russell Midcap Growth Index (reflects no deduction for fees, 15.81% 3.23% 7.86%
expenses or taxes)
------------------------------------------------------------------------------------------------------
|
INVESTMENT ADVISER
Rice Hall James & Associates, LLC
PORTFOLIO MANAGERS
Thomas W. McDowell, Chief Executive Officer and Chief Investment Officer, has managed the Fund since 2004.
Cara M. Thome, Portfolio Manager/Analyst, has managed the Fund since 2004.
Timothy A. Todaro, CFA, Portfolio Manager/Analyst, has managed the Fund since 2004.
James D. Dickinson, CFA, Portfolio Manager/Analyst, has managed the Fund since 2006.
FOR MORE INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 13 OF THE PROSPECTUS.
SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION
PURCHASING AND SELLING FUND SHARES
You can open an account with any Fund with a minimum initial investment of $2,500 for Investor and Institutional Class shares ($500 for individual retirement accounts ("IRAs") and $250 for Spousal IRAs). Subsequent investments in the Fund must be at least $100.
If you own your shares directly, you may redeem your shares on any day the New York Stock Exchange is open for business by contacting the Funds directly by mail or telephone at 1-866-474-5669.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Funds.
TAX INFORMATION
Each Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of a 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 intermediary and your salesperson to recommend a Fund over another investment. Ask your salesperson or visit your financial intermediary's web site for more information.
INVESTING WITH THE RICE HALL JAMES FUNDS
BUYING SHARES
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Funds do not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
Each Fund reserves the right to reject any specific purchase order, including exchange purchases, for any reason. The Funds are not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Funds' policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. Please contact the Funds for more information.
BY MAIL
You can open an account with a Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Funds a check and, if possible, the "Invest by Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and a Fund name.
REGULAR MAIL ADDRESS
The Rice Hall James Funds
P.O. Box 219009
Kansas City, MO 64121
EXPRESS MAIL ADDRESS
The Rice Hall James Funds
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire call 1-866-474-5669 for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA#: 101000695
The Rice Hall James Funds
DDA Acct. # 9871063178
Ref: account number/account name/fund name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the Funds. Purchases can be made monthly, quarterly,
semi-annually, or annually in amounts of at least $100 to meet the minimum
investment amount. To cancel or change a plan, write to the Funds at: The Rice
Hall James Funds, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address:
The Rice Hall James Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas
City, MO 64105). Allow up to 15 days to create the plan and 3 days to cancel or
change it.
MINIMUM INVESTMENTS
To purchase Investor and Institutional Class Shares of the Funds for the first time, you must invest at least $2,500 ($500 for individual retirement accounts ("IRAs") and $250 for Spousal IRAs). Subsequent investments must be made in amounts of at least $100. The Funds reserve the right to waive the minimum initial investment and minimum subsequent investment amounts in its sole discretion.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
FUND CODES
Each Fund's reference information, which is listed below, will be helpful to you when you contact the Funds to purchase or exchange shares, check daily net asset value per share ("NAV") or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE -------------------------------------------------------------------------------- Institutional Class Shares RHJMX 00758M196 1180 Small Cap Portfolio -------------------------------------------------------------------------------- Institutional Class Shares RHJSX 00758M212 1179 Micro Cap Portfolio -------------------------------------------------------------------------------- Investor Class Shares RHJVX 0075W0833 2079 Mid Cap Portfolio -------------------------------------------------------------------------------- |
REDEEMING SHARES
PAYMENT OF REDEMPTION PROCEEDS
Redemption proceeds can be mailed to your account address, sent to your bank by ACH transfer or wired to your bank account (provided that your bank information is already on file). Each Fund will pay for all shares redeemed within seven days after it receives a redemption request in proper form, meaning that it
is complete and contains all necessary information, and has all supporting documentation (such as proper signature guarantees, IRA rollover forms, etc.).
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-866-474-5669 for more information.
If you redeem shares that were purchased by check or through ACH, you will not receive your redemption proceeds until the check has cleared or the ACH transaction has been completed, which may take up to 15 days from the purchase date.
BY MAIL
You may contact the Funds directly by mail at: The Rice Hall James Funds, P.O. Box 219009, Kansas City, MO 64121 (Express Mail Address: The Rice Hall James Funds, c/o DST Systems, Inc., 430 W. 7th Street, Kansas City, MO 64105). Send a letter to the Funds signed by all registered parties on the account specifying:
The Fund name(s);
The account number;
The dollar amount or number of shares you wish to redeem;
The account name(s); and
The address to which redemption (sale) proceeds should be sent.
All registered share owner(s) must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire redemption privilege) by completing the appropriate sections of the account application. Call 1-866-474-5669 to redeem your shares. Based on your instructions, the Funds will mail your proceeds to you or send them to your bank by either Fed wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Funds.
REDEMPTIONS IN-KIND
Under certain conditions and at the Fund's discretion, you may pay for shares of the Fund with securities instead of cash. In addition, the Fund may pay all or part of your redemption proceeds (in excess of $250,000) with securities instead of cash. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
EXCHANGING SHARES
At no charge, you may exchange shares of one Rice Hall James Fund for shares of another Rice Hall James Fund by writing to or calling the Funds. You may only exchange shares between accounts with identical registrations (i.e., the same names and addresses).
The exchange privilege is not intended as a vehicle for short-term or excessive trading. A Fund may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Funds. For more information about the Funds' policy on excessive trading, see "Excessive Trading Policies and Procedures."
For information regarding the federal income tax consequences of transactions in shares of a Fund, including information about cost basis reporting, see "Federal Taxes."
TRANSACTION POLICIES
CALCULATING YOUR SHARE PRICE
You may buy, sell or exchange shares of a Fund on each day the New York Stock Exchange ("NYSE") is open for business (a "Business Day") at a price equal to its NAV next computed after it receives and accepts your order. Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The Funds calculate NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Funds or authorized institution must receive your order in good form (meaning that it is complete and contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.) before the close of trading on the NYSE that day. Otherwise, you will receive the NAV that is calculated at the close of trading on the following Business Day. If the NYSE closes early -- such as on days in advance of certain generally observed holidays -- the Funds will calculate NAV as of the earlier closing time. The Funds will not accept orders that request a particular day or price for the transaction or any other special conditions. Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays.
NAV for one Fund share is the value of that share's portion of all of the net assets of a fund. In calculating NAV, the Funds generally value their investment portfolios at market price. If market prices
are not readily available or the Funds reasonably believe that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Funds are required to price those securities at fair value as determined in good faith using methods approved by the Board of Trustees (the "Board"). Pursuant to policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Funds' determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Funds assign to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Funds invest primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which a Fund would price securities at fair value - for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Funds through their transfer agent, you may also buy or sell shares of the Funds through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Funds prior to the time the Funds calculate their NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Funds on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Funds after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Funds with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Funds with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Funds. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of the same, the Micro Cap Portfolio charges a 2.00% redemption fee on redemptions of shares that have been held for less than 90 days. The redemption fee is deducted from the sale proceeds and cannot be paid
separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that due to operational requirements, the intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's.
The Micro Cap Portfolio reserves the right to waive the redemption fee in its
discretion where it believes such waiver is in the best interests of the Fund,
including with respect to certain categories of redemptions that the Fund
reasonably believes may not raise frequent trading or market timing concerns.
These categories include, but are not limited to, the following: (i)
participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic redemptions; and (v) retirement
loans and withdrawals.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Funds have certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Funds are not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Funds over the telephone, you will generally bear the risk of any loss.
RULE 12B-1 FEES FOR INVESTOR CLASS SHARES
Investor Class Shares of the Mid Cap Portfolio have adopted a distribution plan pursuant to Rule 12b-1 that allows the Fund to pay distribution and/or service fees for the sale and distribution of its Investor Class Shares and for services provided to its shareholders. The maximum annual distribution and/or service fee is 0.25% of the Mid Cap Portfolio's average daily net assets. Since these fees are paid out of the Mid Cap Portfolio's assets on an ongoing basis, over time these fees will increase the cost of your investment in Investor Class Shares of the Mid Cap Portfolio and may cost you more than paying other types of sales charges.
RIGHTS RESERVED BY THE FUND
PURCHASES
At any time and without notice, the Funds may:
Stop offering shares;
Reject any purchase order; or
Bar an investor engaged in a pattern of excessive trading from buying shares. (Excessive trading can hurt performance by disrupting management and increasing expenses.) The Funds
will consider various factors in determining whether an investor has engaged in excessive trading. These factors include, but are not limited to, the investor's historic trading pattern, the number of transactions, the size of the transactions, the time between transactions and the percentage of the investor's account involved in each transaction. For more information about the Funds' policies on excessive trading, please see "Excessive Trading Policies and Procedures."
REDEMPTIONS
At any time and without notice, the Funds may change or eliminate any of the redemption methods described above, except redemption by mail. The Funds may suspend your right to redeem if:
Trading on the NYSE is restricted or halted; or
The U.S. Securities and Exchange Commission ("SEC") allows the Funds to delay redemptions.
EXCHANGES
The Funds may:
Modify or cancel the exchange program at any time on 60 days' written notice to shareholders;
Reject any request for an exchange; or
Limit or cancel a shareholder's exchange privilege, especially when an investor is engaged in a pattern of excessive trading.
ACCOUNT POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Funds are intended for long-term investment purposes only and discourage shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Funds may present risks to the Funds' long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of each Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring each Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
Because the Funds invest in micro, small and mid cap securities that often may trade in lower volumes, frequent trading by certain shareholders may dilute the value of fund shares held by other shareholders. In addition, because frequent trading may cause the Funds to attempt to maintain higher cash positions, changes to a Fund's holdings in response to frequent trading may impact the market prices of such relatively thinly traded securities held by the Funds.
The Funds' service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Funds' policies and procedures described in this prospectus and approved by the Funds' Board. For purposes of applying these policies, the Funds' service providers may consider the trading history of accounts under common ownership or control. The Funds' policies and procedures include:
Shareholders are restricted from making more than one (1) "round trip" into or out of each Fund per rolling 90 days. The Funds define a "round trip" as a purchase into a Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the
Adviser reasonably believes would be harmful or disruptive to the Fund. Shareholders are also restricted from making more than one (1) exchange (from one Rice Hall James Fund to another Rice Hall James Fund) per rolling 90 days. If a shareholder exceeds this amount, the Funds and/or their service providers may, at their discretion, reject any additional purchase or exchange orders.
The Micro Cap Portfolio assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 90 days (subject to certain exceptions as discussed in "Redemption Fee").
Each Fund reserves the right to reject any purchase or exchange request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
Each Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Funds do not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in a Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Funds for their customers through which transactions are placed. The Funds have entered into "information sharing agreements" with these financial intermediaries which permit the Funds to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Funds. If the Funds or their service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Funds, the Funds or their service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Funds or their service providers determine that the trading activity of any customer may be detrimental to the Funds, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Funds by that customer. If the Funds are not satisfied that the intermediary has taken appropriate action, the Funds may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Funds' shares is requested by the Funds and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Funds have an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Funds, to restrict or prohibit the indirect intermediary from purchasing shares of the Funds on behalf of other persons.
The Funds and their service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Funds. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Funds to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Funds will ask your name, address, date of birth, and other information that will allow the Funds to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Funds are required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Funds are required to collect documents to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Funds, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the application, your investment will be received and your order will be processed at the NAV next-determined.
Each Fund reserves the right to close your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within the timeframe established in the sole discretion of the Fund. Further, the Funds reserve the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Funds' overall obligation to deter money laundering under federal law. The Funds have adopted an Anti-Money Laundering Compliance Program designed to prevent the Funds from being used for money laundering or the financing of terrorist activities. In this regard, the Funds reserve the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of a Fund or in cases when a Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds.
SMALL ACCOUNTS
The Funds may redeem your shares without your permission if the value of your account falls below 50% of the required minimum initial investment. This provision does not apply:
To retirement accounts and certain other accounts; or
When the value of your account falls because of market fluctuations and not your redemptions.
The Funds will provide you at least 30 days' written notice to allow you time to add to your account and avoid the sale of your shares.
DISTRIBUTIONS
Normally, each Fund distributes its net investment income quarterly and its net capital gains at least once a year. Each will automatically reinvest dividends and distributions in additional shares of the Fund, unless you elect on your account application to receive them in cash.
FEDERAL TAXES
The following is a summary of the federal income tax consequences of investing in a Fund. This summary does not apply to shares held in an individual retirement account or other tax-qualified plan, which are not subject to current tax. Transactions relating to shares held in such accounts may, however, be taxable at some time in the future. You should always consult your tax advisor for specific guidance regarding the federal, state and local tax effect of your investment in the Funds.
TAXES ON DISTRIBUTIONS
Each Fund will distribute substantially all of its net investment income and its net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund may be subject to federal, state, and local taxation, depending upon your tax situation. Income distributions, including distributions of net short-term capital gains but excluding distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Long-term capital gains distributions and distributions that are designated by the Funds as qualified dividend income are generally taxable at the rates applicable to long-term capital gains. Once a year the Funds will send you a statement showing the types and total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the purchase price would reflect the amount of the upcoming distribution. In this case, you would be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of your investment. This is known as "buying a dividend" and should be avoided by taxable investors. Call 1-866-474-5669 to find out when the Funds expect to make distributions to shareholders.
Each sale or exchange of shares of a Fund may be a taxable event. For tax purposes, an exchange of shares of one Rice Hall James Portfolio for another is the same as a sale. A sale may result in a capital gain or loss to you. The gain or loss generally will be treated as short term if you held the shares 12 months or less, long term if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, a Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, a Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, a Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted
cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
More information about taxes is in the Statement of Additional Information ("SAI").
ADDITIONAL INFORMATION ABOUT THE FUNDS
OTHER INVESTMENT PRACTICES AND STRATEGIES
The investment objective of each of the Small Cap Portfolio and the Micro Cap Portfolio is to seek maximum capital appreciation, consistent with reasonable risk to principal, by investing primarily in small market capitalization companies. The investment objective of the Mid Cap Portfolio is to seek maximum capital appreciation, consistent with reasonable risk to principal, by investing primarily in mid-market capitalization companies. Each Fund may change its investment objective without shareholder approval.
In addition to its principal investment strategies, each Fund may use the investment strategies described below. Each Fund may also employ investment practices that this prospectus does not describe, such as participating in repurchase agreements, when-issued and forward commitment transactions, lending of securities, borrowing and other techniques. For more information concerning these and each Fund's other investment practices and their risks, you should read the SAI.
DERIVATIVES
Each Fund may invest in derivatives, a category of investments that includes forward foreign currency exchange contracts, futures, options and swaps to protect its investments against changes resulting from market conditions (a practice called "hedging"), to reduce transaction costs or to manage cash flows. Forward foreign currency exchange contracts, futures and options are called derivatives because their value is based on an underlying asset or economic factor. Derivatives are often more volatile than other investments and may magnify a Fund's gains or losses. There are various factors that affect a Fund's ability to achieve its objectives with derivatives. Successful use of a derivative depends on the degree to which prices of the underlying assets correlate with price movements in the derivatives a Fund buys or sells. The Funds could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
AMERICAN DEPOSITORY RECEIPTS ("ADRS")
Each Fund may invest up to 15% of its total assets in ADRs. ADRs are certificates evidencing ownership of shares of a foreign issuer that are issued by depositary banks and generally trade on an established market in the United States or elsewhere. Although ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies, they continue to be subject to many of the risks associated with investing directly in foreign securities.
Foreign securities, especially those of companies in emerging markets, can be riskier and more volatile than domestic securities. Adverse political and economic developments or changes in the value of foreign currency can make it harder for the Funds to sell their securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Although not a principal investment strategy, each Fund may invest in REITs. REITs pool investors' funds for investment primarily in income producing real estate or real estate related loans or interests. REITs can generally be classified as equity REITs and mortgage REITs. Equity REITs, which invest the majority of their assets directly in real property, derive their income primarily from rents. Equity REITs can also realize capital gains or losses by selling properties. Mortgage REITs, which invest the majority of their assets in real estate mortgages, derive their income primarily from interest payments.
Each Fund is subject to the risk that the securities of issuers in the real estate industry that the Fund purchases will underperform the market as a whole. In general, real estate values can be affected by a variety of factors, including supply and demand for properties and the strength of specific industries that rent properties. In general, equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. In the event of a default by a borrower or lessee, a REIT may experience delays and may incur substantial costs in enforcing its rights as a mortgagee or lessor.
SHORT-TERM INVESTING
The investments and strategies described in this prospectus are those that the Funds use under normal circumstances. During unusual economic, market, political or other circumstances, the Funds may invest up to 100% of their assets in short-term, high quality debt instruments, such as U.S. government securities. These instruments would not ordinarily be consistent with the Funds' principal investment strategies, and may prevent the Funds from achieving their investment objective. Each Fund will use a temporary strategy if the Adviser believes that pursuing the Fund's investment objective will subject it to a significant risk of loss. Each Fund has a policy requiring it to invest at least 80% of its net assets in particular types of securities as described in the Fund's principal investment strategy, and will not change this policy without 60 days' prior written notice to shareholders. In addition to the temporary defensive measures discussed above, the Funds may also temporarily deviate from this 80% policy in other limited, appropriate circumstances, such as if a Fund experiences large cash inflows or redemptions.
When the Adviser pursues a temporary defensive strategy, the Funds may not profit from favorable developments that they would have otherwise profited from if they were pursuing their normal strategies.
PORTFOLIO TURNOVER
The Funds may buy and sell investments relatively often. Such a strategy often involves higher expenses, including brokerage commissions, and may increase the amount of capital gains (in particular, short-term gains) realized by the Funds. Shareholders must pay tax on such capital gains.
INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Fund generally publishes a complete list of its portfolio holdings and a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at HTTP://WWW.RHJFUNDS.COM. The information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of any Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund. Please consult the Funds' SAI for a full description of the policies and procedures that govern disclosure of the Funds' portfolio holdings.
INVESTMENT MANAGEMENT
INVESTMENT ADVISER
Rice Hall James & Associates, LLC, a 100% employee owned Delaware limited liability company located at 600 West Broadway, Suite 1000, San Diego, CA 92101, serves as each Fund's investment adviser. The Adviser manages and supervises the investment of each Fund's assets on a discretionary basis, subject to oversight by the Board. As of December 31 2012, the Adviser had approximately $1.1 billion in assets under management.
For its services, the Small Cap Portfolio pays the Adviser an annual fee of 0.80% of its average daily net assets. The Adviser has voluntarily agreed to reduce fees and reimburse expenses in order to keep total annual Fund operating expenses of the Fund (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 1.50% of the Fund's average daily net assets. The Adviser intends to continue these fee reductions and expense reimbursements until further notice, but may discontinue them at any time. During its most recent fiscal year, the Fund paid 0.80% of its average daily net assets in advisory fees (after fee reductions) to the Adviser.
For its services, the Micro Cap Portfolio pays the Adviser an annual fee of 0.75% of its average net assets. The Adviser has voluntarily agreed to reduce fees and reimburse expenses in order to keep total annual Fund operating expenses of the Fund (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 1.60% of the Fund's average daily net assets. The Adviser intends to continue these fee reductions and expense reimbursements until further notice, but may discontinue them at any time. During its most recent fiscal year, the Fund paid 0.75% of its average daily net assets in advisory fees (after fee reductions) to the Adviser.
For its services, the Mid Cap Portfolio pays the Adviser an annual fee of 0.90% on the first $250 million, 0.80% on the next $250 million and 0.70% for amounts over $500 million, of its average daily net assets. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses of the Fund (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.40% of the Fund's average daily net assets for a period of one year from the date of this prospectus. In addition, if at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between total annual Fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. During its most recent fiscal year, the Fund paid 0.015% of its average daily net assets in advisory fees (after fee reductions) to the Adviser.
A discussion regarding the basis for the Board's approval of Funds' investment advisory agreement is available in the Funds' Annual Report dated October 31, 2012, which covers the period from November 1, 2011 to October 31, 2012.
PORTFOLIO MANAGERS
The RHJ Funds are managed by a team of investment professionals. The following portfolio managers are jointly and primarily responsible for the day-to-day management of the Funds. The SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
Thomas W. McDowell, Chief Executive Officer and Chief Investment Officer, is jointly and primarily responsible for managing the Micro Cap Portfolio, the Small Cap Portfolio and the Mid Cap Portfolio. Mr. McDowell joined RHJ in 1984 as a Portfolio Manager and Analyst and has 33 years of investment experience. Mr. McDowell assumed leadership of RHJ in 1994. Mr. McDowell has a B.A. from the University of California, Los Angeles and an M.B.A. from San Diego State University.
Cara M. Thome, Portfolio Manager/Analyst, is jointly and primarily responsible for managing the Micro Cap Portfolio, the Small Cap Portfolio and the Mid Cap Portfolio. Ms. Thome joined RHJ in January 2001 and has 15 years of investment experience. She was previously an Analyst at the Equity Research Department at George K. Baum & Company from 1997 to 2001. Ms. Thome has a B.A. from Truman State University and an M.A. in Finance from the University of Exeter.
Timothy A. Todaro, CFA, Portfolio Manager/Analyst, is jointly and primarily responsible for managing the Micro Cap Portfolio, the Small Cap Portfolio and the Mid Cap Portfolio. Mr. Todaro joined RHJ in 1983 and has 33 years of investment experience. Mr. Todaro has a B.A. from the University of California, San Diego and an M.B.A. from the University of Wisconsin at Madison.
James D. Dickinson, CFA, Portfolio Manager/Analyst, is jointly and primarily responsible for managing the Micro Cap Portfolio, the Small Cap Portfolio and the Mid Cap Portfolio. Mr. Dickinson rejoined RHJ in January 2006 and has 43 years of investment experience. He was previously with Rice Hall James from 1979-1986 and rejoined for a two-year period in 1996. Mr. Dickinson has a B.A. in Economics and an M.S. in Finance from the University of California, Los Angeles.
SHAREHOLDER SERVICING ARRANGEMENTS
The Funds may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Funds generally pay financial intermediaries a fee that is based on the assets of the Funds that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Funds, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Funds do not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Funds, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any 12b-1 or shareholder servicing payments that are reflected in the fees and expenses listed in the fee table section of this prospectus. These payments are sometimes characterized as "revenue
sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Funds. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Funds available to their customers or registered representatives, including providing the Funds with "shelf space," placing them on a preferred or recommended fund list, or promoting the Funds in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Funds' SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the NAV or price of the Funds' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about each Fund. The information is intended to help you understand each Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Funds, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm whose report, along with the Funds' financial statements, is included in the Funds' Annual Report. The report of PricewaterhouseCoopers LLP, along with the Funds' financial statements and related notes, appears in the Annual Report that accompanies the Statement of Additional Information. You can obtain the Annual Report, which contains more performance information, at no charge by calling 1-866-474-5669.
RICE HALL JAMES SMALL CAP PORTFOLIO
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGH EACH YEAR
YEARS ENDED OCTOBER 31,
-------------------------------------------------------------------
2012 2011 2010 2009 2008
----------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $13.40 $10.30 $8.52 $7.34 $13.93
------ ------ ----- ----- ------
Income (Loss) from Investment Operations:
Net Investment Loss(1) (0.02) (0.12) (0.10) (0.06) (0.06)
Net Realized and Unrealized Gain (Loss) 0.44 3.22 1.88 1.24 (4.45)
---- ---- ---- ---- ----
Total from Investment Operations 0.42 3.10 1.78 1.18 (4.51)
---- ---- ---- ---- ----
Distributions from:
Net Realized Gain (0.59) -- -- -- (2.08)
---- ---- ---- ---- ----
Return of Capital --(2) -- -- -- --(2)
---- ---- ---- ---- ----
Total Distributions (0.59) -- -- -- (2.08)
---- ---- ---- ---- ----
Net Asset Value, End of Year $13.23 $13.40 $10.30 $8.52 $7.34
====== ====== ====== ===== =====
Total Return(4) 3.63% 30.10% 20.89% 16.08%(5) (37.45)%
======= ====== ====== ===== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $87,715 $140,176 $34,672 $40,733 $35,321
Ratio of Net Expenses to Average Net
Assets(3) 1.32% 1.37% 1.47% 1.34% 1.17%
Ratio of Expenses to Average Net Assets
(Excluding Fees Paid Indirectly) 1.44% 1.47% 1.49% 1.41% 1.20%
Ratio of Net Investment Loss to Average
Net Assets (0.12)% (0.96)% (1.02)% (0.82)% (0.54)%
Portfolio Turnover Rate 89% 79% 78% 78% 88%
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(1) Per share calculations were performed using average shares for the year.
(2) Value is less than $0.01 per share.
(3) The Ratio of Net Expenses to Average Net Assets excludes the effect of fees paid indirectly. If these expense offsets were included, the ratio would have been the same.
(4) Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
(5) Total return would have been lower had certain fees not been waived and/or expenses assumed by the Adviser during the year.
Amounts designated as "--" are either $0 or have been rounded to $0.
RICE HALL JAMES MICRO CAP PORTFOLIO
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGH EACH YEAR
YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------
2012 2011 2010 2009 2008
--------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $16.95 $14.71 $12.10 $11.12 $21.95
------ ------ ------ ------ ------
Income (Loss) from Investment
Operations:
Net Investment Loss(1) (0.21) (0.22) (0.19) (0.12) (0.15)
Net Realized and Unrealized Gain
(Loss) 2.37 2.46 2.80 1.10 (8.13)
---- ---- ---- ---- ----
Total from Investment Operations 2.16 2.24 2.61 0.98 (8.28)
Redemption Fees(2) -- -- -- -- --
---- ---- ---- ---- ----
Distributions from:
Net Realized Gain -- -- -- -- (2.55)
---- ---- ---- ---- ----
Return of Capital -- -- -- -- --(2)
Total Distributions -- -- -- -- (2.55)
==== ==== ==== ==== ====
Net Asset Value, End of Year $19.11 $16.95 $14.71 $12.10 $11.12
===== ===== ===== ===== =====
Total Return(3) 12.74% 15.23% 21.57% 8.81%(4) (41.94)%
===== ===== ===== ===== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $33,596 $34,334 $60,582 $108,613 $109,691
Ratio of Net Expenses to Average Net
Assets(5) 1.36% 1.50% 1.60% 1.47% 1.31%
Ratio of Expenses to Average Net
Assets (Excluding Fees Paid Indirectly) 1.43% 1.62% 1.66% 1.54% 1.31%
Ratio of Net Investment Loss to
Average Net Assets (1.14)% (1.31)% (1.36)% (1.11)% (0.97)%
Portfolio Turnover Rate 101% 147% 128% 139% 119%
|
(1) Per share calculations were performed using average shares for the year.
(2) Value is less than $0.01 per share.
(3) Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
(4) Total return would have been lower had certain fees not been waived and/or expenses assumed by the Adviser during the year.
(5) The Ratio of Net Expenses to Average Net Assets excludes the effect of fees paid indirectly. If these expense offsets were included, the ratio would have been 1.36%, 1.50%, 1.61%, 1.47% and 1.31%, respectively.
Amounts designated as "--" are either $0 or have been rounded to $0.
RICE HALL JAMES MID CAP PORTFOLIO
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGH EACH YEAR
YEARS ENDED OCTOBER 31,
--------------------------------------------------------------
2012 2011 2010 2009 2008
------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $13.49 $12.61 $10.65 $9.19 $15.44
------ ------ ------ ----- ------
Income (Loss) from Investment Operations:
Net Investment Income (Loss)(1) 0.01 (0.07) (0.05) (0.04) (0.03)
Net Realized and Unrealized Gain (Loss) (0.32) 0.95 2.01 1.50 (5.56)
---- ---- ---- ---- ----
Total from Investment Operations (0.31) 0.88 1.96 1.46 (5.59)
---- ---- ---- ---- ----
Dividends and Distributions from:
Net Realized Gain -- -- -- -- (0.66)
Return of Capital -- -- -- -- --(2)
---- ---- ---- ---- ----
Total Dividends and Distributions -- -- -- -- (0.66)
Net Asset Value, End of Year $13.18 $13.49 $12.61 $10.65 $9.19
====== ====== ====== ====== =====
Total Return(3) (2.30)% 6.98% 18.40% 15.89% (37.73)%
====== ====== ====== ====== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $8,580 $9,087 $7,203 $20,934 $22,568
Ratio of Net Expenses to Average Net Assets(4) 1.40% 1.40% 1.40% 1.40% 1.40%
Ratio of Expenses to Average Net Assets
(Excluding Waivers, Reimbursements and
Fees Paid Indirectly) 2.12% 2.22% 2.00% 1.85% 1.62%
Ratio of Net Investment Income (Loss) to
Average Net Assets 0.08% (0.47)% (0.42)% (0.47)% (0.25)%
Portfolio Turnover Rate 60% 57% 67% 60% 68%
|
(1) Per share calculations were performed using average shares for the year.
(2) Value is less than $0.01 per share.
(3) Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total return would have been lower had certain fees not been waived and/or expenses assumed by the Adviser during the period.
(4) The Ratio of Net Expenses to Average Net Assets excludes the effect of fees paid indirectly. If these expense offsets were included, the ratio would have been 1.37%, 1.38%, 1.42%, 1.40% and 1.40%, respectively.
Amounts designated as "--" are either $0 or have been rounded to $0.
THE ADVISORS' INNER CIRCLE FUND
THE RICE HALL JAMES FUNDS
Investors who are interested in receiving more information about the Funds should read the Funds' Annual and Semi-Annual Reports and the Funds' SAI. The Annual and Semi-Annual Reports of the Funds provide additional information about their investments. In the Annual Report, you will also find a discussion of the market conditions and investment strategies that significantly affected the performance of the Funds during the last fiscal year. The SAI contains additional detailed information about the Funds and is incorporated by reference into (is legally part of) this prospectus.
Investors can receive free copies of the SAI, shareholder reports and other information about the Funds at www.rhjfunds.com. Investors can also receive these documents, as well as make shareholder inquiries by writing to or calling:
The Rice Hall James Funds P.O. Box 219009 Kansas City, MO 64121 www.rhjfunds.com 1-866-474-5669
You can review and copy information about the Funds (including the SAI and the Annual and Semi-Annual Reports) at the U.S. Securities and Exchange Commission's Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room by calling the U.S. Securities and Exchange Commission at 202-551-8090. Reports and other information about the Funds are available on the EDGAR Database on the U.S. Securities and Exchange Commission's Internet site at: HTTP://WWW.SEC.GOV. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following e-mail address: PUBLICINFO@SEC.GOV, or by writing the U.S. Securities and Exchange Commission's Public Reference Section, Washington, D.C. 20549-1520.
THE TRUST'S INVESTMENT COMPANY ACT OF 1940 FILE NUMBER IS 811-06400.
RHJ-PS-001-1200
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
SANDS CAPITAL GLOBAL GROWTH FUND
TICKER SYMBOL: SCMGX
INSTITUTIONAL CLASS SHARES
INVESTMENT ADVISER:
SANDS CAPITAL MANAGEMENT, LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
FUND SUMMARY .................................................... 1
INVESTMENT OBJECTIVE ....................................... 1
FUND FEES AND EXPENSES ..................................... 1
PRINCIPAL INVESTMENT STRATEGY .............................. 2
PRINCIPAL RISKS ............................................ 3
PERFORMANCE INFORMATION .................................... 5
INVESTMENT ADVISER ......................................... 6
PORTFOLIO MANAGERS ......................................... 6
PURCHASE AND SALE OF FUND SHARES ........................... 6
TAX INFORMATION ............................................ 7
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES ........................................... 7
MORE INFORMATION ABOUT RISK ..................................... 8
MORE INFORMATION ABOUT FUND INVESTMENTS ......................... 8
INFORMATION ABOUT PORTFOLIO HOLDINGS ............................ 9
MORE INFORMATION ABOUT THE INVESTMENT ADVISER ................... 9
PORTFOLIO MANAGERS .............................................. 10
RELATED PERFORMANCE DATA OF THE ADVISER ......................... 10
PURCHASING AND SELLING FUND SHARES .............................. 12
OTHER POLICIES .................................................. 17
SHAREHOLDER SERVICING ARRANGEMENTS .............................. 19
PAYMENTS TO FINANCIAL INTERMEDIARIES ............................ 20
DIVIDENDS AND DISTRIBUTIONS ..................................... 20
TAXES ........................................................... 20
FINANCIAL HIGHLIGHTS ............................................ 22
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ................... Back Cover
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SANDS CAPITAL GLOBAL GROWTH FUND
INVESTMENT OBJECTIVE
The Sands Capital Global Growth Fund's (the "Fund") investment objective is long-term capital appreciation.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD INSTITUTIONAL CLASS SHARES OF THE FUND.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INSTITUTIONAL CLASS
SHARES
Management Fees 0.85%
Other Expenses 1.50%
-----
Total Annual Fund Operating Expenses 2.35%
Less Fee Reductions and/or Expense Reimbursements (1.25)%
-----
Total Annual Fund Operating Expenses After Fee Reductions and/or 1.10%
Expense Reimbursements(1)
|
(1) Sands Capital Management, LLC (the "Adviser") has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Class Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.10% of the Fund's Institutional Class Shares' average daily net assets until February 28, 2014. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions and expense reimbursements made during the preceding three-year period during which this agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$112 $614 $1,142 $2,590
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 21% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
Under normal circumstances, the Fund invests primarily in equity securities of publicly-traded companies located anywhere in the world, including equity securities in developed and emerging markets. Under normal market conditions, the Fund expects to invest at least 40% of its net assets, plus the amount of any borrowings for investment purposes, in non-U.S. companies. In making investment decisions for the Fund, Sands Capital Management, LLC (the "Adviser") focuses on companies that generate (or that the Adviser expects to generate) above average earnings growth and that, in the Adviser's opinion, are leading growth businesses in the marketplace. The Fund typically invests in a portfolio of 30-50 issuers that the Adviser believes represents the best opportunities to achieve the Fund's investment objective. In selecting securities for the Fund, the Adviser utilizes a fundamental, bottom-up, business-focused research approach. This research starts with internal competitive landscape analysis, ongoing participation at industry conferences, review of industry and trade periodicals and quantitative screens to populate an initial universe of publicly traded companies that it expects will generate above average earnings growth. The Adviser then evaluates each company for six key investment criteria:
o sustainable above-average earnings growth;
o leadership position in a promising business space;
o significant competitive advantages;
o clear mission and value-added focus;
o financial strength; and
o rational valuation relative to the market and business prospects.
Companies that the Adviser determines may meet all six investment criteria are then screened with in-depth qualitative and quantitative research, including a full competitive analysis and proprietary financial modeling. This additional screening also typically includes identifying the key metrics for a particular business or industry, any specific risks or issues relating to a company, as well as a hypothetical "sell case," i.e. evaluating a range of scenarios under which a position in a security would be reduced or sold.
The Fund intends to buy and hold securities for the long term and seeks to maintain a low level of portfolio turnover. The portfolio turnover rate of the Fund is expected to be below 50% of the average value of its portfolio. The Adviser employs a sell discipline in which the security of a company is sold if an issue emerges that negatively impacts the Adviser's assessment of one or more of the six investment
criteria discussed above and the Adviser believes that the issue cannot be resolved within an acceptable time frame. The Adviser may also sell a holding if it becomes materially overvalued versus its underlying business, for risk management purposes, and/or if a more attractive investment opportunity presents itself.
While the Fund may invest in equity securities of companies of any size, the Fund will primarily invest in large and mid-capitalization companies given the Adviser's focus on what it considers to be established business "leaders." As such, the Fund will generally not invest in companies with a market capitalization of less than $2 billion and its total median market capitalization will typically be significantly greater than that of the MSCI Barra's ("MSCI") All Country World Index, the Fund's benchmark. As of December 31, 2012, the total median market capitalization of the MSCI All Country World Index was $7.7 billion.
The equity securities in which the Fund invests include common stocks as well as preferred securities. The Fund may also purchase American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs" and, together with ADRs and EDRs, "Depositary Receipts"), which are certificates typically issued by a bank or trust company that represent securities issued by a foreign or domestic company. From time to time, the Fund may have significant investments in one or more countries. The Fund may invest up to the greater of 30% of its net assets or three times the emerging markets component of the MSCI All Country World Index, in securities of companies located in emerging markets. As of December 31, 2012, the emerging markets component of the MSCI All Country World Index was 13.3% of the total Index.
The Fund may also invest in derivatives, specifically "market access products," to gain economic exposure to markets where holding an underlying security is not feasible. A market access product is a derivative security that provides market exposure to an underlying foreign issuer. Examples of market access products are low exercise price options ("LEPOs") and participatory notes ("P-notes"), both of which allow the holder to gain exposure to issuers in certain countries. A LEPO is an option to purchase a security with an exercise price significantly below the market price of the underlying security. Because of its low exercise price, a LEPO is virtually certain to be exercised and the value and performance of its intrinsic value is effectively identical to that of the underlying equity. These features are designed to allow participation in the performance of an equity security where there are legal or financial obstacles to purchasing the underlying security directly. If the LEPO is cash-settled, the buyer profits to the same extent as with a direct holding in the underlying, but without having to transact in it. P-notes are derivatives that are generally traded over the counter and constitute general unsecured contractual obligations of the banks and broker-dealers that issue them. Generally, these banks and broker-dealers buy securities listed on certain foreign exchanges and then issue P-notes which are designed to replicate the performance of certain issuers and markets. The Fund's investments in derivatives are limited to market access products and only for the purpose of gaining exposure to an underlying long equity position. The Fund may invest up to 20% of its net assets in these derivatives.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of
securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
Investing in foreign companies, including direct investments and through Depositary Receipts, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a foreign currency, the value of which may be influenced by currency exchange rates and exchange control regulations. Changes in the value of a currency compared to the U.S. dollar may affect (positively or negatively) the value of the Fund's investments. These currency movements may occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While Depositary Receipts provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in Depositary Receipts continue to be subject to many of the risks associated with investing directly in foreign securities.
The Fund may invest in companies located or doing business in emerging market countries. An "emerging market" country is any country determined by the Adviser to have an emerging market economy, considering factors such as the country's credit rating, its political and economic stability and the development of its financial and capital markets. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products than more developed countries. For purposes of determining whether a particular country is considered a developed market or an emerging market, the Fund uses the designation set forth by the MSCI, a prominent provider of investment tools and data services for institutions worldwide.
Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. Differences in tax and accounting standards and difficulties in obtaining information about foreign governments or foreign companies may impair investment decisions. In addition, emerging markets securities may be subject to smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, emerging markets governments may have limited ability to raise taxes or authorize appropriations for debt repayment. In addition, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies. Moreover, the currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. The Fund may incur operating expenses that are higher than those of mutual funds that invest exclusively in U.S. equity securities due to higher custodial fees and brokerage commissions associated with investments in foreign securities. These risks may be magnified in less-established, emerging markets.
The large capitalization companies in which the Fund may invest may lag the performance of smaller capitalization companies because large capitalization companies may experience slower rates of growth than smaller capitalization companies and may not respond as quickly to market changes and opportunities. The mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these mid-
sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, mid-cap stocks may be more volatile than those of larger companies.
The Fund pursues a "growth style" of investing, meaning that the Fund invests in equity securities of companies that the Adviser believes will increase their earnings at a certain rate that is generally higher than the rate expected for non-growth companies. If a growth company does not meet these expectations, the price of its stock may decline significantly, even if it has increased earnings. Many growth companies do not pay dividends. Companies that pay dividends often have lower stock price declines during market downturns. Over time, a growth investing style may go in and out of favor, causing the Fund to sometimes underperform other equity funds that use differing investing styles.
The Fund may also invest in derivatives, specifically "market access products," to gain economic exposure to markets where holding an underlying security is not feasible. A market access product is a derivative security that provides market exposure to an underlying foreign issuer. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its investment objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
The lack of a liquid secondary market for a derivative may prevent the Fund from closing its derivative positions and could adversely impact its ability to achieve its investment objective or to realize profits or limit losses.
Because derivative instruments may be purchased by the Fund for a fraction of the market value of the investments underlying such instruments, a relatively small price movement in the underlying investment may result in an immediate and substantial gain or loss to the Fund. Derivatives are often more volatile than other investments and the Fund may lose more in a derivative than it originally invested in it.
Additionally, derivative instruments, particularly market access products, are subject to counterparty risk, meaning that the party that issues the derivative may experience a significant credit event and may be unwilling or unable to make timely settlement payments or otherwise honor its obligations.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual total returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling 1-888-826-5646.
2011 (3.09)%
2012 20.22%
BEST QUARTER WORST QUARTER
17.05% (15.29)%
(03/31/2012) (09/30/2011)
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
SINCE
INCEPTION
INSTITUTIONAL CLASS SHARES 1 YEAR (3/31/10)
-------------------------------------------------------------------------------------------
Fund Returns Before Taxes 20.22% 13.34%
Fund Returns After Taxes on Distributions 20.00% 13.23%
Fund Returns After Taxes on Distributions and Sale of Fund 13.43% 11.51%
Shares
MSCI All Country World Index (reflects no deduction for fees, 16.13% 6.06%
expenses, or taxes)
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INVESTMENT ADVISER
Sands Capital Management, LLC.
PORTFOLIO MANAGERS
Sunil H. Thakor, CFA, Senior Research Analyst and Senior Portfolio Manager, has managed the Fund since its inception.
David E. Levanson, CFA, Senior Research Analyst and Senior Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $1 million. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-888-826-5646.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which it trades. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, instruments that attempt to track the price movement of equity indices, as well as interests in Depositary Receipts. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the Fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
Investments in securities of foreign companies or governments (including direct investments as well as through Depositary Receipts) can be more volatile than investments in U.S. companies or governments. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investment objective of the Fund is long-term capital appreciation. This investment objective may be changed without shareholder approval, upon 60 days' prior notice to shareholders.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objectives. The Fund will do so only if the Adviser
believes that the risk of loss outweighs the opportunity for capital appreciation. The Fund intends to remain as fully invested as practicable regardless of market conditions.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as the strategies described in this prospectus, are described in detail in the Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI, see the back cover of this prospectus). Of course, the Fund cannot guarantee that it will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
Sands Capital Management, LLC, a Delaware limited liability company, serves as investment adviser to the Fund. The Adviser was initially formed in 1992 as a Sub-Chapter S-Corporation and converted to a limited liability company in 2005. The Adviser's principal place of business is located at 1101 Wilson Boulevard, Suite 2300, Arlington, VA 22209. The Adviser is an independent investment management firm focused exclusively on portfolios of high quality growth companies. Clients include corporate pension plans, public plans, endowments, foundations, Taft-Hartley plans, family offices and individuals. As of December 31, 2012, the Adviser had approximately $27 billion in assets under management. The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
For its services to the Fund, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.85% based on the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) for Institutional Class Shares of the Fund from exceeding 1.10% of the Fund's Institutional Class Shares' average daily net assets until February 28, 2014. If at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the total annual Fund operating expenses (not including excluded expenses) and its expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. For the fiscal year ended October 31, 2012, the Fund did not pay any advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals each of whom is jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Sunil H. Thakor, CFA, Senior Research Analyst and Senior Portfolio Manager, has been with the Adviser since 2004. Mr. Thakor was Research Analyst and Portfolio Manager from 2007 to 2008 and Research Analyst from 2005 to 2006. He has more than 12 years of investment and research experience.
David E. Levanson, CFA, Senior Research Analyst and Senior Portfolio Manager, has been with the Adviser since 2002. He has more than 22 years of investment and research experience.
RELATED PERFORMANCE DATA OF THE ADVISER
The following tables give the related performance of all the actual, fee-paying and non-fee-paying separate accounts (each, an "Account"), referred to as a "Composite," managed by the Adviser that have investment objectives, strategies and policies substantially similar to those of the Fund. The Composite does not reflect all of the Adviser's assets under management. A complete list and description of the Adviser's composites is available upon request. The data illustrates the past performance of the Adviser in managing substantially similar accounts. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. Performance is historical and does not represent the future performance of the Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs from that of registered mutual funds such as the Fund. The Adviser claims compliance with the Global Investment Performance Standards (GIPS([R])) and has been independently verified for the periods February 7, 1992 through September 30, 2012.(1) All returns presented were calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of investment management fees, brokerage commissions, and execution costs paid by the Accounts included in the Composite, without taking into account federal or state income taxes. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor's domicile. Custodial fees, if any, were not included in the calculations. Securities are valued as of trade-date. Each Account in the Composite was under management for the entire reporting period in which the Account was included. The currency used to express performance in the Composite is stated in U.S. dollars. Performance results are presented both net of fees and gross of fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular Account. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The performance of the Composite (net of fees) reflects the Adviser's applicable account fees and expenses; however, the Fund's fees and expenses are generally expected to be higher than those of the Accounts including in the Composite. If the Fund's fees and expenses had been imposed on the Accounts included in the Composite, the performance shown below would have been lower. The Accounts that are included in the Composite are not subject to the same type of expenses to which the Fund is subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the Accounts in the Composite were subject to the same federal securities and tax laws as the Fund.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Fund. During the period shown the markets for equity securities were subject to significant volatility and experienced both large upward and downward price movements. Composite outperformance relative to the benchmark during the period shown is attributable to the Adviser's individual security selection. The performance shown during the period is no indication and is not a guarantee that the Adviser's investment strategy will yield similar results in the future. THE PERFORMANCE DATA SHOWN BELOW SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE INFORMATION. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
PERFORMANCE INFORMATION FOR THE ADVISER'S GLOBAL GROWTH STRATEGY COMPOSITE(4)
(12/31/2008 THROUGH 12/31/2012)
------------------------------------------------------------------------------------------
TOTAL
MSCI ALL ASSETS AT
TOTAL RETURN COUNTRY NUMBER END OF PERCENTAGE
TOTAL RETURN (GROSS OF WORLD OF PERIOD OF FIRM
YEAR (NET OF FEES) FEES) INDEX(3) PORTFOLIOS ($ MILLIONS) ASSETS
------------------------------------------------------------------------------------------
2012 20.38% 21.37% 16.13% 12 $4,045 14%
------------------------------------------------------------------------------------------
2011 -1.98% -1.14% -7.35% <5 $1,545 8%
------------------------------------------------------------------------------------------
2010 27.67% 28.74% 12.67% <5 $1,530 10%
------------------------------------------------------------------------------------------
2009 86.69% 88.18% 34.63% <5 $1,223 9%
------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF 12/31/12)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
MSCI ALL COUNTRY
TIME PERIOD NET OF FEES GROSS OF FEES WORLD INDEX(3)
--------------------------------------------------------------------------------
1 Year 20.38% 21.37% 16.13%
2 Years 8.63% 9.54% 3.73%
3 Years 14.64% 15.60% 6.63%
4 Years 29.50% 30.57% 13.03%
Since Inception(2) 29.50% 30.57% 13.03%
--------------------------------------------------------------------------------
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(1) The GIPS standards were created and are administered by CFA Institute, the global, not-for-profit association of investment professionals that awards the Chartered Financial Analyst (CFA)[R] and Certificate in Investment Performance Measurement (CIPM)[R] designations. GIPS[R] is a registered trademark of CFA Institute. CFA Institute has not been involved in the preparation or review of this report.
(2) Inception Date of the Composite is December 31, 2008.
(3) The MSCI All Country World Index ("ACWI") is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of December 2012, the MSCI ACWI consisted of 45 country indices comprising 24 developed and 21 emerging market country indices.
(4) Returns include the reinvestment of all income. Net results are calculated using the highest management fee. Returns are based on fully discretionary accounts under management, including, for certain time periods, those accounts no longer with the Adviser.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Institutional Class Shares of the Fund.
Institutional Class Shares are for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-888-826-5646.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
You may also buy shares through accounts with financial intermediaries, such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. If you invest through a financial intermediary, you will have to follow its procedures, which may be different from the procedures for investing directly. Your financial intermediary may charge a fee for its services in addition to the fees charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution. Please contact your financial intermediary for more information.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "Sands Capital Global Growth Fund."
REGULAR MAIL ADDRESS
Sands Capital Global Growth Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Sands Capital Global Growth Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-888-826-5646 for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
Sands Capital Global Growth Fund
DDA Account #9870523965
Ref: account number/account name
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The price per share will be the NAV next determined after the Fund receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Funds may change on days when you are unable to purchase or redeem shares.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information as related to the securities.
MINIMUM INVESTMENTS
You can open an account with the Fund with a minimum initial investment of $1 million. There is no minimum for subsequent investments. The Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase Institutional Class Shares, check daily NAV or obtain additional information.
FUND NAME SHARE CLASS TICKER SYMBOL CUSIP FUND CODE Sands Capital Global Institutional SCMGX 00769G303 1291 Growth Fund |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-888-826-5646.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
If you would like to close your account, or have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-888-826-5646 for more information.
The sale price will be the NAV next determined after the Fund receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 2.00% redemption fee on redemptions of shares that have been held for less than 90 days. The redemption fee is deducted from the Fund's sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that, due to operational requirements, the intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's.
The Fund reserves the right to reduce all or a portion of the redemption fee in
its discretion when it believes such reduction is in the best interests of the
Fund, including with respect to certain categories of redemptions that the Fund
reasonably believes may not raise frequent trading or market timing concerns.
These categories include, but are not limited to, the following: (i)
participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic redemptions; and (v) retirement
loans and withdrawals.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs. In addition, because the Fund invests in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities.
Because the Fund may invest in mid-cap securities, which often may trade in lower volumes and may be less liquid, the Fund may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market price of these types of securities.
In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of their Fund's shares if the prices of the Fund's foreign securities do not reflect their fair value. Although the Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage. For more information on the Fund uses fair value pricing, see "How the Fund Calculates NAV."
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than five (5) "round trips" into or out of the Fund per calendar year. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 90 days (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its
Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the next-determined NAV per share.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section briefly describes how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees on shares purchased directly.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (E.G., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" and "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend
income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains and set at a maximum tax rate for individuals at 20% (lower rates apply to individuals in lower tax brackets).
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. Because the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. The Fund may elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Institutional Class Shares of the Fund. The financial highlights table is intended to help you understand the financial performance of the Fund for the period since the Fund's commencement of operations on March 31, 2010 through the most recent fiscal year end. Certain information contained in the table reflects the financial results for a single share of the Fund. The total returns in the table represent the rate that an investor would have earned on an investment in the Fund assuming all dividends and distributions were reinvested. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-888-826-5646.
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, 2010(1)
2012 2011
NET ASSET VALUE, BEGINNING OF YEAR $12.15 $11.49 $10.00
------ ------ ------
Income from Investment Operations:
Net Investment Income(2) 0.02 0.03 0.01
Net Realized and Unrealized Gain 1.18 0.66 1.48
---- ---- ----
Total From Investment Operations 1.20 0.69 1.49
---- ---- ----
Dividends and Distributions from:
Net Realized Gains (0.04) (0.03) --
---- ---- ----
Total Dividends and Distributions (0.04) (0.03) --
---- ---- ----
Redemption Fees(7) --(6) -- --
---- ---- ----
Net Asset Value, End of Year $13.31 $12.15 $11.49
===== ===== =====
Total Return(3) 9.90% 6.02% 14.90%
==== ==== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $57,329 $15,027 $5,207
Ratio of Expenses to Average Net Assets 1.10% 1.10% 1.10%(4)
Ratio of Expenses to Average Net Assets
(Excluding Waivers, Expense Reimbursements
and Fees Paid Indirectly) 2.35% 5.42% 13.43%(4)
Ratio of Net Investment Income to Average Net
Assets 0.13% 0.26% 0.11%(4)
Portfolio Turnover Rate 21% 19% 17%(5)
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1 Commenced operations on March 31, 2010.
2 Per share calculations were performed using average shares for the period.
3 Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total return would have been lower had the Adviser not waived its fee and reimbursed other expenses.
4 Annualized.
5 Not Annualized.
6 Amount less than $0.01.
7 See note 2 in "Notes to Financial Statements" in the Fund's 2012 Annual Report.
Amounts designated as "--" are $0.
THE ADVISORS' INNER CIRCLE FUND
SANDS CAPITAL GLOBAL GROWTH FUND
INVESTMENT ADVISER
Sands Capital Management, LLC
1101 Wilson Boulevard, Suite 2300
Arlington, VA 22209
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the Sands Capital Global Growth Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-888-826-5646
BY MAIL: Write to us at:
Sands Capital Global Growth Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY E-MAIL: sandscapfunds@seic.com
BY INTERNET: www.sandscapital.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: HTTP://WWW.SEC.GOV. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
PUBLICINFO@SEC.GOV.
The Trust's Investment Company Act registration number is 811-06400.
SAN-PS-002-0400
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
SANDS CAPITAL GLOBAL GROWTH FUND
TICKER SYMBOL: SCGVX
INVESTOR CLASS SHARES
INVESTMENT ADVISER:
SANDS CAPITAL MANAGEMENT, LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN
EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE
FUND, PLEASE SEE:
PAGE
FUND SUMMARY ................................................... 1
INVESTMENT OBJECTIVE ...................................... 1
FUND FEES AND EXPENSES .................................... 1
PRINCIPAL INVESTMENT STRATEGY ............................. 2
PRINCIPAL RISKS ........................................... 3
PERFORMANCE INFORMATION ................................... 5
INVESTMENT ADVISER ........................................ 6
PORTFOLIO MANAGERS ........................................ 6
PURCHASE AND SALE OF FUND SHARES .......................... 6
TAX INFORMATION ........................................... 7
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES .......................................... 7
MORE INFORMATION ABOUT RISK .................................... 8
MORE INFORMATION ABOUT FUND INVESTMENTS ........................ 8
INFORMATION ABOUT PORTFOLIO HOLDINGS ........................... 9
MORE INFORMATION ABOUT THE INVESTMENT ADVISER .................. 9
PORTFOLIO MANAGERS ............................................. 10
RELATED PERFORMANCE DATA OF THE ADVISER ........................ 10
PURCHASING AND SELLING FUND SHARES ............................. 12
OTHER POLICIES ................................................. 17
SHAREHOLDER SERVICING ARRANGEMENTS ............................. 19
PAYMENTS TO FINANCIAL INTERMEDIARIES ........................... 20
DIVIDENDS AND DISTRIBUTIONS .................................... 20
TAXES .......................................................... 21
FINANCIAL HIGHLIGHTS ........................................... 22
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND .................. Back Cover
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SANDS CAPITAL GLOBAL GROWTH FUND
INVESTMENT OBJECTIVE
The Sands Capital Global Growth Fund's (the "Fund") investment objective is long-term capital appreciation.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD INVESTOR CLASS SHARES OF THE FUND.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INVESTOR CLASS SHARES
Management Fees 0.85%
Other Expenses 1.61%
Shareholder Servicing Fees(1) 0.25%
----
Total Annual Fund Operating Expenses 2.71%
Less Fee Reductions and/or Expense Reimbursements (1.36)%
----
Total Annual Fund Operating Expenses After Fee Reductions and/or 1.35%
Expense Reimbursements(2)
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(1) The expense information in the table has been restated to reflect current fees.
(2) Sands Capital Management, LLC (the "Adviser") has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Investor Class Shares (excluding shareholder servicing fees, interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.10% of the Fund's Investor Class Shares' average daily net assets until February 28, 2014. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions and expense reimbursements made during the preceding three-year period during which this agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time, or (ii) by the Adviser upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$137 $712 $1,314 $2,942
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 21% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGY
Under normal circumstances, the Fund invests primarily in equity securities of publicly-traded companies located anywhere in the world, including equity securities in developed and emerging markets. Under normal market conditions, the Fund expects to invest at least 40% of its net assets, plus the amount of any borrowings for investment purposes, in non-U.S. companies. In making investment decisions for the Fund, Sands Capital Management, LLC (the "Adviser") focuses on companies that generate (or that the Adviser expects to generate) above average earnings growth and that, in the Adviser's opinion, are leading growth businesses in the marketplace. The Fund typically invests in a portfolio of 30-50 issuers that the Adviser believes represents the best opportunities to achieve the Fund's investment objective. In selecting securities for the Fund, the Adviser utilizes a fundamental, bottom-up, business-focused research approach. This research starts with internal competitive landscape analysis, ongoing participation at industry conferences, review of industry and trade periodicals and quantitative screens to populate an initial universe of publicly traded companies that it expects will generate above average earnings growth. The Adviser then evaluates each company for six key investment criteria:
o sustainable above-average earnings growth;
o leadership position in a promising business space;
o significant competitive advantages;
o clear mission and value-added focus;
o financial strength; and
o rational valuation relative to the market and business prospects.
Companies that the Adviser determines may meet all six investment criteria are then screened with in-depth qualitative and quantitative research, including a full competitive analysis and proprietary financial modeling. This additional screening also typically includes identifying the key metrics for a particular business or industry, any specific risks or issues relating to a company, as well as a hypothetical "sell case," i.e. evaluating a range of scenarios under which a position in a security would be reduced or sold.
The Fund intends to buy and hold securities for the long term and seeks to maintain a low level of portfolio turnover. The portfolio turnover rate of the Fund is expected to be below 50% of the average value of its portfolio. The Adviser employs a sell discipline in which the security of a company is sold if an issue emerges that negatively impacts the Adviser's assessment of one or more of the six investment criteria discussed above and the Adviser believes that the issue cannot be resolved within an acceptable time frame. The Adviser may also sell a holding if it becomes materially overvalued versus its underlying business, for risk management purposes, and/or if a more attractive investment opportunity presents itself.
While the Fund may invest in equity securities of companies of any size, the Fund will primarily invest in large and mid-capitalization companies given the Adviser's focus on what it considers to be established business "leaders." As such, the Fund will generally not invest in companies with a market capitalization of less than $2 billion and its total median market capitalization will typically be significantly greater than that of the MSCI Barra's ("MSCI") All Country World Index, the Fund's benchmark. As of December 31, 2012, the total median market capitalization of the MSCI All Country World Index was $7.7 billion.
The equity securities in which the Fund invests include common stocks as well as preferred securities. The Fund may also purchase American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs" and, together with ADRs and EDRs, "Depositary Receipts"), which are certificates typically issued by a bank or trust company that represent securities issued by a foreign or domestic company. From time to time, the Fund may have significant investments in one or more countries. The Fund may invest up to the greater of 30% of its net assets or three times the emerging markets component of the MSCI All Country World Index, in securities of companies located in emerging markets. As of December 31, 2012, the emerging markets component of the MSCI All Country World Index was 13.3% of the total Index.
The Fund may also invest in derivatives, specifically "market access products," to gain economic exposure to markets where holding an underlying security is not feasible. A market access product is a derivative security that provides market exposure to an underlying foreign issuer. Examples of market access products are low exercise price options ("LEPOs") and participatory notes ("P-notes"), both of which allow the holder to gain exposure to issuers in certain countries. A LEPO is an option to purchase a security with an exercise price significantly below the market price of the underlying security. Because of its low exercise price, a LEPO is virtually certain to be exercised and the value and performance of its intrinsic value is effectively identical to that of the underlying equity. These features are designed to allow participation in the performance of an equity security where there are legal or financial obstacles to purchasing the underlying security directly. If the LEPO is cash-settled, the buyer profits to the same extent as with a direct holding in the underlying, but without having to transact in it. P-notes are derivatives that are generally traded over the counter and constitute general unsecured contractual obligations of the banks and broker-dealers that issue them. Generally, these banks and broker-dealers buy securities listed on certain foreign exchanges and then issue P-notes which are designed to replicate the performance of certain issuers and markets. The Fund's investments in derivatives are limited to market access products and only for the purpose of gaining exposure to an underlying long equity position. The Fund may invest up to 20% of its net assets in these derivatives.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A FUND SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
Investing in foreign companies, including direct investments and through Depositary Receipts, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a foreign currency, the value of which may be influenced by currency exchange rates and exchange control regulations. Changes in the value of a currency compared to the U.S. dollar may affect (positively or negatively) the value of the Fund's investments. These currency movements may occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While Depositary Receipts provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in Depositary Receipts continue to be subject to many of the risks associated with investing directly in foreign securities.
The Fund may invest in companies located or doing business in emerging market countries. An "emerging market" country is any country determined by the Adviser to have an emerging market economy, considering factors such as the country's credit rating, its political and economic stability and the development of its financial and capital markets. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products than more developed countries. For purposes of determining whether a particular country is considered a developed market or an emerging market, the Fund uses the designation set forth by the MSCI, a prominent provider of investment tools and data services for institutions worldwide.
Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. Differences in tax and accounting standards and difficulties in obtaining information about foreign governments or foreign companies may impair investment decisions. In addition, emerging markets securities may be subject to smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, emerging markets governments may have limited ability to raise taxes or authorize appropriations for debt repayment. In addition, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies. Moreover, the currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. The Fund may incur operating expenses that are higher than those of mutual funds that invest exclusively in U.S. equity securities due to higher custodial fees and brokerage commissions associated with investments in foreign securities. These risks may be magnified in less-established, emerging markets.
The large capitalization companies in which the Fund may invest may lag the performance of smaller capitalization companies because large capitalization companies may experience slower rates of growth than smaller capitalization companies and may not respond as quickly to market changes and opportunities. The mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, mid-cap stocks may be more volatile than those of larger companies.
The Fund pursues a "growth style" of investing, meaning that the Fund invests in equity securities of companies that the Adviser believes will increase their earnings at a certain rate that is generally higher than the rate expected for non-growth companies. If a growth company does not meet these expectations, the price of its stock may decline significantly, even if it has increased earnings. Many growth companies do not pay dividends. Companies that pay dividends often have lower stock price declines during market downturns. Over time, a growth investing style may go in and out of favor, causing the Fund to sometimes underperform other equity funds that use differing investing styles.
The Fund may also invest in derivatives, specifically "market access products," to gain economic exposure to markets where holding an underlying security is not feasible. A market access product is a derivative security that provides market exposure to an underlying foreign issuer. Derivatives are often more volatile than other investments and may magnify the Fund's gains or losses. There are various factors that affect the Fund's ability to achieve its investment objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. The Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
The lack of a liquid secondary market for a derivative may prevent the Fund from closing its derivative positions and could adversely impact its ability to achieve its investment objective or to realize profits or limit losses.
Because derivative instruments may be purchased by the Fund for a fraction of the market value of the investments underlying such instruments, a relatively small price movement in the underlying investment may result in an immediate and substantial gain or loss to the Fund. Derivatives are often more volatile than other investments and the Fund may lose more in a derivative than it originally invested in it.
Additionally, derivative instruments, particularly market access products, are subject to counterparty risk, meaning that the party that issues the derivative may experience a significant credit event and may be unwilling or unable to make timely settlement payments or otherwise honor its obligations.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual total returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available by calling 1-888-826-5646.
2011 (3.34)%
2012 19.95%
BEST QUARTER WORST QUARTER
16.94% (15.40)%
(03/31/2012) (09/30/2011)
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
SINCE
INCEPTION
INVESTOR CLASS SHARES 1 YEAR (3/31/10)
-------------------------------------------------------------------------------------------
Fund Returns Before Taxes 19.95% 13.11%
Fund Returns After Taxes on Distributions 19.77% 13.00%
Fund Returns After Taxes on Distributions and Sale of Fund 13.20% 11.29%
Shares
MSCI All Country World Index (reflects no deduction for fees, 16.13% 6.06%
expenses, or taxes)
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INVESTMENT ADVISER
Sands Capital Management, LLC.
PORTFOLIO MANAGERS
Sunil H. Thakor, CFA, Senior Research Analyst and Senior Portfolio Manager, has managed the Fund since its inception.
David E. Levanson, CFA, Senior Research Analyst and Senior Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-888-826-5646.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in the Fund, just as you could with similar investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which it trades. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, instruments that attempt to track the price movement of equity indices, as well as interests in Depositary Receipts. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the Fund's net asset value ("NAV") to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
Investments in securities of foreign companies or governments (including direct investments as well as through Depositary Receipts) can be more volatile than investments in U.S. companies or governments. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investment objective of the Fund is long-term capital appreciation. This investment objective may be changed without shareholder approval, upon 60 days' prior notice to shareholders.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objectives. The Fund will do so only if the Adviser
believes that the risk of loss outweighs the opportunity for capital appreciation. The Fund intends to remain as fully invested as practicable regardless of market conditions.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities described in this prospectus. In addition to the investments and strategies described in this prospectus, the Fund also may invest, to a lesser extent, in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as the strategies described in this prospectus, are described in detail in the Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI, see the back cover of this prospectus). Of course, the Fund cannot guarantee that it will achieve its investment goal.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
Sands Capital Management, LLC, a Delaware limited liability company, serves as investment adviser to the Fund. The Adviser was initially formed in 1992 as a Sub-Chapter S-Corporation and converted to a limited liability company in 2005. The Adviser's principal place of business is located at 1101 Wilson Boulevard, Suite 2300, Arlington, VA 22209. The Adviser is an independent investment management firm focused exclusively on portfolios of high quality growth companies. Clients include corporate pension plans, public plans, endowments, foundations, Taft-Hartley plans, family offices and individuals. As of December 31, 2012, the Adviser had approximately $27 billion in assets under management. The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Trust's Board of Trustees (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities.
For its services to the Fund, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.85% based on the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses (excluding shareholder servicing fees, interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) for Investor Class Shares of the Fund from exceeding 1.10% of the Fund's Investor Class Shares' average daily net assets until February 28, 2014. If at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the total annual Fund operating expenses (not including excluded expenses) and its expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. For the fiscal year ended October 31, 2012, the Fund did not pay any advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement will be available in the Fund's Semi-Annual Report to Shareholders dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals each of whom is jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Sunil H. Thakor, CFA, Senior Research Analyst and Senior Portfolio Manager, has been with the Adviser since 2004. Mr. Thakor was Research Analyst and Portfolio Manager from 2007 to 2008 and Research Analyst from 2005 to 2006. He has more than 12 years of investment and research experience.
David E. Levanson, CFA, Senior Research Analyst and Senior Portfolio Manager, has been with the Adviser since 2002. He has more than 22 years of investment and research experience.
RELATED PERFORMANCE DATA OF THE ADVISER
The following tables give the related performance of all the actual, fee-paying and non-fee-paying separate accounts (each, an "Account"), referred to as a "Composite," managed by the Adviser that have investment objectives, strategies and policies substantially similar to those of the Fund. The Composite does not reflect all of the Adviser's assets under management. A complete list and description of the Adviser's composites is available upon request. The data illustrates the past performance of the Adviser in managing substantially similar accounts. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. Performance is historical and does not represent the future performance of the Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs from that of registered mutual funds such as the Fund. The Adviser claims compliance with the Global Investment Performance Standards (GIPS([R])) and has been independently verified for the periods February 7, 1992 through September 30, 2012.(1) All returns presented were calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of investment management fees, brokerage commissions, and execution costs paid by the Accounts included in the Composite, without taking into account federal or state income taxes. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor's domicile. Custodial fees, if any, were not included in the calculations. Securities are valued as of trade-date. Each Account in the Composite was under management for the entire reporting period in which the Account was included. The currency used to express performance in the Composite is stated in U.S. dollars. Performance results are presented both net of fees and gross of fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular Account. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The performance of the Composite (net of fees) reflects the Adviser's applicable account fees and expenses; however, the Fund's fees and expenses are generally expected to be higher than those of the Accounts including in the Composite. If the Fund's fees and expenses had been imposed on the Accounts included in the Composite, the performance shown below would have been lower. The Accounts that are included in the Composite are not subject to the same type of expenses to which the Fund is subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the Accounts in the Composite were subject to the same federal securities and tax laws as the Fund.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Fund. During the period shown the markets for equity securities were subject to significant volatility and experienced both large upward and downward price movements. Composite outperformance relative to the benchmark during the period shown is attributable to the Adviser's individual security selection. The performance shown during the period is no indication and is not a guarantee that the Adviser's investment strategy will yield similar results in the future. THE PERFORMANCE DATA SHOWN BELOW SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE INFORMATION. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
PERFORMANCE INFORMATION FOR THE ADVISER'S GLOBAL GROWTH STRATEGY COMPOSITE(4)
(12/31/2008 THROUGH 12/31/2012)
------------------------------------------------------------------------------------------
TOTAL
MSCI ALL ASSETS AT
TOTAL RETURN COUNTRY NUMBER END OF PERCENTAGE
TOTAL RETURN (GROSS OF WORLD OF PERIOD OF FIRM
YEAR (NET OF FEES) FEES) INDEX(3) PORTFOLIOS ($ MILLIONS) ASSETS
------------------------------------------------------------------------------------------
2012 20.38% 21.37% 16.13% 12 $4,045 14%
------------------------------------------------------------------------------------------
2011 -1.98% -1.14% -7.35% <5 $1,545 8%
------------------------------------------------------------------------------------------
2010 27.67% 28.74% 12.67% <5 $1,530 10%
------------------------------------------------------------------------------------------
2009 86.69% 88.18% 34.63% <5 $1,223 9%
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--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF 12/31/12)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
MSCI ALL COUNTRY
TIME PERIOD NET OF FEES GROSS OF FEES WORLD INDEX(3)
--------------------------------------------------------------------------------
1 Year 20.38% 21.37% 16.13%
2 Years 8.63% 9.54% 3.73%
3 Years 14.64% 15.60% 6.63%
4 Years 29.50% 30.57% 13.03%
Since Inception(2) 29.50% 30.57% 13.03%
--------------------------------------------------------------------------------
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(1) The GIPS standards were created and are administered by CFA Institute, the global, not-for-profit association of investment professionals that awards the Chartered Financial Analyst (CFA)[R] and Certificate in Investment Performance Measurement (CIPM)[R] designations. GIPS[R] is a registered trademark of CFA Institute. CFA Institute has not been involved in the preparation or review of this report.
(2) Inception Date of the Composite is December 31, 2008.
(3) The MSCI All Country World Index ("ACWI") is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of December 2012, the MSCI ACWI consisted of 45 country indices comprising 24 developed and 21 emerging market country indices.
(4) Returns include the reinvestment of all income. Net results are calculated using the highest management fee. Returns are based on fully discretionary accounts under management, including, for certain time periods, those accounts no longer with the Adviser.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Investor Class Shares of the Fund.
Investor Class Shares are for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund, complete and send in the application. If you need an application or have questions, please call 1-888-826-5646.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
You may also buy shares through accounts with financial intermediaries, such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. If you invest through a financial intermediary, you will have to follow its procedures, which may be different from the procedures for investing directly. Your financial intermediary may charge a fee for its services in addition to the fees charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution. Please contact your financial intermediary for more information.
The Fund reserves the right to suspend all sales of new shares or to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "Sands Capital Global Growth Fund."
REGULAR MAIL ADDRESS
Sands Capital Global Growth Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Sands Capital Global Growth Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 1-888-826-5646 for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund's name and your account number).
WIRING INSTRUCTIONS
UMB Bank, NA
ABA #101000695
Sands Capital Global Growth Fund
DDA Account #9870523965
Ref: account number/account name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $250. To cancel or change a plan, write to the Fund at: Sands Capital Global Growth Fund, P.O. Box 219009, Kansas City, Missouri 64121-9009 (Express Mail Address: Sands Capital Global Growth Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The price per share will be the NAV next determined after the Fund receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Funds may change on days when you are unable to purchase or redeem shares.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
With respect to non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information as related to the securities.
MINIMUM INVESTMENTS
You can open an account with the Fund with a minimum initial investment of $100,000. There is no minimum for subsequent investments. The Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase Investor Class Shares, check daily NAV or obtain additional information.
FUND NAME SHARE CLASS TICKER SYMBOL CUSIP FUND CODE Sands Capital Global Investor SCGVX 00769G402 1290 Growth Fund |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-888-826-5646.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services, in addition to the fees charged by the Fund.
If you would like to close your account, or have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-888-826-5646 for more information.
The sale price will be the NAV next determined after the Fund receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after it receives your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $100,000, you may transfer as little as $250 per month from your account to another financial institution. To participate in this service you must complete the appropriate sections of the account application and mail it to the Fund.
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). The Fund may also redeem in kind to discourage short term trading of shares. It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100,000 because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the U.S. Securities and Exchange Commission ("SEC"). More information about this is in the SAI.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 2.00% redemption fee on redemptions of shares that have been held for less than 90 days. The redemption fee is deducted from the Fund's sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that, due to operational requirements, the intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's.
The Fund reserves the right to reduce all or a portion of the redemption fee in
its discretion when it believes such reduction is in the best interests of the
Fund, including with respect to certain categories of redemptions that the Fund
reasonably believes may not raise frequent trading or market timing concerns.
These categories include, but are not limited to, the following: (i)
participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic redemptions; and (v) retirement
loans and withdrawals.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests and experiencing increased transaction costs. In addition, because the Fund invests in foreign securities traded primarily on markets that close prior to the time the Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities.
Because the Fund may invest in mid-cap securities, which often may trade in lower volumes and may be less liquid, the Fund may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market price of these types of securities.
In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of their Fund's shares if the prices of the Fund's foreign securities do not reflect their fair value. Although the Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage. For more information on the Fund uses fair value pricing, see "How the Fund Calculates NAV."
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than five (5) "round trips" into or out of the Fund per calendar year. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a
subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 90 days (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or its Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the next-determined NAV per share.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section briefly describes how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial
intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Fund has adopted a shareholder servicing plan that provides that the Fund may pay financial intermediaries for shareholder services in an annual amount not to exceed 0.25% based on the average daily net assets of the Investor Class Shares. The Fund does not pay these service fees on shares purchased directly.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any shareholder servicing payments that are reflected in the fees and expenses listed in the fee table sections of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (E.G., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" and "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of
the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Fund, may be subject to federal, state and local taxation, depending upon your tax situation. Income distributions (including net short-term capital gains), other than distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Capital gains distributions and distributions that are designated by the Fund as qualified dividend income are generally taxable at the rates applicable to long-term capital gains and set at a maximum tax rate for individuals at 20% (lower rates apply to individuals in lower tax brackets).
Each sale of Fund shares may be a taxable event. The gain or loss on the sale of Fund shares generally will be treated as a short-term capital gain or loss if you held the shares for 12 months or less or a long-term capital gain or loss if you held the shares for longer. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. Because the Fund invests in foreign securities, it may be subject to foreign withholding taxes with respect to dividends or interest the Fund received from sources in foreign countries. The Fund may elect to treat some of those taxes as a distribution to shareholders, which would allow shareholders to offset some of their U.S. federal income tax.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Investor Class Shares of the Fund. The financial highlights table is intended to help you understand the financial performance of the Fund for the period since the Fund's commencement of operations on March 31, 2010 through the most recent fiscal year end. Certain information contained in the table reflects the financial results for a single share of the Fund. The total returns in the table represent the rate that an investor would have earned on an investment in the Fund assuming all dividends and distributions were reinvested. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-888-826-5646.
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2012 2011 2010(1)
------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $12.11 $11.48 $10.00
----- ----- -----
Income from Investment Operations:
Net Investment Income (Loss)(2) (0.02) 0.01 --
Net Realized and Unrealized Gain 1.19 0.65 1.48
---- ---- ----
Total From Investment Operations 1.17 0.66 1.48
---- ---- ----
Dividends and Distributions from:
Net Realized Gains (0.04) (0.03) 0.00
---- ---- ----
Total Dividends and Distributions (0.04) (0.03) 0.00
---- ---- ----
Net Asset Value, End of Year $13.24 $12.11 $11.48
===== ===== =====
Total Return(3) 9.68% 5.76% 14.80%
==== ==== =====
Ratios and Supplemental Data
Net Assets, End of Year (Thousands) $1,297 $353 $234
Ratio of Expenses to Average Net Assets 1.35% 1.28%(5) 1.20%(4,5)
Ratio of Expenses to Average Net Assets
(Excluding Waivers 2.71% 5.84% 13.67%(4)
and Fees Paid Indirectly)
Ratio of Net Investment Income (Loss) to (0.13)% 0.08% 0.02%(4)
Average Net Assets
Portfolio Turnover Rate 21% 19% 17%(6)
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1 Commenced operations on March 31, 2010.
2 Per share calculations were performed using average shares for the period.
3 Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total return would have been lower had the Adviser not waived its fee and reimbursed other expenses.
4 Annualized.
5 Ratio would have been 1.35% had the Fund been charged the full 0.25% for shareholder servicing fees.
6 Not annualized.
Amounts designated as " --"are $0 or less than $0.01.
THE ADVISORS' INNER CIRCLE FUND
SANDS CAPITAL GLOBAL GROWTH FUND
INVESTMENT ADVISER
Sands Capital Management, LLC
1101 Wilson Boulevard, Suite 2300
Arlington, VA 22209
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available, without charge, through the following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about The Advisors' Inner Circle Fund and the Sands Capital Global Growth Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-888-826-5646
BY MAIL: Write to us at:
Sands Capital Global Growth Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY E-MAIL: sandscapfunds@seic.com
BY INTERNET: www.sandscapital.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports,
as well as other information about The Advisors' Inner Circle Fund, from the
EDGAR Database on the SEC's website at: HTTP://WWW.SEC.GOV. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
PUBLICINFO@SEC.GOV.
The Trust's Investment Company Act registration number is 811-06400.
SAN-PS-001-0400
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
THOMSON HORSTMANN & BRYANT MICROCAP FUND
INSTITUTIONAL CLASS SHARES (THBIX)
INVESTOR CLASS SHARES (THBVX)
INVESTMENT ADVISER:
THOMSON HORSTMANN & BRYANT, INC.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE FUND, PLEASE SEE:
PAGE
FUND SUMMARY ................................................................. 1
FUND INVESTMENT OBJECTIVE ............................................... 1
FUND FEES AND EXPENSES .................................................. 1
PRINCIPAL INVESTMENT STRATEGIES ......................................... 2
PRINCIPAL RISKS ......................................................... 2
PERFORMANCE INFORMATION ................................................. 4
INVESTMENT ADVISER ...................................................... 4
PORTFOLIO MANAGERS ...................................................... 4
PURCHASE AND SALE OF FUND SHARES ........................................ 4
TAX INFORMATION ......................................................... 5
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES ........................................................ 5
MORE INFORMATION ABOUT RISK .................................................. 6
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE AND
INVESTMENTS ..................................................................10
INFORMATION ABOUT PORTFOLIO HOLDINGS .........................................11
INVESTMENT ADVISER ...........................................................11
PORTFOLIO MANAGERS ...........................................................12
RELATED PERFORMANCE DATA OF THE ADVISER ......................................12
PURCHASING AND SELLING FUND SHARES ...........................................14
DISTRIBUTION OF FUND SHARES ..................................................20
SHAREHOLDER SERVICING ARRANGEMENTS ...........................................20
PAYMENTS TO FINANCIAL INTERMEDIARIES .........................................20
OTHER POLICIES ...............................................................21
DIVIDENDS AND DISTRIBUTIONS ..................................................24
TAXES ........................................................................24
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ........................Back Cover
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THOMSON HORSTMANN & BRYANT MICROCAP FUND
FUND INVESTMENT OBJECTIVE
The Thomson Horstmann & Bryant MicroCap Fund (the "Fund") seeks capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Class and Investor Class Shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Redemption Fee (as a percentage of amount redeemed, if shares redeemed have been held for less than 30 days) 2.00%
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
INSTITUTIONAL CLASS INVESTOR CLASS
SHARES SHARES
Management Fees 1.25% 1.25%
12b-1 Fees None 0.25%
Other Expenses 32.25% 32.45%
Shareholder Servicing Fee NONE 0.05%
-------- --------
Total Annual Fund Operating Expenses(1) 33.50% 34.00%
Less Fee Waivers (32.25)% (32.25)%
-------- --------
Total Annual Fund Operating Expenses after Fee Waivers and/or 1.25% 1.75%
Expense Reimbursements(2)
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(1) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratios in the Fund's Financial Highlights because the ratios in the Financial Highlights reflect the impact of the initial lower level of average net assets associated with commencement of operations.
(2) Thomson Horstmann & Bryant, Inc. (the "Adviser") has contractually agreed to waive fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses after Fee Waivers and/or Expense Reimbursements (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses) from exceeding 1.25% and 1.75% of the Fund's Institutional Class and Investor Class Shares' average daily net assets, respectively, until February 28, 2014. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2014.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Institutional Class $127 $5,239 $7,852 $10,074
Shares
--------------------------------------------------------------------------------
Investor Class $178 $5,310 $7,898 $10,053
Shares
--------------------------------------------------------------------------------
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During the fiscal period from March 30, 2012 (commencement of Fund operations) to October 31, 2012, the Fund's portfolio turnover rate was 17% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
In pursuing the Fund's investment objective, Thomson Horstmann & Bryant, Inc. (the "Adviser"), the Fund's adviser, seeks to identify and invest Fund assets in equity securities of smaller U.S. companies that, in the Adviser's opinion, are undervalued in the market. The equity securities in which the Fund invests are primarily common stocks. In addition, the Fund may invest in American Depositary Receipts ("ADRs"). The Fund expects that typically 10% or less of the Fund's total asset value will be invested in ADRs, as determined at the time of investment. The Adviser may invest in both growth and value stocks. Investments are selected based on an active fundamental process which combines financial analysis and proprietary research to evaluate potential investments' management and long-term outlook and business strategies.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of micro-capitalization companies. This investment policy may be changed by the Fund without shareholder approval upon 60 days' prior notice to shareholders. The Fund considers micro-capitalization companies to be companies with market capitalizations that, at the time of initial purchase, are within the range of capitalization of companies included in the Russell Microcap Index (the "Index"). As of the May 31, 2012 Index reconstitution, the capitalization range of the Index was $20 million to $679 million. The Adviser expects the Fund's weighted average market capitalization to be similar to that of the Index, although this may vary at any time. The Fund may, from time to time, focus its investments in one or more sectors represented in the Index.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its goal. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. A FUND SHARE IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. This price volatility is the principal risk of investing in the Fund.
MICRO-CAPITALIZATION COMPANY RISK -- Micro-capitalization companies may be newly-formed or in the early stages of development with limited product lines, markets or financial resources. In addition, there may be less public information available about these companies. Micro-cap stock prices may be more volatile than small-, mid- and large-capitalization companies and such stocks may be more thinly-traded and thus difficult for the Fund to buy and sell in the market.
VALUE STOCK RISK -- Value investing focuses on companies with stocks that appear undervalued in light of a variety of factors. If the Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong, the Fund could suffer losses or produce poor performance relative to other funds.
GROWTH STOCK RISK -- Growth investing focuses on companies that, in the Adviser's opinion, have the potential for growth in revenues and earnings. If the Adviser's assessment of a company's aptitude for growth is wrong, the Fund could suffer losses or produce poor performance relative to other funds.
FOREIGN COMPANY RISK -- Investing in foreign companies poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers.
SECTOR FOCUS RISK -- Because the Fund's investments may, from time to time, be more heavily invested in particular sectors, the value of its shares may be especially sensitive to factors and economic risks that specifically affect those sectors. As a result, the Fund's share price may fluctuate more widely than the value of shares of a mutual fund that invests in a broader range of sectors. The specific risks for each of the sectors in which the Fund may focus its investments include the additional risks described below:
o FINANCIAL SERVICES. Companies in the financial services sector are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments they can make, the interest rates and fees they can charge, the scope of their activities, the prices they can charge and the amount of capital they must maintain.
o HEALTH CARE. Companies in the health care sector are subject to extensive government regulation and their profitability can be significantly affected by restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure (including price discounting), limited product lines and an increased emphasis on the delivery of healthcare through outpatient services.
o PRODUCER DURABLES. Companies in the producer durables sector are subject to intense competition, consolidation, domestic and international politics, excess capacity, consumer demand and spending trends and the general state of the economy.
o MATERIALS. Companies in the materials sector are subject to the level and volatility of commodity prices, exchange rates, depletion of resources, over production, consumer demand, litigation and government regulations.
o TECHNOLOGY. Companies in the technology sector are subject to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition, both
domestically and internationally, including competition from foreign competitors with lower production costs.
o CONSUMER DISCRETIONARY. Companies in the consumer discretionary sector are subject to the performance of the overall international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and consumer spending.
o CONSUMER STAPLES. Companies in the consumer staples sector are subject to government regulation and changes in consumer spending, competition, demographics and consumer preferences.
o ENERGY. Companies in the energy sector are subject to supply and demand, exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies.
o UTILITIES. Companies in the utilities sector are subject to increases in fuel and operating costs, rising costs of financing capital construction and the cost of complying with federal and state regulations, environmental factors, liabilities for environmental damage and general civil liabilities, and rate caps or rate changes.
MANAGEMENT RISK -- The Adviser's investment strategy may fail to produce the intended result.
PERFORMANCE INFORMATION
The Fund commenced operations on March 30, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Thomson Horstmann & Bryant, Inc.
PORTFOLIO MANAGERS
Chad M. Nelson, Portfolio Manager and Principal, has managed the Fund since its inception.
Christopher N. Cuesta, Portfolio Manager and Principal, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Institutional Class Shares of the Fund for the first time, you must invest at least $100,000 (there is no minimum investment for individual retirement accounts ("IRAs")). Each minimum subsequent investment in Institutional Class Shares of the Fund is required to be at least $2,500. To purchase Investor Class Shares of the Fund for the first time, you must invest at least $100. There is no minimum investment amount for subsequent purchases of Investor Class Shares.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day") by contacting the Fund directly by mail at: Thomson Horstmann & Bryant MicroCap Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail: Thomson Horstmann & Bryant MicroCap Fund c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105, or telephone at 1-855-THB-FUND).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk, and there is no guarantee that the Fund will achieve its goal. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good of a job the Adviser does, you could lose money on your investment in the Fund, just as you could with other investments.
The value of your investment in the Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
EQUITY RISK -- Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, shares of real estate investment trusts ("REITs") and American Depositary Receipts ("ADRs"), as well as shares of exchange-traded funds ("ETFs") that attempt to track the price movement of equity indices. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stockholders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
FOREIGN COMPANY RISK -- Investing in foreign companies, whether through investments made in foreign markets or made through the purchase of American Depository Receipts ("ADRs"), which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies may be denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
Investments in securities of foreign companies (including through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio.
MICRO-CAPITALIZATION COMPANY RISK -- The micro-capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these micro-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets or financial resources. Micro-capitalization companies may be less financially secure than large-, mid- and small-capitalization companies and may be more vulnerable to key personnel losses due to reliance on a smaller number of management personnel. In addition, there may be less public information available about these companies. Therefore, micro-cap stocks may be more volatile than those of larger companies large-, mid- and small-capitalization companies and such stocks may be more thinly traded and thus difficult for the Fund to buy and sell in the market. These securities may be traded over-the-counter or listed on an exchange.
VALUE STYLE RISK -- Value investing focuses on companies with stocks that appear undervalued in light of a variety of factors. If the Adviser's assessment of a company's value or prospects is wrong, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time. Because there is substantial uncertainty concerning the outcome of transactions involving financially troubled companies in which the Fund may invest, there is a potential risk of loss by the Fund of its entire investment in such companies. Over time, a value investing style may go in and out of favor, causing the Fund to sometimes underperform other funds that use differing investing styles.
GROWTH STYLE RISK -- The price of equity securities rises and falls in response to many factors, including the historical and prospective earnings of the issuer of the stock, the value of its assets, general economic conditions, interest rates, investor perceptions, and market liquidity. The Fund may invest in securities of companies that the Adviser believes have superior prospects for robust and sustainable growth of revenues and earnings. These may be companies with new, limited or cyclical product lines, markets or financial resources, and the management of such companies may be dependent upon one or a few key people. The stocks of such companies can therefore be subject to more abrupt or erratic market movements than stocks of larger, more established companies or the stock market in general.
SECTOR FOCUS RISK -- Because the Fund's investments may, from time to time, be more heavily invested in particular sectors, the value of its shares may be especially sensitive to factors and economic risks that specifically affect those sectors. As a result, the Fund's share price may fluctuate more widely than the value of shares of a mutual fund that invests in a broader range of sectors. The specific risks for each of the sectors in which the Fund may focus its investments include the additional risks described below:
o FINANCIAL SERVICES. Financial services companies are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments they can make, the interest rates and fees they can charge, the scope of their activities, the prices they can charge and the amount of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change or due to increased competition. In addition, the recent deterioration of the credit markets generally has caused an adverse impact in a broad range of markets, including U. S. and international credit and interbank money markets generally, thereby affecting a wide range of financial institutions and markets. Recent events in the financial sector have resulted, and may continue to result, in an unusually high degree of volatility in the financial markets, both domestic and foreign, and cause certain financial services companies to incur large losses. Numerous financial services companies have experienced substantial declines in the valuations of their assets, taken action to raise capital (such as the issuance of debt or equity securities), or even ceased operations. These actions have caused the securities of many financial services companies to experience a dramatic decline in value. Credit losses resulting from financial difficulties of borrowers and financial losses associated with investment activities can negatively impact the sector.
o HEALTH CARE. Companies in the health care sector are subject to extensive government regulation and their profitability can be significantly affected by restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure (including price discounting), limited product lines and an increased emphasis on the delivery of healthcare through outpatient services. Companies in the health care sector are heavily dependent on obtaining and defending patents, which may be time consuming and costly, and the expiration of patents may also adversely affect the profitability of the companies. Health care companies are also subject to extensive litigation based on product liability and similar claims. In addition, their products can become obsolete due to industry innovation, changes in technologies or other market developments. Many new products in the health care sector require significant research and development and may be subject to regulatory approvals, all of which may be time consuming and costly with no guarantee that any product will come to market.
o PRODUCER DURABLES. Many companies in the producer durables sector convert unfinished goods into finished durables used to manufacture other goods or provide services, including electrical equipment and components, industrial products, manufactured housing and telecommunications equipment. General risks of these companies include intense competition, consolidation, domestic and international politics, excess capacity, consumer demand and spending trends and the general state of the economy. In addition, they may also be significantly affected by overall capital spending levels, economic cycles, technical obsolescence, delays in modernization, labor relations, government regulations and e-commerce initiatives.
o MATERIALS. Companies in the materials sector are subject to the level and volatility of commodity prices, exchange rates, depletion of resources, over production, consumer demand, litigation and government regulations. At times, worldwide production of industrial materials has exceeded demand as a result of over-building or economic downturns, leading to poor investment returns or losses. Other risks may include liabilities for environmental damage and general civil liabilities, and mandated expenditures for safety and pollution control.
o TECHNOLOGY. Companies in the technology sector are subject to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition, both domestically and internationally, including competition from foreign competitors with lower
production costs. Technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Technology companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the technology sector may face dramatic and often unpredictable changes in growth rates and competition for the services of qualified personnel.
o CONSUMER DISCRETIONARY. Companies in the consumer discretionary sector are subject to the performance of the overall international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on their profitability. Changes in demographics and consumer tastes can also affect the demand for, and success of, consumer products and services in the marketplace.
o CONSUMER STAPLES. Companies in the consumer staples sector are subject to government regulation and changes in consumer spending, competition, demographics and consumer preferences. For instance, government regulations may affect the permissibility of using various food additives and production methods of companies that make food products, which could affect company profitability. Also, the success of food, beverage, household and personal products companies may be strongly affected by consumer interest, marketing campaigns and other factors affecting supply and demand.
o ENERGY. Energy companies develop and produce oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services. Stock prices for these types of companies are affected by supply and demand, exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies. Weak demand for energy companies' products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disasters or terrorist attacks, would adversely impact the Fund's performance.
o UTILITIES. Companies in the utilities sector are subject to increases in fuel and operating costs, rising costs of financing capital construction and the cost of complying with federal and state regulations, environmental factors, liabilities for environmental damage and general civil liabilities, and rate caps or rate changes. Although rate changes of a utility usually fluctuate in approximate correlation with financing costs due to political and regulatory factors, rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a regulated utility company's earnings and dividends in times of decreasing costs, but conversely, will tend to adversely affect earnings and dividends when costs are rising. The value of regulated utility equity securities may tend to have an inverse relationship to the movement of interest rates. Certain utility companies have experienced full or partial deregulation in recent years. These utility companies are frequently more similar to industrial companies in that they are subject to greater competition and have been permitted by regulators to diversify outside of their original geographic regions and their traditional lines of business. These opportunities may permit certain utility companies to earn more than their traditional regulated rates of return. Some companies, however, may be forced to defend their core business and may be less profitable. In addition, natural disasters, terrorist attacks, government intervention or other
factors may render a utility company's equipment unusable or obsolete and negatively impact profitability.
MANAGEMENT RISK -- The investment performance of the Fund depends largely on the skill of key personnel and investment professionals of the Adviser. The Fund's investment strategy permits investments to be made in a range of issuers, securities, financial instruments and transactions. Within these parameters, the Adviser will make investment decisions for the Fund as it deems appropriate. No assurance can be given that the Fund will be successful in obtaining suitable investments, or that if such investments are made, the objectives of the Fund will be achieved. If key personnel, including key investment or key technical staff, were to leave the Adviser or be unable to perform their duties, the Adviser might not be able to find equally desirable replacements in a timely fashion and the performance of the Fund could, as a result, be adversely affected.
MORE INFORMATION ABOUT THE FUND'S OBJECTIVE AND INVESTMENTS
When selecting securities for the Fund, the Adviser attempts to identify securities where the market has undervalued the potential of the company with regards to operating structure and profitability; failed to recognize the inherent value on a cost replacement basis; and overlooked the resulting synergies available with respect to a potential acquisition.
The Adviser selects investments based on a process which combines financial analysis and proprietary research to evaluate potential investments' management structure and long-term outlook and business strategies. In constructing the Fund's portfolio, the Adviser uses a bottom-up fundamental research process that utilizes both quantitative and qualitative analysis to identify investment opportunities. The Adviser's quantitative process screens the potential investment universe to uniquely combine fundamental and valuation factors that are consistent with the Adviser's investment approach. Candidate companies generally must possess distinguishing characteristics that help define them as leaders within their respective industries, while also demonstrating some form of identifiable positive change in either the underlying business or corporate structure. The Adviser aims to anticipate how such positive changes may affect the income statement, balance sheet or market perception of that particular company.
Qualitative analysis is a by-product of a number of sources, including but not limited to the Adviser's previous knowledge of a company and/or sector, industry referrals, due diligence such as company visits, as well as general industry research. As part of its qualitative analysis, the Adviser focuses not only on the depth and quality of a company's management team, but also on management's economic alignment with the company's shareholders.
A security may be sold when the Adviser determines: (i) the security's price is no longer justifiable; (ii) the investment is no longer appropriate for the Fund's portfolio; or (iii) a company has experienced a fundamental deterioration. In addition, a security may be sold if, due to an increase in value, it represents a pre-determined percentage of the total market value of the Fund's portfolio.
The Fund may invest in cash or cash items for investment purposes or pending other investments. These cash items may include a number of money market instruments such as negotiable or non-negotiable securities issued by or short-term deposits with the U.S. and non-U.S. governments and agencies or instrumentalities thereof, bankers' acceptances, high quality commercial paper, repurchase agreements, bank certificates of deposit, and short-term debt securities of U.S. or non-U.S. issuers deemed to be creditworthy by the Investment Adviser. The Fund may also hold interests in investment vehicles that hold cash or cash items. While investments in cash items generally involve relatively low risk levels, they may produce lower than expected returns, and could result in losses.
The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objective. If the Fund invests in this manner, it may not achieve its investment objective. The Fund will only do so if the Adviser believes that the risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategies, and the Fund will normally invest in the types of securities and other investments described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, the Fund also may invest in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies are described in detail in the Fund's Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI, see the back cover of this prospectus). Of course, there is no guarantee that the Fund will achieve its investment goals.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policies and procedures with respect to the circumstances under which the Fund discloses its portfolio holdings is available in the SAI.
INVESTMENT ADVISER
Thomson Horstmann & Bryant, Inc., a Delaware corporation formed in 1982, serves as the investment adviser to the Fund. The Adviser is a 100% employee-owned investment management firm with its principal place of business located at 501 Merritt 7, Norwalk, CT 06851. As of December 31, 2012, the Adviser had approximately $1.3 billion in assets under management.
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board of Trustees of the Trust (the "Board") supervises the Adviser and establishes policies that the Adviser must follow in its management activities. For its services to the Fund, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.25% of the average daily net assets of the Fund.
The Adviser has contractually agreed to waive fees and expenses of the Fund in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 1.25% and 1.75% of the Fund's Institutional Class and Investor Class Shares' average daily net assets, respectively, until February 28, 2014. To maintain these expense limits, the Adviser may reduce a portion of its management fee and/or reimburse certain expenses of the Fund. During its most recent fiscal year, the Fund did not pay any advisory fees to the Adviser.
A discussion regarding the basis for the Board's approval of the Fund's investment advisory agreement is available in the Fund's Semi-Annual Report dated April 30, 2012, which covers the period from November 1, 2011 to April 30, 2012.
PORTFOLIO MANAGERS
The Fund is co-managed by a team of investment professionals who are jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
Chad M. Nelson, Portfolio Manager and Principal, joined the Adviser in 1999 and has served as a Portfolio Manager on the Adviser's micro cap products since 2002, and on the Adviser's small cap products since 2005. Before joining the Adviser, Mr. Nelson worked for Lazard Asset Management in its New York and London offices from 1995 to 1999. He received an MBA from the University of Missouri in 1995, and a BS from Northwest Missouri State University in 1993. Mr. Nelson is a Chartered Financial Analyst.
Christopher N. Cuesta, Portfolio Manager and Principal, joined the Adviser in 2002 and has served as a Portfolio Manager of the Adviser's micro cap products since 2004, and on the Adviser's small cap products since 2005. Prior to joining the Adviser, Mr. Cuesta worked for Salomon Smith Barney from 1999 to 2002, and Van Eck Associates from 1995 to 1999. Mr. Cuesta received a BS from Fordham University in 1995 and is a Chartered Financial Analyst.
RELATED PERFORMANCE DATA OF THE ADVISER
The following table gives the historical performance of all actual, fee-paying accounts, referred to as a "Composite," managed by the Adviser that have investment objectives, policies and strategies substantially similar to those of the Fund. The Composite does not reflect all of the firm's assets under management. Performance is historical and does not represent the future performance of the Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs from that of registered mutual funds such as the Fund.
The performance shown below is calculated in accordance with recognized industry standards; however, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund. The methodology used to calculate the information below differs from the Securities and Exchange Commission's standardized method that the Fund will use to calculate its own performance. The accounts that are included in the Composite are not subject to the same type of expenses to which the Fund is subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for the Composite could have been adversely affected if the accounts in the Composite were subject to the same federal securities and tax laws as the Fund. In addition, the accounts are not subject to the same adverse effects of cash inflows and outflows of investor money that a public mutual fund such as the Fund may be subject to, and accordingly the performance of the accounts may be higher than for a public mutual fund managed with substantially the same investment strategy. The Fund's fees and expenses are generally expected to be higher than those of the accounts included in the Composite. If the Fund's fees and expenses had been imposed on accounts included in the Composite, the performance shown below would have been lower. "Composite Net-of-Fees" performance results are net of all fees, expenses and, if applicable, sales loads or placement fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular account.
The investment results for the Composite presented below are not intended to predict or suggest the future returns of the Fund. The performance data shown below should not be considered a substitute for the Fund's own performance information. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND.
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ANNUAL PERFORMANCE RESULTS
(ANNUAL TOTAL RETURN 3 YEAR ANNUALIZED
TOTAL ADVISER COMPOSITE ASSETS FOR CALENDAR YEARS ENDING DECEMBER 31) STANDARD DEVIATION
ASSETS UNDER -----------------------------------------------------------------------------------------------------------
YEAR MANAGEMENT USD NUMBER OF COMPOSITE COMPOSITE COMPOSITE
END (MILLIONS) (MILLIONS) ACCOUNTS GROSS-OF-FEES NET-OF-FEES BENCHMARK DISPERSION COMPOSITE BENCHMARK
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2012 $1,297 $393 11 24.14% 22.60% 19.75% 0.46% 21.83% 21.20%
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2011 $1,444 $311 9 -6.85% -8.06% -9.27% 0.61% 27.12% 26.10%
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2010 $2,222 $ 81 Five or fewer 32.36% 30.43% 28.89% N/A 31.73% 29.02%
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2009 $1,814 $291 Five or fewer 43.81% 42.05% 27.48% N/A 29.00% 27.48%
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2008 $1,286 $209 Five or fewer -45.31% -46.03% -39.78% N/A
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2007 $2,514 $403 Five or fewer 6.83% 5.51% -8.00% N/A
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2006 $2,552 $389 Five or fewer 16.56% 15.13% 18.34% N/A
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2005 $2,164 $274 Five or fewer 5.88% 4.57% 4.56% N/A
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2004 $2,314 $210 Five or fewer 21.14% 19.66% 18.32% N/A
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2003 $2,211 $168 Five or fewer 66.86% 64.87% 47.25% N/A
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2002 $1,777 $ 85 Five or fewer 0.17% -1.08% -20.48% N/A
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2001 $2,431 $ 38 Five or fewer 25.42% 23.89% 2.49% N/A
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2000 $2,505 $ 26 Five or fewer 15.48% 14.06% -3.03% N/A
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1999 $2,595 $ 16 Five or fewer 43.18% 41.45% 21.27% N/A
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1998* $2,355 $ 11 Five or fewer
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N/A - Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.
* The inception date of the Composite was June 1, 1998.
The Composite contains fully discretionary micro cap equity accounts and for comparison purposes is measured against the Russell Micro Cap Index. Prior to January 1, 2007, the Composite is compared to the Russell 2000 Index. The index was changed to be more representative of the Composite strategy. The minimum account size for this Composite is $1 million.
Thomson Horstmann & Bryant, Inc. is an independent registered investment adviser. The firm maintains a complete list and description of composites, which is available, free of charge, upon request by emailing THBFunds@thbinc.com.
Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results.
The U.S. dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using the highest applicable annual management fee of 1.25% on assets under management (except during the period between January 1, 2010 and February 28, 2011, when the highest management fee was 1.50% on assets under management) applied quarterly (excluding performance fees charged on certain accounts). Additional information regarding the policies for calculating and reporting returns is available upon request. All returns are calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Additional information regarding the policies for calculating and reporting returns is available upon request.
Dispersion is a measure for the statistical distribution of portfolio returns. It is the asset-weighted standard deviation of individual portfolio returns within a composite from the composite return. Dispersion measures are deemed not meaningful when a given composite contains five or fewer portfolios.
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem") Institutional and Investor Class Shares of the Fund.
Institutional Class Shares are for individual and institutional investors. Investor Class Shares are for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
You will ordinarily submit your purchase orders through your securities broker or other financial intermediary through which you opened your shareholder account. To purchase shares directly from the Fund through its transfer agent, complete and send in the application. If you need an application or have questions, please call 1-855-THB-FUND.
All investments must be made by check, Automated Clearing House ("ACH") or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Fund reserves the right to reject any specific purchase order, including exchange purchases, for any reason. The Fund is not intended for excessive trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on excessive trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Fund a check and, if possible, the "Invest By Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the Fund's name. Make your check payable to "THB Funds."
REGULAR MAIL ADDRESS
Thomson Horstmann & Bryant MicroCap Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Thomson Horstmann & Bryant MicroCap Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-855-THB-FUND for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
Wiring Instructions
UMB Bank, N.A.
ABA # 101000695
Thomson Horstmann & Bryant MicroCap Fund
DDA # 9870523965
Ref: Fund name/account number/account name
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any Business Day. Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. The Fund's price per share will be the net asset value ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number and other identification required by law or regulation, as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund (or an authorized institution) must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days preceding certain holidays -- the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Fund may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund through its transfer agent, you may also buy or sell shares of the Fund through accounts with financial intermediaries, such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund. In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value, as determined in good faith using methods approved by the Fund's Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Fund's Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
With respect to any non-U.S. securities held by the Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot
buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities may not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information related to the securities.
MINIMUM PURCHASES
You can open an account with a minimum initial investment of $100,000 for Institutional Class Shares and $100 for Investor Class Shares. The Fund may accept investments of smaller amounts in its sole discretion. Each subsequent investment in Institutional Class Shares of the Fund is required to be at least $2,500. There is no minimum for subsequent purchases of Investor Class Shares.
BY AUTOMATIC INVESTMENT PLAN (VIA ACH) (INVESTOR CLASS SHARES ONLY)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually or annually in amounts of at least $100. To cancel or change a plan, write to the Fund at Thomson Horstmann & Bryant MicroCap Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Thomson Horstmann & Bryant MicroCap Fund Inc., c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Allow up to 15 days to create the plan and 3 days to cancel or change it.
FUND CODES
The reference information listed below will be helpful to you when you contact the Fund to purchase shares of the Fund, check daily NAV or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE Thomson Horstmann & Bryant MicroCap Fund Institutional Class Shares THBIX 00769G659 8662 Investor Class Shares THBVX 00769G642 8661 |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day by contacting the Fund directly by mail or telephone at 1-855-THB-FUND.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a
redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-855-THB-FUND for more information.
The sale price of each share will be the NAV next determined after the Fund receives your request in proper form.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
Thomson Horstmann & Bryant MicroCap Fund
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Thomson Horstmann & Bryant MicroCap Fund
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire or ACH redemption privilege) by completing the appropriate sections of the account application.
Call 1-855-THB-FUND to redeem your shares. Based on your instructions, the Fund will mail your proceeds to you or send them to your bank via wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH) (INVESTOR CLASS SHARES ONLY)
If your account balance is at least $5,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Fund.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the Fund receives your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Fund's remaining shareholders, the Fund might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in-kind). The Fund may also redeem in-kind to discourage short term trading of shares. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $100 with respect to Investor Class Shares and $50,000 with respect to Institutional Class Shares because of redemptions, you may be required to sell your shares. The Fund generally will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares. The Fund reserves the right to waive the minimum account value requirement in its sole discretion. If your Fund shares are redeemed for this reason within 30 calendar days of their purchase, the redemption fee will not be applied.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions it reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss.
DISTRIBUTION OF FUND SHARES
The Fund has adopted a distribution plan under Rule 12b-1 under the 1940 Act for Investor Class Shares that allows the Fund to pay distribution and/or service fees for the sale and distribution of its shares, and for services provided to shareholders. Because these fees are paid out of the Fund's assets continuously, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The maximum annual distribution and/or service fee for Investor Class Shares of the Fund is 0.25%.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies and any other institution having a service, administration or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Fund has adopted a shareholder servicing plan that provides that the Fund may pay financial intermediaries for shareholder services in an annual amount not to exceed 0.25% based on the Fund's Investor Class Shares' average daily net assets. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any Rule 12b-1 fees and/or shareholder servicing fees that are reflected in the fee table section of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For
more information, please see "Payments to Financial Intermediaries" and "Shareholder Services" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the NAV or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because the Fund invests in micro-cap securities, which often trade in lower volumes and may be less liquid, the Fund may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market prices of these types of securities.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than 3 "round trips" into or out of the Fund over a 90 day period. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund assesses a redemption fee of 2.00% on redemptions by shareholders of Fund shares held for less than 30 days (subject to certain exceptions as discussed in "Redemption Fee").
o The Fund reserves the right to reject any purchase or exchange request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund
or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases or redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
REDEMPTION FEE
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of short-term trading, the Fund charges a 2.00% redemption fee on redemptions of shares that have been held for less than 30 days. The fee is deducted from the sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Fund shares purchased either directly from the Fund or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that due to operational and systems limitations, intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's. Therefore, to the extent that financial
intermediaries are unable to collect the redemption fee, the Fund may not be able to defray the expenses associated with those short-term trades made by that financial intermediary's customers.
The Fund reserves the right to waive its redemption fee at its discretion when it believes such waiver is in the best interests of the Fund, including with respect to certain categories of redemptions that the Fund reasonably believes may not raise frequent trading or market timing concerns or where the financial intermediary's processing systems are unable to properly apply the redemption fee. These categories currently include, but are not limited to, the following: (i) participants in certain group retirement plans whose processing systems are incapable of properly applying the redemption fee to underlying shareholders; (ii) redemptions resulting from certain transfers upon the death of a shareholder; (iii) redemptions by certain pension plans as required by law or by regulatory authorities; (iv) systematic withdrawals; and (v) retirement loans and withdrawals.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the next-determined NAV.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall obligation to deter money laundering under federal law. The Fund has adopted an anti-money laundering compliance program designed to prevent the Fund from being used for money laundering or the financing of illegal activities. In this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii)
freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Fund or in cases when the Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Fund is required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income, if any, quarterly and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution. Dividends and distributions will automatically be reinvested in additional shares of the Fund, unless you elect to have the distributions paid in cash. To elect to receive your distribution in cash, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions made available by the Fund in cash after the Fund receives your notice. To cancel your election, simply send written notice to the Fund. Distributions from the Fund will be taxable to shareholders whether received in cash or reinvested in additional shares. Shareholders who reinvest distributions in the Fund will be required to pay taxes on such distributions from other resources.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, depending upon your tax situation. Distributions you receive from the Fund may be taxable whether or not you reinvest them. Income distributions, other than distributions of qualified dividend income, and distributions of short-term capital gains are generally taxable at ordinary income tax rates. Distributions of long-term capital gains and distributions of qualified dividend income are generally taxable at the rates applicable to long-term capital gains. Long-term capital gains are taxed at a maximum rate of 20% (lower rates apply to individuals in lower income brackets).
Each sale of Fund shares may be a taxable event. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. The gain or loss on the sale of Fund shares generally will be treated as a short term capital gain or loss if you held the shares for 12 months or less or a long term capital gain or loss if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders
to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the cost basis reporting law applies to them.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the Fund. The financial highlights tables are intended to help you understand the financial performance of the Fund for the period since the Fund's commencement of operations on March 30, 2012 through the most recent fiscal year end. Certain information contained in the tables reflects the financial results for a single share of the Fund. The total returns in the tables represent the rate that an investor would have earned on an investment in the Fund assuming all dividends and distributions were reinvested. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Fund, which is available upon request by calling the Fund at 1-855-THB-FUND.
THOMSON HORSTMANN & BRYANT MICROCAP FUND -- INSTITUTIONAL CLASS SHARES
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE
PERIOD ENDED OCTOBER 31, 2012(1)
------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net Investment Loss(*) (0.03)
Net Realized and Unrealized Gain 0.37
----
Total from Investment Operations 0.34
----
NET ASSET VALUE, END OF PERIOD $10.34
======
TOTAL RETURN(2) 3.40%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $1,382
Ratio of Expenses to Average Net Assets 1.25%(3)
Ratio of Expenses to Average Net Assets (Excluding
Waivers and Reimbursements) 72.09%(3)
Ratio of Net Investment Loss to Average Net Assets (0.49)%(3)
Portfolio Turnover Rate(4) 17%
|
* Per share calculations were performed using average shares for the period.
(1) Commenced operations on March 30, 2012.
(2) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deductions of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total return would have been lower had the Adviser not waived its fee and reimbursed other expenses.
(3) Annualized.
(4) Portfolio turnover rate is for the period indicated and has not been annualized.
THOMSON HORSTMANN & BRYANT MICROCAP FUND -- INVESTOR CLASS SHARES
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE
PERIOD ENDED OCTOBER 31, 2012(1)
------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net Investment Loss(*) (0.05)
Net Realized and Unrealized Gain 0.38
----
Total from Investment Operations 0.33
----
NET ASSET VALUE, END OF PERIOD $10.33
======
TOTAL RETURN(2) 3.30%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $58
Ratio of Expenses to Average Net Assets 1.55%(3)
Ratio of Expenses to Average Net Assets (Excluding
Waivers and Reimbursements) 331.49%(3)
Ratio of Net Investment Loss to Average Net Assets (0.88)%(3)
Portfolio Turnover Rate(4) 17%
|
* Per share calculations were performed using average shares for the period.
(1) Commenced operations on March 30, 2012.
(2) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deductions of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Total return would have been lower had the Adviser not waived its fee and reimbursed other expenses.
(3) Annualized.
(4) Portfolio turnover rate is for the period indicated and has not been annualized.
THE ADVISORS' INNER CIRCLE FUND
THOMSON HORSTMANN & BRYANT MICROCAP FUND
INVESTMENT ADVISER
Thomson Horstmann & Bryant, Inc.
501 Merritt 7
Norwalk, Connecticut 06851
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
MORE INFORMATION ABOUT THE FUND IS AVAILABLE, WITHOUT CHARGE, THROUGH THE FOLLOWING:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated March 1, 2013, includes detailed information about the Thomson Horstmann & Bryant MicroCap Fund and The Advisors' Inner Circle Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-855-THB-FUND
BY MAIL: Thomson Horstmann & Bryant MicroCap Fund
P.O. Box 219009
Kansas City, Missouri 64121-9009
BY INTERNET: The Fund does not have a website, but you can obtain the SAI,
Annual or Semi-Annual Report by mail or telephone.
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
|
Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: HTTP://WWW.SEC.GOV. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: PUBLICINFO@SEC.GOV.
THE ADVISORS' INNER CIRCLE FUND'S INVESTMENT COMPANY ACT REGISTRATION NUMBER IS
811-06400.
THB-PS-001-0200
THOMPSON, SIEGEL & WALMSLEY LLC
INVESTMENT MANAGEMENT
THE TS&W PORTFOLIOS
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
March 1, 2013
o TS&W EQUITY PORTFOLIO
Ticker Symbol: TSWEX
o TS&W FIXED INCOME PORTFOLIO
Ticker Symbol: TSWFX
The U.S. Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
PAGE
TS&W EQUITY PORTFOLIO SUMMARY .............................. 1
Investment Objective .................................. 1
Fund Fees and Expenses ................................ 1
Principal Investment Strategies ....................... 2
Principal Risks ....................................... 2
Performance Information ............................... 3
Investment Adviser .................................... 4
Portfolio Managers .................................... 4
TS&W FIXED INCOME PORTFOLIO SUMMARY ........................ 5
Investment Objective .................................. 5
Fund Fees and Expenses ................................ 5
Principal Investment Strategies ....................... 5
Principal Risks ....................................... 6
Performance Information ............................... 7
Investment Adviser .................................... 8
Portfolio Managers .................................... 8
SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES,
TAXES AND FINANCIAL INTERMEDIARY COMPENSATION ......... 9
INVESTING WITH THE FUNDS ................................... 10
Buying Shares ......................................... 10
Redeeming Shares ...................................... 11
Exchanging Shares ..................................... 13
Transaction Policies .................................. 13
Account Policies ...................................... 17
ADDITIONAL INFORMATION ABOUT THE FUNDS ..................... 20
Other Investment Practices and Strategies ............. 20
Investment Management ................................. 22
Shareholder Servicing Arrangements .................... 23
Payments to Financial Intermediaries .................. 24
FINANCIAL HIGHLIGHTS ....................................... 25
TS&W Equity Portfolio ................................. 26
TS&W Fixed Income Portfolio ........................... 27
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TS&W EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The TS&W Equity Portfolio (the "Equity Portfolio" or the "Fund") seeks maximum long-term total return, consistent with reasonable risk to principal, by investing in a diversified portfolio of common stocks of relatively large companies.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
--------------------------------------------------------------------------------
Management Fees 0.75%
Other Expenses 0.63%
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Total Annual Fund Operating Expenses 1.38%
--------------------------------------------------------------------------------
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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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$140 $437 $755 $1,657
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 22% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund will generally invest in a diversified portfolio of common stocks of companies that are relatively large in terms of revenues and assets. Although the Fund will primarily draw its holdings from larger, more seasoned or established companies, it may also invest in companies of varying size as measured by assets, sales or market capitalization. The Fund will emphasize common stocks, but may also invest in other types of equity securities. The Fund may also invest in American Depositary Receipts ("ADRs"), which are certificates evidencing ownership of shares of a foreign issuer that are issued by depositary banks and generally trade on an established market, in the United States or elsewhere.
Thompson, Siegel & Walmsley LLC ("TS&W" or the "Adviser") uses a combination of quantitative and qualitative methods based on a Four-Factor valuation screen to build a portfolio of securities designed to outperform the S&P 500 Index. The initial universe for the screen is approximately 1,000 stocks and consists of actively traded issues. Parts one and two of the screen attempt to assess a company's attractiveness based on cash flows relative to other large-cap stocks and as compared to their industry or sector peers. The third factor considers the relative earnings prospects of the company. The fourth factor involves looking at the company's recent price action. From the model, approximately 250 stocks are identified for further research. These are the stocks that rank the highest on the basis of these four factors combined. TS&W generally limits its investment universe to those companies with a minimum of three years of sound operating history.
TS&W's analysts also perform rigorous fundamental analysis, exploring numerous factors that may affect the outlook for a company. They evaluate publicly available information including sell-side research, company filings, and trade periodicals. The analysts may speak with company management to hear their perspectives and outlook on pertinent business issues. They apply a consistent and disciplined review in a team environment that encourages critical thinking and analysis for each company considered for investment. A portfolio composed of 45-60 stocks is selected as a result of this process.
Established positions in the portfolio are ranked daily and are reviewed regularly in the same manner to re-examine their fundamental and valuation characteristics. The product team meets periodically to discuss each stock's place in the portfolio. TS&W employs a consistent sell discipline which includes a significant negative earnings revision, a stock being sold when the catalyst is no longer valid or another stock presents a more attractive opportunity.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its objective. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. A FUND SHARE IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the Fund is subject to the risk that stock prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and the
value of the Fund's equity securities may fluctuate drastically from day-to-day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
Undervalued companies may have experienced adverse business developments or other events that have caused their stocks to be out of favor. If the Adviser's assessment of a company is inaccurate, or if the market does not recognize the value of a company, the price of its stock may fail to meet expectations and the Fund's share price may suffer. Value oriented mutual funds may not perform as well as certain other types of mutual funds using different approaches during periods when value investing is out of favor.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.tswinvest.com or by calling 1-866-4TSW-FUN.
2003 26.73%
2004 13.85%
2005 9.93%
2006 13.76%
2007 6.35%
2008 (34.68)%
2009 21.02%
2010 10.28%
2011 (5.10)%
2012 13.05%
BEST QUARTER WORST QUARTER
16.24% (21.96)%
(06/30/2003) (12/31/2008)
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
Returns after taxes on distributions and sale of Fund shares may be higher than before-tax returns when a net capital loss occurs upon the redemption of Fund shares.
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Fund Returns Before Taxes 13.05% (1.33)% 6.02%
--------------------------------------------------------------------------------
Fund Returns After Taxes on Distributions 12.64% (1.52)% 5.44%
--------------------------------------------------------------------------------
Fund Returns After Taxes on Distributions and 8.47% (1.19)% 5.23%
Sale of Fund Shares
--------------------------------------------------------------------------------
S&P 500 Index (reflects no deduction for fees, 16.00% 1.66% 7.10%
expenses or taxes)
--------------------------------------------------------------------------------
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INVESTMENT ADVISER
Thompson, Siegel & Walmsley LLC
PORTFOLIO MANAGERS
Charles J. Wittmann, CFA, Officer and Portfolio Manager, has managed the Fund since 2009.
Elizabeth Cabell Jennings, CFA, Officer and Portfolio Manager/Client Service, has managed the Fund since 2000.
FOR MORE INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 9 OF THE PROSPECTUS.
TS&W FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE
The TS&W Fixed Income Portfolio (the "Fixed Income Portfolio" or the "Fund") seeks maximum long-term total return, consistent with reasonable risk to principal, by investing primarily in investment grade debt securities of varying maturities.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees ...................................................... 0.45% Other Expenses ....................................................... 0.59% Total Annual Fund Operating Expenses ................................. 1.04% |
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$106 $331 $574 $1,271
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 104% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in debt securities. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers debt securities to include bonds, notes, debentures, preferred
stock, convertible securities and other instruments that have debt-like characteristics. The Fund generally invests at least 80% of its assets, plus the amount of any borrowings for investment purposes, in a diversified mix of investment-grade debt securities, and may invest up to 20% in below investment grade (high yield or "junk") debt securities.
Thompson, Siegel & Walmsley LLC ("TS&W" or the "Adviser") expects to actively manage the Fund to meet its investment objective. The Adviser attempts to be risk averse, believing that preserving principal in periods of rising interest rates should lead to above-average returns over the long run. The Adviser will structure the Fund based largely on its assessment of the following factors:
Current economic conditions and trends;
The Federal Reserve Board's management of monetary policy;
Fiscal policy;
Inflation expectations;
Government and private credit demands; and
Global conditions.
Once the Adviser has carefully analyzed these factors, it will formulate an outlook for the direction of interest rates and will adjust the maturity and/or duration of the Fund accordingly. The Adviser expects the weighted-average maturity of the Fund to range from four to nine years and its duration to range from three to seven years.
In addition to judgment about the direction of interest rates, the Adviser will shift emphasis among sectors, credit qualities, maturity ranges and coupons based on an analysis of relative values and interest rate spreads. The liquidity and marketability of individual issues and diversification within the Fund are also considered in the portfolio construction process.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its goal. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. A FUND SHARE IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY GOVERNMENT AGENCY. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
As with most funds that invest in debt securities, changes in interest rates are one of the most important factors that could affect the value of your investment. Rising interest rates tend to cause the prices of debt securities (especially those with longer maturities) and the Fund's share price to fall. Rising interest rates may also cause investors to pay off mortgage-backed and asset-backed securities later than anticipated, forcing the Fund to keep its money invested at lower rates. Falling interest rates, however, generally cause investors to pay off mortgage-backed and asset-backed securities earlier than expected, forcing the Fund to reinvest the money at a lower interest rate.
The concept of duration is useful in assessing the sensitivity of a fixed-income fund to interest rate movements, which are the main source of risk for most fixed-income funds. Duration measures price volatility by estimating the change in price of a debt security for a 1% change in its yield. For example, a duration of five years means the price of a debt security will change
about 5% for every 1% change in its yield. Thus, the higher duration, the more volatile the security.
Debt securities have a stated maturity date when the issuer must repay the principal amount of the bond. Some debt securities, known as callable bonds, may repay the principal earlier than the stated maturity date. Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate. Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security held by the mutual fund, with the maturity of each security weighted by the percentage of its assets of the mutual fund it represents.
The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risk that the issuer will fail to pay interest fully and return principal in a timely manner. Credit ratings are not an absolute standard of quality, but rather general indicators that reflect only the view of the originating rating agencies from which an explanation of the significance of such ratings may be obtained. If an issuer defaults or becomes unable to honor its financial obligations, the security may lose some or all of its value. The issuer of an investment-grade security is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal.
High yield, or "junk" bonds are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business conditions of the corporation issuing these securities influences their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause the Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
PERFORMANCE INFORMATION
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 year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.tswinvest.com or by calling 1-866-4TSW-FUN.
2003 3.41% 2004 3.74% 2005 1.45% 2006 4.92% 2007 4.67% 2008 (3.75)% 2009 15.10% 2010 9.01% 2011 5.73% 2012 8.55%
BEST QUARTER WORST QUARTER 6.28% (8.89)% (09/30/2009) (09/30/2008) |
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
Fund Returns Before Taxes 8.55% 6.74% 5.18% -------------------------------------------------------------------------------- Fund Returns After Taxes on Distributions 6.58% 4.79% 3.39% -------------------------------------------------------------------------------- Fund Returns After Taxes on Distributions and 5.75% 4.66% 3.41% Sale of Fund Shares -------------------------------------------------------------------------------- Barclays Capital U.S. Aggregate Bond Index 4.21% 5.95% 5.18% (reflects no deduction for fees, expenses or taxes) -------------------------------------------------------------------------------- Barclays Capital U.S. Government/Credit Bond 4.82% 6.06% 5.25% Index (reflects no deduction for fees, expenses or taxes) -------------------------------------------------------------------------------- |
INVESTMENT ADVISER
Thompson, Siegel & Walmsley LLC
PORTFOLIO MANAGER
William M. Bellamy, CFA, Officer and Director of Fixed Income, has managed the Fund since 2002.
FOR MORE INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT THE PURCHASE AND SALE OF FUND SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 9 OF THE PROSPECTUS.
SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES, TAXES AND FINANCIAL INTERMEDIARY COMPENSATION
PURCHASING AND SELLING FUND SHARES
To purchase shares of a Fund for the first time, you must invest at least $2,500 ($500 for individual retirement accounts ("IRAs") and $250 for Spousal IRAs). You can purchase additional shares of a Fund for as little as $100.
If you own your shares directly, you may sell your shares on any day the New York Stock Exchange is open for business by contacting the Funds directly by mail or telephone at 1-866-4TSW-FUN.
If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Funds.
TAX INFORMATION
Each Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of a 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 intermediary and your salesperson to recommend a Fund over another investment. Ask your salesperson or visit your financial intermediary's web site for more information.
INVESTING WITH THE FUNDS
BUYING SHARES
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Funds do not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
Each Fund reserves the right to reject any specific purchase order, including exchange purchases, for any reason. The Funds are not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Funds' policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. Please contact the Funds for more information.
BY MAIL
You can open an account with a Fund by sending a check and your account application to the address below. You can add to an existing account by sending the Funds a check and, if possible, the "Invest by Mail" stub that accompanies your statement. Be sure your check identifies clearly your name, your account number and the appropriate Fund name(s).
REGULAR MAIL ADDRESS
The TS&W Portfolios
P.O. Box 219009
Kansas City, Missouri 64121-9009
EXPRESS MAIL ADDRESS
The TS&W Portfolios
c/o DST Systems, Inc.
430 West 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-866-4TSW-FUN (1-866-487-9386) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the appropriate Fund name(s) and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA # 101000695
The TS&W Portfolios
DDA Acct. # 9871063178
Ref: fund name(s)/account number/account name
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the Funds. Purchases can be made monthly, quarterly,
semi-annually, or annually in amounts of at least $100 to meet the minimum
investment amount. To cancel or change a plan, write to the Funds at: TS&W
Portfolios, P.O. Box 219009, Kansas City, Missouri 64121 (Express Mail Address:
TS&W Portfolios, c/o DST Systems, Inc., 430 West 7th Street, Kansas City,
Missouri 64105). Please allow up to 15 days to create the plan and 3 days to
cancel or change it.
PURCHASES IN-KIND
Subject to the approval of the Funds, an investor may purchase shares of the Funds with liquid securities and other assets that are eligible for purchase by the Funds (consistent with the Funds' investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Funds' valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Funds. Assets purchased by the Funds in such a transaction will be valued in accordance with procedures adopted by the Funds. The Funds reserve the right to amend or terminate this practice at any time.
MINIMUM INVESTMENTS
To purchase shares of a Fund for the first time, you must invest at least $2,500 ($500 for individual retirement accounts ("IRAs") and $250 for spousal IRAs). Subsequent investments must be made in amounts of at least $100. Each Fund may accept investments of smaller amounts in its sole discretion.
FUND CODES
Each Fund's reference information, which is listed below, will be helpful to you when you contact the Funds to purchase or exchange shares, check daily net asset value per share ("NAV") or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE -------------------------------------------------------------------------------- Equity Portfolio TSWEX 00758M311 1278 -------------------------------------------------------------------------------- Fixed Income Portfolio TSWFX 00758M295 1279 -------------------------------------------------------------------------------- |
REDEEMING SHARES
PAYMENT OF REDEMPTION PROCEEDS
Redemption proceeds can be mailed to your account address, sent to your bank by ACH transfer or wired to your bank account (provided that your bank information is already on file). Each Fund will pay for all shares redeemed within seven days after it receives a redemption request in proper form, meaning that it is complete, contains all necessary information, and has all supporting documentation (such as proper signature guarantees, IRA rollover forms, etc.).
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of
an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership may require additional documentation along with a signature guaranteed letter of instruction. The Fund participates in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-866-487-9386 for more information.
The sale price of each share will be the next NAV determined after the Fund (or an authorized broker) receives your request.
BY MAIL
You may contact the Funds directly by mail at: TS&W Portfolios, P.O. Box 219009, Kansas City, Missouri 64121 (Express Mail Address: TS&W Portfolios, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, Missouri 64105). Send a letter to the Funds signed by all registered parties on the account specifying:
The appropriate Fund name(s);
The account number;
The dollar amount or number of shares you wish to redeem;
The account name(s); and
The address to which redemption (sale) proceeds should be sent.
All registered share owner(s) must sign the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are registered.
Certain shareholders may need to include additional documents or provide a signature guarantee to redeem shares.
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-866-4TSW-FUN to redeem your shares. Based on your instructions, the Funds will mail your proceeds to you or send them to your bank by either Fed wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Funds.
RECEIVING YOUR MONEY
Normally, the Funds will send your sale proceeds within seven days after the Funds receive your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Fund. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN-KIND
Under certain conditions and at the Funds' discretion, you may pay for shares of the Funds with securities instead of cash. In addition, the Funds may pay all or part of your redemption proceeds (in excess of $250,000) with securities instead of cash. It is highly unlikely that your shares would ever be redeemed in-kind, but if they were you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in-kind until they are sold.
EXCHANGING SHARES
At no charge, you may exchange shares of one TS&W Portfolio for shares of any other TS&W Portfolio by writing to or calling the Funds. You may only exchange shares between accounts with identical registrations (i.e., the same names and addresses). If shares of the Equity Portfolio have been held for less than 60 days, the Fund will deduct a redemption fee of 1.00% on exchanged shares.
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Funds may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Funds. For more information about the Funds' policy on excessive trading, see "Excessive Trading Policies and Procedures."
For information regarding the federal income tax consequences of transactions in shares of a Fund, including information about cost basis reporting, see "Federal Taxes."
TRANSACTION POLICIES
CALCULATING YOUR SHARE PRICE
You may buy, sell or exchange shares of the Funds on each day the New York Stock Exchange ("NYSE") is open for business (a "Business Day") at a price equal to its NAV next computed after it receives and accepts your order. Shares cannot be purchased by Federal Reserve wire on days when either the NYSE or the Federal Reserve is closed. The Funds calculate NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, the Fund or authorized institution must receive your order in good form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.) before the close of trading on the NYSE that day. Otherwise, you will receive the NAV that is calculated at the close of trading on the following Business Day. If the NYSE closes early -such as on days in advance of certain generally observed holidays - the Funds will calculate NAV
as of the earlier closing time. The Funds will not accept orders that request a particular day or price for the transaction or any other special conditions. Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays.
NAV for one Fund share is the value of that share's portion of all of the net assets of a Fund. Each Fund calculates its NAV by adding the total value of its assets, subtracting its liabilities and then dividing the result by the number of shares outstanding. In calculating NAV, the Funds generally value their investment portfolios at market price. If market prices are not readily available or the Funds reasonably believe that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Funds are required to price those securities at fair value as determined in good faith using methods approved by the Board of Trustees (the "Board"). Pursuant to policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Funds' Fair Value Pricing Committee, members of which are appointed by the Board. The Funds' determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that a Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Equity Portfolio invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
With respect to non-U.S. securities held by the Equity Portfolio, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot purchase or redeem shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the United States, or other relevant information as related to the securities.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
When valuing fixed income securities with remaining maturities of more than 60 days, the Fixed Income Portfolio uses the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security, securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Fund uses the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from a Fund through its transfer agent, you may also buy or sell shares of a Fund through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from a Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to a Fund prior to the time the Fund calculates its NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to a Fund on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by a Fund after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of a Fund with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of a Fund with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with a Fund. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
REDEMPTION FEES
In an effort to discourage short-term trading and defray costs incurred by shareholders as a result of same, the Equity Portfolio charges a 1.00% redemption fee on redemptions of shares that have been held for less than 60 days. The redemption fee is deducted from the Fund's sale proceeds and cannot be paid separately, and any proceeds of the fee are credited to the assets of the Fund. The fee does not apply to shares purchased with reinvested dividends or distributions. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first.
The redemption fee is applicable to Equity Portfolio shares purchased either directly or through a financial intermediary, such as a broker-dealer. Transactions through financial intermediaries typically are placed with the Fund on an omnibus basis and include both purchase and sale transactions placed on behalf of multiple investors. The Fund requests that financial intermediaries assess the redemption fee on customer accounts and collect and remit the proceeds to the Fund. However, the Fund recognizes that, due to operational requirements, the intermediaries' methods for tracking and calculating the fee may be inadequate or differ in some respects from the Fund's.
The Fund reserves the right to reduce the redemption fee in its discretion when it believes such reduction is in the best interests of the Fund, including with respect to certain categories of redemptions that the Fund reasonably believes may not raise frequent trading or market timing
concerns. These categories include, but are not limited to, the following:
(i) participants in certain group retirement plans whose processing systems are
incapable of properly applying the redemption fee to underlying shareholders;
(ii) redemptions resulting from certain transfers upon the death of a
shareholder; (iii) redemptions by certain pension plans as required by law or
by regulatory authorities; (iv) systematic redemptions; and (v) retirement
loans and withdrawals.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient, but not without risk. Although the Funds have certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Funds are not responsible for any losses or costs incurred by following telephone instructions they reasonably believe to be genuine. If you or your financial institution transact with the Funds over the telephone, you will generally bear the risk of any loss.
RIGHTS RESERVED BY THE FUNDS
PURCHASES
At any time and without notice, the Funds may:
Stop offering shares;
Reject any purchase order; or
Bar an investor engaged in a pattern of excessive trading from buying shares. (Excessive trading can hurt performance by disrupting management and increasing expenses.) The Funds will consider various factors in determining whether an investor has engaged in excessive trading. These factors include, but are not limited to, the investor's historic trading pattern, the number of transactions, the size of the transactions, the time between transactions and the percentage of the investor's account involved in each transaction. For more information about the Funds' policies on excessive trading, please see "Excessive Trading Policies and Procedures."
REDEMPTIONS
At any time and without notice, the Funds may change or eliminate any of the redemption methods described above, except redemption by mail. The Funds may suspend your right to redeem if:
Trading on the NYSE is restricted or halted; or The U.S. Securities and Exchange Commission ("SEC") allows the Funds to delay redemptions.
EXCHANGES
The Funds may:
Modify or cancel the exchange program at any time on 60 days' written notice to shareholders;
Reject any request for an exchange; or
Limit or cancel a shareholder's exchange privilege, especially when an investor is engaged in a pattern of excessive trading.
ACCOUNT POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Funds are intended for long-term investment purposes only and discourage shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Funds may present risks to the Funds' long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Funds' investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Funds to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
The Funds' service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Funds' policies and procedures described in this prospectus and approved by the Funds' Board. For purposes of applying these policies, the Funds' service providers may consider the trading history of accounts under common ownership or control. The Funds' policies and procedures include:
Shareholders are restricted from making more than six (6) "round trips" into or out of each Fund per calendar year. The Funds define a "round trip" as a purchase into a Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund. Shareholders are also restricted from making more than eight exchanges (from one TS&W Portfolio to another TS&W Portfolio) per calendar year. If a shareholder exceeds these amounts, the Funds and/or their service providers may, at their discretion, reject any additional purchase or exchange orders.
The Equity Portfolio assesses a redemption fee of 1.00% on redemptions by shareholders of Fund shares held for less than 60 days (subject to certain exceptions as discussed in "Redemption Fees").
Each Fund reserves the right to reject any purchase or exchange request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Funds and/or their service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Funds' long-term shareholders. The Funds do not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Funds will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Funds for their customers through which transactions are placed. The Funds have entered into "information sharing agreements" with these financial intermediaries, which permit the Funds to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Funds. If the Funds or their service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Funds, the Funds or their service providers may, in their sole discretion, request from the financial intermediary
information concerning the trading activity of its customers. Based upon a review of that information, if the Funds or their service providers determine that the trading activity of any customer may be detrimental to the Funds, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Funds by that customer. If the Funds are not satisfied that the intermediary has taken appropriate action, the Funds may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Funds' shares is requested by the Funds and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Funds have an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Funds, to restrict or prohibit the indirect intermediary from purchasing shares of the Funds on behalf of other persons.
The Funds and their service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Funds. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Funds to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Funds will ask your name, address, date of birth, and other information that will allow the Funds to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Funds are required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Funds are required to collect documents to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Funds, your application will be rejected.
Upon receipt of your application in proper form (meaning that it is complete, contains all necessary information, and has all supporting documentation such as proper signature guarantees, IRA rollover forms, etc.), or upon receipt of all identifying information required on the application, your investment will be received and your order will be processed at the NAV next-determined.
Each Fund reserves the right to close your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be performed within the timeframe established in the sole discretion of the Funds. Further, the Funds reserve the right to hold your proceeds until your original check clears the bank, which
may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Funds' overall obligation to deter money laundering under federal law. The Funds have adopted an Anti-Money Laundering Compliance Program designed to prevent the Funds from being used for money laundering or the financing of terrorist activities. In this regard, the Funds reserve the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of a Fund or in cases when a Fund is requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds.
SMALL ACCOUNTS
The Funds may redeem your shares without your permission if the value of your account falls below 50% of the required minimum initial investment. This provision does not apply:
To retirement accounts and certain other accounts; or
When the value of your account falls because of market fluctuations and not your redemptions.
The Funds will provide you at least 30 days' written notice to allow you time to add to your account and avoid the sale of your shares.
DIVIDENDS AND DISTRIBUTIONS
Normally, the Equity Portfolio distributes its net investment income quarterly. The Fixed Income Portfolio declares its net investment income daily and distributes it monthly. Each Fund distributes its net capital gains at least once a year. Each Fund will automatically reinvest dividends and distributions in additional shares of the Fund, unless you elect on your account application to receive them in cash.
FEDERAL TAXES
The following is a summary of the federal income tax consequences of investing in the Funds. This summary does not apply to shares held in an individual retirement account or other tax-qualified plan, which are not subject to current tax. Transactions relating to shares held in such accounts may, however, be taxable at some time in the future. You should always consult your tax advisor for specific guidance regarding the federal, state and local tax effects of your investment in the Funds.
TAXES ON DISTRIBUTIONS
Each Fund will distribute substantially all of its net investment income and its net realized capital gains, if any. The dividends and distributions you receive, whether in cash or reinvested in additional shares of the Funds, may be subject to federal, state, and local taxation, depending
upon your tax situation. Income distributions, including distributions of net short-term capital gains but excluding distributions of qualified dividend income, are generally taxable at ordinary income tax rates. Long-term capital gains distributions and distributions that are designated by the Funds as qualified dividend income are generally taxable at rates applicable to long-term capital gains and set at a maximum tax rate for individuals at 20% (lower rates apply to individuals in lower tax brackets). The Fixed Income Portfolio does not expect to distribute qualified dividend income. Once a year, the Funds will send you a statement showing the types and total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the purchase price would reflect the amount of the upcoming distribution. In this case, you would be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of your investment. This is known as "buying a dividend" and should be avoided by taxable investors. Call 1-866-4TSW-FUN to find out when the Funds expect to make a distribution to shareholders.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
The Funds (or their administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders cost basis information for
Fund shares purchased on or after January 1, 2012, and sold on or after that
date. In addition to reporting the gross proceeds from the sale of Fund shares,
a Fund is also required to report the cost basis information for such shares
and indicate whether these shares had a short-term or long-term holding period.
For each sale of Fund shares, a Fund will permit shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, a Fund will use the average basis method
as the default cost basis method. The cost basis method elected by the Fund
shareholder (or the cost basis method applied by default) for each sale of Fund
shares may not be changed after the settlement date of each such sale of Fund
shares. Fund shareholders should consult with their tax advisors to determine
the best IRS-accepted cost basis method for their tax situation and to obtain
more information about how the new cost basis reporting law applies to them.
Each sale or exchange of shares of a Fund may be a taxable event. For tax purposes, an exchange of shares of one TS&W Portfolio for another is the same as a sale.
A sale may result in a capital gain or loss to you. The gain or loss generally will be treated as short term if you held the shares for 12 months or less, long term if you held the shares for longer.
MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION
("SAI").
ADDITIONAL INFORMATION ABOUT THE FUNDS
OTHER INVESTMENT PRACTICES AND STRATEGIES
The investment objective of the Equity Portfolio is to seek maximum long-term total return, consistent with reasonable risk to principal, by investing in a diversified portfolio of common stocks of relatively large companies. The investment objective of the Fixed Income Portfolio is
to seek maximum long-term total return, consistent with reasonable risk to principal, by investing primarily in investment grade debt securities of varying maturities.
In addition to its principal investment strategies, each Fund may use the investment strategies described below. Each Fund may also employ investment practices that this prospectus does not describe, such as participating in repurchase agreements, when-issued and forward commitment transactions, lending of securities, borrowing and other techniques. For more information concerning these and each Fund's other investment practices and their risks, you should read the SAI.
DERIVATIVES
Each Fund may invest in derivatives, a category of investments that includes forward foreign currency exchange contracts, futures, options and swaps to protect its investments against changes resulting from market conditions (a practice called "hedging"), to reduce transaction costs or to manage cash flows. Forward foreign currency exchange contracts, futures and options are called derivatives because their value is based on an underlying asset or economic factor. Derivatives are often more volatile than other investments and may magnify a Fund's gains or losses. There are various factors that affect a Fund's ability to achieve its objectives with derivatives. Successful use of a derivative depends on the degree to which prices of the underlying assets correlate with price movements in the derivatives a Fund buys or sells. The Funds could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
The Equity Portfolio may invest up to 20% of its total assets in ADRs. ADRs are certificates evidencing ownership of shares of a foreign issuer that are issued by depositary banks and generally trade on an established market, in the United States or elsewhere. Although ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies, they continue to be subject to many of the risks associated with investing directly in foreign securities.
Foreign securities, especially those of companies in emerging markets, can be riskier and more volatile than domestic securities. Adverse political and economic developments or changes in the value of foreign currency can make it harder for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions.
SHORT-TERM INVESTING
The investments and strategies described in this prospectus are those that the Funds use under normal circumstances. During unusual economic, market, political or other circumstances, the Funds may invest up to 100% of their assets in short-term, high quality debt instruments, such as U.S. government securities. These instruments would not ordinarily be consistent with a Fund's principal investment strategies, and may prevent the Funds from achieving their investment objectives. A Fund will use a temporary strategy if the Adviser believes that pursuing the Fund's investment objective will subject it to a significant risk of loss. Each Fund has a policy requiring it to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in particular types of securities as described in each Fund's principal investment strategy, and will not change this policy without 60 days' prior written notice to shareholders. In
addition to the temporary defensive measures discussed above, each Fund may also temporarily deviate from this 80% policy in other limited, appropriate circumstances, such as if a Fund experiences large cash inflows or redemptions. When the Adviser pursues a temporary defensive strategy, a Fund may not profit from favorable developments that it would have otherwise profited from if it were pursuing its normal strategies.
INFORMATION ABOUT PORTFOLIO HOLDINGS
The Funds generally publish a complete list of their portfolio holdings on a monthly basis, as of the end of the previous month. For example, each Fund's investments as of the end of January would ordinarily be published at the end of February. Each Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://aicfundholdings.com/tsw. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of a Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund. Please consult the Funds' SAI for a full description of the policies and procedures that govern disclosure of each Fund's portfolio holdings.
INVESTMENT MANAGEMENT
INVESTMENT ADVISER
Thompson, Siegel & Walmsley LLC, a Delaware limited liability company located at 6806 Paragon Place, Suite 300, Richmond, Virginia 23230, serves as each Fund's investment adviser. The Adviser manages and supervises the investment of each Fund's assets on a discretionary basis, subject to oversight by the Board. As of December 31, 2012, the Adviser had approximately $6.2 billion in assets under management. The Adviser, an affiliate of Old Mutual (US) Holdings Inc. (formerly named United Asset Management Corporation) has provided investment management services to corporations, pension and profit-sharing plans, 401(k) and thrift plans, trusts, estates and other institutions and individuals since 1970. Old Mutual (US) Holdings Inc. is an indirectly-owned subsidiary of Old Mutual plc, a financial services company based in the United Kingdom.
For its services, the Funds pay the Adviser an annual management fee equal to 0.75% and 0.45% of the average daily net assets of the Equity Portfolio and the Fixed Income Portfolio, respectively. The Adviser has voluntarily agreed to reduce fees and reimburse expenses in order to keep total annual Fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 1.50% and 0.75% of the average daily net assets of the Equity Portfolio and the Fixed Income Portfolio, respectively. The Adviser intends to continue these fee reductions and expense reimbursements until further notice, but may discontinue them at any time.
Set forth in the table below are the management fees each Fund paid to the Adviser for its services during the most recent fiscal year, expressed as a percentage of each Fund's average daily net assets.
Equity Fixed Income
Portfolio Portfolio
---------------------------------------------------------
Management Fee 0.75% 0.16%
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A discussion regarding the basis for the Board's approval of the Funds' investment advisory agreement will be available in the Funds' Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The following portfolio managers are jointly and/or primarily responsible for the day-to-day management of the Funds. The SAI provides additional information about the portfolio managers' compensation, other accounts managed and ownership of Fund shares.
William M. Bellamy, CFA, Officer and Director of Fixed Income, is primarily responsible for managing the Fixed Income Portfolio. Mr. Bellamy joined TS&W in 2002 and has over 26 years of investment experience. Before joining TS&W, Mr. Bellamy was a Vice President at Trusco Capital Management. Mr. Bellamy received a B.S. from Cornell University and an M.B.A. from Duke University.
Elizabeth Cabell Jennings, CFA, Officer and Portfolio Manager/Client Service, is jointly and primarily responsible for managing the Equity Portfolio. Ms. Jennings joined TS&W in 1986 and has over 28 years of investment experience. Ms. Jennings received a B.A. from The College of William and Mary.
Charles (Chip) J. Wittmann, CFA, Officer and Portfolio Manager, is jointly and primarily responsible for managing the Equity Portfolio. Mr. Wittmann joined TS&W in 2004 and has over 20 years of investment experience. Mr. Wittmann received a B.A. from Davidson College and an M.B.A. from the Fuqua School of Business, Duke University.
SHAREHOLDER SERVICING ARRANGEMENTS
The Funds may compensate financial intermediaries for providing a variety of services to shareholders. "Financial intermediaries" include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Funds generally pay financial intermediaries a fee that is based on the assets of the Funds that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Funds, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Funds do not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Funds, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Funds. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Funds available to their customers or registered representatives, including providing the Funds with "shelf space," placing them on a preferred or recommended fund list, or promoting the Funds in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and FINRA rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Funds' SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the NAV or price of the Funds' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about each Fund. The information is intended to help you understand each Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Funds, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm whose report, along with the Funds' financial statements, is included in the Funds' Annual Report. The report of PricewaterhouseCoopers LLP, along with the Funds' financial statements and related notes, appears in the Annual Report that accompanies the Statement of Additional Information. You can obtain the Annual Report, which contains more performance information, at no charge by calling 1-866-4TSW-FUN.
EQUITY PORTFOLIO
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
YEARS ENDED OCTOBER 31,
-------------------------------------------------------------------
2012 2011 2010 2009 2008
--------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $10.20 $10.01 $8.97 $8.58 $14.24
------ ------ ----- ----- ------
Income from Operations:
Net Investment Income(3) 0.10 0.08 0.05 0.09 0.12
Net Realized and Unrealized
Gain (Loss) 0.89 0.20 1.05 0.38 (4.59)
---- ---- ---- ---- ----
Total From Operations 0.99 0.28 1.10 0.47 (4.47)
---- ---- ---- ---- ----
Dividends and Distributions:
Net Investment Income (0.11) (0.09) (0.06) (0.08) (0.12)
Net Realized Gain -- -- -- -- (1.07)
Return of Capital -- -- -- -- --(1)
---- ---- ---- ---- ----
Total Dividends and Distributions (0.11) (0.09) (0.06) (0.08) (1.19)
---- ---- ---- ---- ----
Net Asset Value, End of Year $11.08 $10.20 $10.01 $8.97 $8.58
====== ====== ====== ===== =====
Total Return(2) 9.77% 2.80% 12.28% 5.64% (34.02)%
==== ==== ===== ==== =====
Ratios and Supplemental Data:
Net Assets, End of Year (Thousands) $41,044 $43,424 $45,658 $43,227 $39,198
Ratio of Expenses to Average Net Assets(4) 1.38% 1.34% 1.30% 1.40% 1.22%
Ratio of Net Investment Income to Average Net
Assets 0.93% 0.75% 0.57% 1.08% 1.00%
Portfolio Turnover Rate 22% 30% 34% 41% 46%
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(1) Amount was less than $0.01 per share.
(2) Returns shown do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.
(3) Per share calculations were performed using average shares for the year.
(4) The Ratio of Expenses to Average Net Assets excludes the effect of fees paid indirectly. If these expense offsets were included, the ratio would have been the same as the ratio reported.
Amounts designated as "--" are either $0 or round to $0.
FIXED INCOME PORTFOLIO
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
YEARS ENDED OCTOBER 31,
2012 2011 2010 2009 2008
Net Asset Value, Beginning of Year $10.36 $10.61 $10.00 $8.60 $9.98
------ ------ ------ ----- -----
Income from Operations:
Net Investment Income(2) 0.38 0.44 0.48 0.47 0.48
Net Realized and Unrealized
Gain (Loss) 0.51 (0.05) 0.61 1.40 (1.37)
---- ---- ---- ---- ----
Total From Operations 0.89 0.39 1.09 1.87 (0.89)
---- ---- ---- ---- ----
Dividends and Distributions:
Net Investment Income (0.41) (0.46) (0.48) (0.47) (0.49)
Net Realized Gain (0.18) (0.18) -- -- --
---- ---- ---- ---- ----
Total Dividends and Distributions (0.59) (0.64) (0.48) (0.47) (0.49)
---- ---- ---- ---- ----
Net Asset Value, End of Year $10.66 $10.36 $10.61 $10.00 $8.60
====== ====== ====== ====== =====
Total Return(1) 8.88% 3.91% 11.16% 22.23% (9.35)%
====== ======= ======= ======= =======
Ratios and Supplemental Data:
Net Assets, End of Year (Thousands) $68,904 $61,428 $60,786 $52,344 $44,055
Ratio of Expenses to Average Net
Assets(3) 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Expenses to Average Net
Assets (Excluding Waivers and
Fees Paid Indirectly) 1.04% 1.03% 1.00% 1.09% 0.95%
Ratio of Net Investment Income to
Average Net Assets 3.63% 4.27% 4.63% 5.01% 4.87%
Portfolio Turnover Rate 104% 93% 89% 147% 103%
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(1) Returns shown do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares. Total return would have been lower had the Adviser not waived a portion of its fees during the period.
(2) Per share calculations were performed using average shares for the year.
(3) The Ratio of Expenses to Average Net Assets excludes the effect of fees paid indirectly. If these expense offsets were included, the ratio would have been the same as the ratio reported.
Amounts designated as "--" are either $0 or round to $0.
THE ADVISORS' INNER CIRCLE FUND
THE TS&W PORTFOLIOS
Investors who are interested in receiving more information about the Funds should read the Funds' Annual and Semi-Annual Reports and the Funds' SAI. The Annual and Semi-Annual Reports of the Funds provide additional information about its investments. In the Annual Report, you will also find a discussion of the market conditions and investment strategies that significantly affected the performance of each Fund during the last fiscal year. The SAI contains additional detailed information about the Funds and is incorporated by reference into (is legally part of) this prospectus.
Investors can receive free copies of the SAI, shareholder reports and other information about the Funds at www.tswinvest.com. Investors can also receive these documents, as well as make shareholder inquiries by writing to or calling:
The TS&W Portfolios P.O. Box 219009 Kansas City, MO 64121 866-4TSW-FUN (866-487-9386)
You can review and copy information about the Funds (including the SAI and Annual and Semi-Annual Reports) at the U.S. Securities and Exchange Commission's Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room by calling the U.S. Securities and Exchange Commission at 202-551-8090. Reports and other information about the Funds are available on the EDGAR Database on the U.S. Securities and Exchange Commission's Internet site at: http://www.sec.gov. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the U.S. Securities and Exchange Commission's Public Reference Section, Washington, D.C. 20549-1520.
The Trust's Investment Company Act of 1940 file number is 811-06400.
UNITED ASSOCIATION
S&P 500 INDEX FUND
CLASS I & CLASS II
CLASS I TICKER SYMBOL: UASPX
CLASS II TICKER SYMBOL: UAIIX
PROSPECTUS
MARCH 1, 2013
These U.S. Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
UAF-PS-018-0600
TABLE OF CONTENTS
PAGE
Fund Summary ....................................................... 1
Investment Objective .......................................... 1
Fund Fees and Expenses ........................................ 1
Principal Investment Strategies ............................... 2
Principal Risks ............................................... 2
Performance Information ....................................... 3
Investment Adviser ............................................ 4
Portfolio Managers ............................................ 4
Purchase and Sale of Fund Shares .............................. 4
Tax Information ............................................... 4
Payments to Broker-Dealers and Other Financial
Intermediaries ................................................ 4
More Information about the Investment Adviser ...................... 5
How Do I Invest in the Fund? ....................................... 5
Other Policies ..................................................... 12
Distribution Plan .................................................. 15
Shareholder Servicing Arrangements ................................. 15
Payments to Financial Intermediaries ............................... 15
Financial Highlights ............................................... 17
Additional Information about the Fund .............................. Back Cover
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No person has been authorized to give any information or to make any representation that is not contained in this Prospectus, or in the Statement of Additional Information ("SAI") that is incorporated herein by reference in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon. Also, this Prospectus does not constitute an offering by The Advisor's Inner Circle Fund (the "Trust") or its distributor in any jurisdiction where such an offering would not be lawful.
UNITED ASSOCIATION S&P 500 INDEX FUND
INVESTMENT OBJECTIVE
The United Association S&P 500 Index Fund's (the "Fund") investment objective is to approximate, before Fund expenses, the aggregate price and dividend performance of the securities included in the S&P 500 Index.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
CLASS I CLASS II
--------------------------------------------------------------------------------
Management Fees 0.095% 0.095%
Distribution (12b-1) Fees None 0.100%
Other Expenses 0.295% 0.295%
------ ------
Total Annual Fund Operating Expenses 0.390% 0.490%
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(1) The Fund is permitted to pay its distributor up to 0.10% of the average daily net assets of the Fund that are attributable to Class II shares on an annual basis pursuant to the Fund's Rule 12b-1 Plan. During the most recently completed fiscal year, the distributor limited this amount to 0.05%.
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 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. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
Class I $40 $125 $219 $493
Class II $50 $157 $274 $616
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 22% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment objective is to provide investment results that, before Fund expenses, approximate the aggregate price and dividend performance of the securities included in the S&P 500 Index. Under normal circumstances, the Fund invests substantially all, but in no event less than 80%, of its net assets (plus any borrowings for investment purposes) in stocks included in the S&P 500 Index. The S&P 500 Index is made up of common stocks of 500 large, publicly traded companies. The vast majority of the Fund's assets will normally be invested in stocks included in the S&P 500 Index in approximately the same relative proportion as those stocks are held in the S&P 500 Index, but the Fund does not simply invest in a portfolio that replicates the precise composition of the S&P 500 Index. PNC Capital Advisors, LLC (the "Adviser") also does not generally "manage" the Fund in the traditional sense (i.e., by using economic, financial or market analysis). However, the Adviser believes that employing certain active management strategies for a percentage of the Fund's assets, if successful, may result in net returns after expenses that may more closely approximate the returns of the S&P 500 Index. For example, the Adviser may invest in S&P 500 Index futures in addition to or in place of S&P 500 Index stocks to attempt to equal the performance of the S&P 500 Index. The Fund may also invest in other S&P 500 Index derivatives, such as options, swaps and options on futures, with economic characteristics similar to the common stocks in the S&P 500 Index. Under normal circumstances, the notional amount of investments in derivatives will not exceed 20% of the Fund's net assets. The Fund may use derivatives as a substitute for taking a position in an underlying asset, to increase returns, to manage risk/volatility or as part of a hedging strategy.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. There is also a possibility that the Fund will not achieve its objective. This could occur because its strategy failed to produce the intended results or because the Adviser did not implement its strategy properly. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
Since it purchases equity securities, the Fund is subject to the risk that equity security prices may fall over short or extended periods of time. Historically, the equity markets have moved in cycles, and therefore, the value of the 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 and developments. The prices of securities issued by such companies may decline in response.
The Fund is also subject to the risk that its market segment, the S&P 500 Index of common stocks, may underperform other equity market segments or the equity market as a whole.
Certain risks are associated with the Fund's investments in derivatives such as options, swaps, futures and options on futures. Derivatives are financial instruments whose values depend upon, or are derived from, the value of a reference asset, such as one or more underlying assets, indexes or currencies. A small investment in derivatives could have a potentially large impact on the Fund's performance. The use of derivatives involves risks different from the risks associated with investing directly in the reference asset. Derivatives can be volatile, illiquid and difficult to value, and an imperfect correlation may exist between changes in the value of a derivative held by the Fund and the value of the reference asset. Some derivatives are "leveraged" and therefore may magnify or otherwise increase investment losses to the Fund. The Fund's use of derivatives may also increase the amount of taxes payable by shareholders. In addition, there is also the risk that a Fund may be unable to terminate or sell a derivatives position and the
risk that derivative counterparties may suffer financial difficulties and may not fulfill their contractual obligations to the Fund.
The Fund's ability to replicate the performance of the S&P 500 Index will depend to some extent on the size and timing of cash flows into and out of the Fund, the composition of the S&P 500 Index, the extent to which there are changes in the number of shares issued by the companies represented in the S&P 500 Index, the investment decisions made by the Adviser and the level of the Fund's expenses. For additional information about risks, see the Fund's SAI.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in the Class I shares of the Fund by showing changes in the Class I shares of the Fund's performance from year to year and by showing how the Class I shares of the Fund's average annual returns for 1, 5 and 10 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at WWW.UAFUND.COM or by calling 1-888-766-8043. The Fund acquired the assets and assumed the historical performance of another fund on March 10, 2003. The performance shown in the bar chart and performance table for periods prior to that date represents the performance of the predecessor fund.
2003 28.69%
2004 10.79%
2005 4.78%
2006 15.93%
2007 5.48%
2008 (36.71)%
2009 26.75%
2010 14.59%
2011 2.02%
2012 15.70%
BEST QUARTER WORST QUARTER
15.86% (21.66)%
(06/30/2009) (12/31/2008)
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown only for the Class I shares. After-tax returns for Class II shares will vary.
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
-----------------------------------------------------------------------------------------------------
Fund Returns Before Taxes
Class I (inception 3/1/2000) 15.70% 1.64% 7.08% 2.14%
Class II (inception 3/27/2000) 15.67% 1.58% 7.01% 1.30%
Fund Returns After Taxes on Distributions
Class I (inception 3/1/2000) 15.37% 1.34% 6.77% 1.80%
Fund Returns After Taxes on Distributions and
Sale of Fund Shares
Class I (inception 3/1/2000) 10.63% 1.35% 6.19% 1.72%
S&P 500 Index (Index comparisons begin on 16.00% 1.66% 7.10% 2.44%
02/29/2000)
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INVESTMENT ADVISER
PNC Capital Advisors, LLC
PORTFOLIO MANAGERS
Hitesh Patel, Ph.D., has managed the Fund since 2005.
Chen Chen, Ph.D., has managed the Fund since 2005.
PURCHASE AND SALE OF FUND SHARES -------------------------------------------------------------------------------- MINIMUM INITIAL INVESTMENT CLASS I CLASS II New Account $500,000 $1,000 IRA Account n/a $1,000 Systematic Investment Program n/a $100 Systematic Withdrawal Plan n/a $10,000 -------------------------------------------------------------------------------- |
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail or telephone at 1-888-766-8043.
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of 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 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.
MORE INFORMATION ABOUT THE INVESTMENT ADVISER
The Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board supervises the Adviser and establishes policies that the Adviser must follow in its management activities. As of December 31, 2012, the Adviser had approximately $35 billion in assets under management.
PNC Capital Advisors, LLC, a Delaware limited liability company with its principal offices at One East Pratt Street, 5th Floor, Baltimore, Maryland 21202, serves as the investment adviser to the Fund. On September 29, 2009, Allegiant Asset Management Company, the Fund's former investment adviser, and its affiliate, PNC Capital Advisors, Inc., merged into the Adviser. For its services, the Fund pays the Adviser an advisory fee at an annualized rate of 0.095% based on the Fund's average daily net assets. A discussion regarding the basis of the Board's approval of the Fund's investment advisory agreement and current advisory fee will be available in the Fund's Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
PORTFOLIO MANAGERS
The Fund is managed by a team of investment professionals, each of whom is jointly and primarily responsible for the day-to-day management of the Fund. The SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
Hitesh Patel, Ph.D. joined the Adviser in 2005. He has 19 years of quantitative research and portfolio management experience. Prior to joining the Adviser, Dr. Patel served as Director of Quantitative Research at Harris Investment Management, Inc. ("HIM"). Dr. Patel had been with HIM since 1998. Dr. Patel received his B.S. in Pharmacy from the University of Gujarat, M.S. in Pharmaceutical Chemistry from Bombay University and his Ph.D. in Medical Chemistry from the University of Illinois in Chicago.
Chen Chen, Ph.D. joined the Adviser in 2005. She has 7 years of experience in quantitative research. Ms. Chen holds a B.S. in Mathematics from Nanjing University, an M.S. in Econometrics from Fudan University, and a Ph.D. in Business Statistics from the University of Illinois in Chicago.
HOW DO I INVEST IN THE FUND?
CLASS I -- The Fund offers Class I shares (institutional shares) that are designed to give organizations, pension funds and other entities (non-natural persons) or financial institutions acting in a fiduciary or agency capacity for such entities, a convenient means of accumulating an interest in the Fund.
CLASS II -- The Fund also offers Class II shares (retail shares). Class II shares offer additional services and are designed for individuals and other investors who seek mutual fund investment convenience plus a lower investment minimum. Class II shares also incur distribution fees.
MINIMUM INVESTMENTS - To purchase Class I Shares of the Fund for the first time you must invest at least $500,000. To purchase Class II Shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA"), you must invest at least $1,000. There are no minimums for subsequent investments. The Fund may accept investments of smaller amounts in its sole discretion.
HOW ARE INVESTMENTS MADE?
As described below, you may purchase shares of the Fund directly from the Fund, or through an authorized broker or investment adviser. Your orders for the purchase of shares will be executed at the net asset value per share ("NAV") next determined after an order has been received in proper form. Your payment will be invested in full and fractional shares of the Fund. You may purchase shares on any day that the New York Stock Exchange ("NYSE") is open for business (a "Business Day"). Orders transmitted to the Fund or an authorized institution in proper form prior to the close of business (normally, 4:00 p.m. Eastern Time) will be executed that day. "Proper form" means that the Fund was provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds. You will not receive certificates for shares that you purchase. The Fund's transfer agent maintains records of each shareholder's holdings of Fund shares. Your initial investment in the Fund must be preceded or accompanied by a completed, signed application.
All purchases, redemptions and exchanges in qualified retirement accounts, such as IRAs, must be in writing.
The Fund reserves the right to reject any specific purchase order for any reason. The Fund is not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Fund's policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of enhanced due diligence. Please contact the Fund for more information.
HOW ARE FUND SHARES VALUED?
The price at which you buy and sell Fund shares is the share price or NAV. The NAV for each Class of shares in the Fund is determined by adding the value of the proportional share of the Fund's investments of each Class, cash and other assets, deducting the proportional share of liabilities of each Class, and then dividing that value by the total number of the shares outstanding in that Class. The Fund calculates NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). If the NYSE closes early - such as on days in advance of certain generally observed holidays - the Fund reserves the right to calculate NAV as of the earlier closing time. The Fund will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays.
In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are not readily available or the Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Board, these methods are implemented through the Fund's Fair Value Pricing Committee, members of which are appointed by the Board. The Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
Although the Fund invests primarily in the stocks of U.S. companies that are traded on U.S. exchanges, there may be limited circumstances in which the Fund would price securities at fair value - for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
INVESTING DIRECTLY WITH THE FUND
You can invest in the Fund directly by using any of the methods described below:
BY MAIL. Make your check payable to the UA S&P 500 Index Fund and mail it, along with the account application (if your purchase is an initial investment), to the address below. Third party checks and foreign checks will not be accepted. For existing accounts please include the Fund name and your account number on all checks. The check should be mailed to:
UA S&P 500 Index Fund
P.O. Box 8635
Boston, MA 02266-8635
BY WIRE. You may purchase shares by wire transfer from your bank account to your UA S&P 500 Index Fund account. There is a $1,000 minimum for purchase by wire. To place a purchase by wire, please call 1-888-766-8043 to speak with a representative. To initiate your wire transaction, contact your depository institution and instruct them to wire Federal Funds (monies transferred from one bank to another through the Federal Reserve System with same-day availability) to:
State Street Bank & Trust Co.
ABA # 011000028
Account# 99056079 credit UA S&P 500 Index Fund
(Account Registration)
(Account Number)
(Wire Control Number)
INVESTING THROUGH YOUR BROKER OR INVESTMENT ADVISER
To purchase shares through authorized brokers and investment advisers, simply complete an account application and contact your broker or investment adviser with instructions as to the amount you wish to invest. Your broker will then contact the Fund to place the order on your behalf. Authorized brokers and investment advisers may impose additional requirements and charges for the services rendered.
Your orders received by the Fund prior to the close of business (normally, 4:00
p.m. Eastern Time) will be executed that day. Brokers who receive your orders
are obligated to transmit them promptly. You will receive written confirmation
of your order within a few days of receipt of instructions from your broker.
HOW DO I REDEEM FUND SHARES?
Shareholders may redeem their shares, in whole or in part, on each Business Day. Shares will be redeemed at the NAV next determined after a proper redemption request has been received by the Fund in proper form.
A redemption is a tax reportable transaction and any gain or loss is a taxable event. See the section entitled "WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?" later in this Prospectus for more information.
Where the shares to be redeemed have been purchased by check or by Automated Clearing House ("ACH") through the Automatic Investment Program, the payment of redemption proceeds may be delayed until the purchase has cleared or the ACH transaction has been completed (which may take up to 15 days from your date of purchase). During the period prior to the time the shares are redeemed, dividends on the shares will continue to accrue and be payable and the shareholder will be entitled to exercise all other beneficial rights of ownership.
Once the shares are redeemed, the Fund will ordinarily send the proceeds by check to the shareholder at the address of record on the next Business Day. The Fund may, however, take up to seven days to make payment. Also, if the NYSE is closed (or when trading is restricted) for any reason other than customary weekend or holiday closings, or if an emergency condition, as determined by the SEC, merits such action, the Fund may suspend redemptions or postpone payment dates beyond the normal seven day redemption period.
To ensure acceptance of your redemption request, it is important to follow the procedures described below. Although the Fund has no present intention to do so, the Fund reserves the right to refuse or to limit the frequency of any telephone or bank transfer redemptions. It may be difficult to make contact by telephone during periods of severe market or economic change. Shareholders should consider alternative methods of communication during such times. You can redeem your shares using any of the methods described below:
REDEEMING YOUR SHARES DIRECTLY FROM THE FUND
BY MAIL. You may redeem your shares by sending a letter directly to the Fund. To be accepted, a letter requesting redemption must include:
o the Fund name and account registration from which you are redeeming shares;
o your account number;
o the amount to be redeemed; and
o an authorized signature along with a signature guarantee (if required).
A signature guarantee is designed to protect you, the Fund, and its agents from fraud. Your written request requires a Medallion signature guarantee if the check is being mailed to an address that has been changed within the last 30 days, if the check is not being mailed to the address on your account, or if the check is not being made out to the account owner. A bank or other financial institution that participates in one of the Medallion signature programs should be able to provide you with a Medallion signature guarantee. A Medallion signature guarantee may not be provided by a notary public.
The transfer agent will accept only STAMP2000 New Technology Medallion Signature Guarantee stamps from eligible guarantors-- these include banks, broker/dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations. The guarantee must appear on the same document as the signature's being guaranteed and as close as practicable to the endorsement.
To obtain the guarantee, you must take your unsigned document to the guaranteeing institution. Most institutions will not guarantee your signature unless you sign in their presence. Be sure to bring the form of personal identification with you that the guaranteeing institution requires.
The guaranteeing institution must use a STAMP2000 New Technology Medallion Signature Guarantee stamp. A stamp that is not in this format is NOT an acceptable substitute. A witnessed, verified, or certified signature or a notarization by a notary public is NOT an acceptable substitute for a guarantee, nor can we accept a comparison guarantee, a handwritten signature guarantee, or a non-Medallion guarantee stamp.
BY TELEPHONE. If you have established the telephone redemption privilege on your Account Application, you may redeem your shares by calling the Fund at 1-888-766-8043. You should be prepared to give the telephone representative the following information:
o your account number, social security number, and account registration;
o the Fund name from which you are redeeming shares;
o the amount to be redeemed; and
o PIN numbers (Class I only).
The telephone conversation may be recorded to protect you and the Fund. The Fund employs reasonable procedures to confirm that instructions communicated to its representatives by telephone are genuine. If the Fund fails to employ such reasonable procedures, it may be liable for any loss, damage or expense arising out of any telephone transactions purporting to be on a shareholder's behalf. However, if the Fund acts on instructions it reasonably believes to be genuine, you will bear the loss.
You cannot redeem shares held in IRAs via the telephone.
REDEEMING YOUR SHARES USING AN AUTHORIZED BROKER OR INVESTMENT ADVISER
You may redeem your shares by contacting your authorized broker or investment adviser and instructing them to redeem your shares. They will then contact the Fund and place a redemption order on your behalf.
METHODS OF REDEMPTION PAYMENTS
BY CHECK. Unless otherwise instructed, a check will be issued to the address of record on your account. For your protection, telephone redemptions by check will be suspended for a period of 30 days following an address change given over the telephone.
BY WIRE. You may instruct the Fund to send your redemption proceeds via Federal wire ($1,000 minimum per transaction) to your personal bank.
Wire redemptions can be made only if the privilege has been established on your account application and you have attached a copy of a voided check. You may change the bank account designated to receive an amount redeemed at any time by sending a letter of instruction with a signature guarantee to the transfer agent. Your bank may charge you a fee for receiving a wire payment on your behalf.
LARGE REDEMPTIONS
It is important that you call the Fund before you redeem a large dollar amount. The Fund must consider the interests of all Fund shareholders and consequently delay delivery of your redemption proceeds for up to seven days if the amount will disrupt the Fund's operations or performance. If you redeem more than $250,000 worth of Fund shares within any 90-day period, the Fund reserves the right to pay part or all of the redemption proceeds above $250,000 in-kind, I.E., in securities rather than in cash. In the event that shares are redeemed in-kind, investors will generally bear additional transaction costs and market risks until the securities are converted into cash.
INVOLUNTARY REDEMPTION OF YOUR SHARES
If your Class II account balance drops below $500 because of redemptions, you may be required to sell your shares. The Fund will provide you at least 30 days' written notice to allow you time to add to your account and avoid the involuntary redemption of your shares.
WHAT ADDITIONAL SERVICES ARE OFFERED BY CLASS II?
AUTOMATIC INVESTMENT PROGRAM. The Automatic Investment Program offers a simple way to establish and maintain a consistent investment program. You may arrange automatic transfers (minimum $50 per transaction) from your bank account to your Fund account on a periodic basis by simply completing the Automatic Investment Program section of your account application. When you participate in this program, the minimum initial investment in the Fund is $100. You may change the amount of your automatic investment, skip an investment, or stop the Automatic Investment Program by calling the Fund at 1-888-766-8043 at least seven business days prior to your next scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN. If your Fund account balance is $10,000 or more, you may elect to have periodic redemptions made from your account on a monthly, quarterly, semi-annual, or annual basis by completing the Systematic Withdrawal Plan section of the account application. The minimum periodic withdrawal is $100 and the transaction normally will be executed on the fifth or twentieth day of the selected month(s). You may request that these payments be sent to a predesignated bank account or other designated party. Depending on the size of the payment requested and fluctuation in the NAV of the shares redeemed, redemptions for the purpose of making such payments may reduce or even exhaust your account. If a shareholder participates in the Systematic Withdrawal Plan, all dividends are automatically reinvested unless the shareholder directs otherwise.
INDIVIDUAL RETIREMENT ACCOUNTS. The Fund may be used as a funding medium for traditional and Roth IRAs. In addition, a traditional or Roth IRA may be established through a custodial account with the Fund. Completion of a special application is required in order to create such an account, and the minimum initial investment for an IRA is $1,000. Contributions to IRAs are subject to the limits and conditions established by the Internal Revenue Service. For more information, call the Fund at 1-888-766-8043 or your tax adviser.
Additional account level fees are imposed for IRA accounts.
For information regarding the federal income tax consequences of transactions in shares of the Fund, including information about cost basis reporting, see "What is the Effect of Federal Income Tax on this Investment?"
WHAT STATEMENTS AND REPORTS DO I RECEIVE FROM THE FUND?
You will receive a quarterly statement and a confirmation after every transaction that affects your share balance or account registration. A statement with tax information will be mailed to you by January 31 of each tax year and also will be filed with the IRS. At least twice a year, you will receive the Fund's financial statements. Please write to the Fund at: United Association Funds, P.O. Box 8635, Boston, MA 02266-8635 or call the Fund at 1-888-766-8043 to request additional copies of these reports.
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
The Fund intends to distribute substantially all of its net investment income and capital gains, if any, to shareholders within each calendar year as well as on a fiscal year basis. Any net capital gains realized are normally distributed in December. Income dividends for the Fund, if any, are declared and paid quarterly.
FEDERAL TAXES. Distributions of capital gains from the sale of assets held by the Fund for more than one year are generally taxable to shareholders at the applicable long-term capital gains rate, regardless of how long they have owned their Fund shares. For tax purposes, an exchange of your Fund shares for shares of a different Fund is the same as a sale. Distributions from other sources are generally taxed as ordinary income. A portion of the Fund's dividends may qualify for the dividends-received deduction for corporations and for the lower tax rates on qualified dividend income for individuals. Distributions are taxable when they are paid, whether taken in cash or reinvested in additional shares, except that distributions declared in October, November, or December and paid in January are taxable as if paid on December 31. The Fund will send each shareholder an IRS Form 1099-DIV by January 31.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the first-in, first-out method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
"BUYING A DIVIDEND." When shares are purchased just before a distribution ("buying a dividend"), the share price will reflect the amount of the upcoming distribution. Consequently, a portion of the share price will be received back as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some of the Federal tax consequences generally affecting the Fund and its shareholders, and no attempt has been made to discuss individual tax consequences generally affecting the Fund and its shareholders. In addition to Federal tax, distributions may be subject to state or local taxes. Shareholders should consult their tax advisers for
details and up-to-date information on the tax laws in your state to determine whether the Fund is suitable given your particular tax situation.
When you sign your Account Application, you will be asked to certify that your taxpayer identification number is correct, that you are not subject to backup withholding for failing to report income to the IRS, and that you are a U.S. person. If you do not comply with IRS regulations, the IRS can require the Fund to withhold a portion of taxable distributions from your account.
OTHER POLICIES
"Standard & Poor's," "S&P," "S&P 500," "Standard & Poor's 500," and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Adviser. The Fund is not sponsored, endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund.
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages shareholders from engaging in "market timing" or other types of short-term trading. This frequent trading into and out of the Fund may present risks to the Fund's long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Fund's investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Fund to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
The Fund's service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Fund's policies and procedures described in this prospectus and approved by the Fund's Board. For purposes of applying these policies, the Fund's service providers may consider the trading history of accounts under common ownership or control. The Fund's policies and procedures include:
o Shareholders are restricted from making more than six (6) "round trips" into or out of the Fund per sixty days. If a shareholder exceeds this amount, the Fund and/or its service providers may, at their discretion, reject any additional purchase orders. The Fund defines a "round trip" as a purchase into the Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Fund and/or its service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Fund's long-term shareholders. The Fund does not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Fund will occur. Systematic purchases and redemptions are exempt from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Fund for their customers through which transactions are placed. The Fund has entered into "information sharing agreements" with these financial intermediaries, which permit the Fund to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Fund. If the Fund or its service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, the Fund or its service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Fund or its service providers determine that the trading activity of any customer may be detrimental to the Fund, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Fund by that customer. If the Fund is not satisfied that the intermediary has taken appropriate action, the Fund may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Fund's shares is requested by the Fund and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Fund has an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Fund, to restrict or prohibit the indirect intermediary from purchasing shares of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Fund. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Fund to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Fund will ask your name, address, date of birth, and other information that will allow the Fund to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Fund, your application will be rejected.
Upon receipt of your application in proper form, or upon receipt of all identifying information required on the application, your investment will be received and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if it is unable to verify your identity. Attempts to verify your identity will be
performed within a reasonable timeframe established in the sole discretion of the Fund. Further, the Fund reserves the right to hold your proceeds until your original check clears the bank which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted
an anti-money laundering compliance program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities. In
this regard, the Fund reserves the right to: (i) refuse, cancel or rescind any
purchase order; (ii) freeze any account and/or suspend account services; or
(iii) involuntarily close your account in cases of threatening conduct or
suspected fraudulent or illegal activity. These actions will be taken when, in
the sole discretion of Fund management, they are deemed to be in the best
interest of the Fund or in cases when the Fund is requested or compelled to do
so by governmental or law enforcement authority. If your account is closed at
the request of governmental or law enforcement authority, you may not receive
proceeds of the redemption if the Fund is required to withhold such proceeds.
INFORMATION ABOUT PORTFOLIO HOLDINGS
The Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at HTTP://AICFUNDHOLDINGS.COM/ALLEGIANT. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund. Please consult the Fund's SAI for a full description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
PROXY VOTING POLICIES
The Board of Trustees of the Trust (the "Board") has appointed a proxy consulting service to act as the Fund's agent in exercising its proxy voting rights subject to the general oversight by the Trustees. In addition, the Fund may also initiate shareholder proposals as recommended by this proxy service. Because the Fund is distributed primarily to the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada (the "UA") either through direct investment by UA members, or through investment by UA pension funds, the Trustees have considered the recommendations of the UA in appointing the Fund's proxy voting agent. For more information about the Fund's proxy voting practices, please refer to the SAI.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan pursuant to Rule 12b-1 that allows the Fund to pay its distributor for distribution and/or service expenses incurred in the sale and distribution of its Class II shares, and for services provided to Class II shareholders. Because these fees are paid out of the Fund's assets continuously, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. For Class II shares of the Fund, the maximum annual distribution and/or service fee under the Plan is 0.10% of the average daily net assets of the Fund. The Fund's distributor has voluntarily agreed to limit this amount to 0.05% of the average daily net assets of the Fund, but may discontinue all or part of this limitation at any time.
SEI Investments Distribution Co. (the "Distributor") may, from time to time in
its sole discretion, institute one or more promotional incentive programs for
dealers, which will be paid for by the Distributor from any sales charge it
receives or from any other source available to it. Under any such program, the
Distributor may provide cash or non-cash compensation as recognition for past
sales or encouragement for future sales that may include the following:
merchandise, travel expenses, prizes, meals, lodgings, and gifts that do not
exceed $100 per year, per individual.
SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Fund generally pays financial intermediaries a fee that is based on the assets of the Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Fund, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request. The Fund does not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any Rule 12b-1 and shareholder servicing fees that are reflected in the fee table section of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Fund. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Fund
available to their customers or registered representatives, including providing the Fund with "shelf space," placing it on a preferred or recommended fund list, or promoting the Fund in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Fund's shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
FINANCIAL HIGHLIGHTS
The table that follows presents performance information about the Fund. The information is intended to help you understand the Fund's financial performance for the past five fiscal years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm whose report, along with the Fund's financial statements, is included in the Fund's Annual Report. The report of PricewaterhouseCoopers LLP, along with the Fund's financial statements and related notes, appears in the Annual Report that accompanies the Statement of Additional Information. You can obtain the Annual Report, which contains more performance information, at no charge by calling 1-888-766-8043.
Selected data for a share of beneficial interest outstanding throughout the periods is shown below:
CLASS I
OCTOBER OCTOBER OCTOBER OCTOBER OCTOBER
FOR THE YEAR ENDED : 31, 2012 31, 2011 31, 2010 31, 2009 31, 2008
-----------------------------------------------------------------------------------------------------------------------
Net asset value - beginning of year $9.15 $8.64 $7.60 $7.05 $11.23
------ ----- ----- ----- ------
Net investment income(2) 0.18 0.16 0.16 0.15 0.19
Net realized and unrealized gains (losses) on
investments(2) 1.18 0.53 1.04 0.55 (4.18)
---- ---- ---- ---- ----
Total from operations 1.36 0.69 1.20 0.70 (3.99)
---- ---- ---- ---- ----
Dividends from net investment income (0.18) (0.18) (0.16) (0.15) (0.19)
Total dividends (0.18) (0.18) (0.16) (0.15) (0.19)
Net asset value -- end of year $10.33 $9.15 $8.64 $7.60 $7.05
------ ---- ---- ---- ----
Total Return(1) 14.93% 8.02% 15.99% 10.29% (35.95)%
===== ==== ===== ===== =====
Net assets -- end of year (000) $99,303 $105,692 $203,744 $185,803 $144,247
Ratio of expenses to average net assets 0.39% 0.28% 0.25% 0.28% 0.23%
Ratio of expenses to average net assets
(Excluding Waivers and Fees Paid
Indirectly) 0.39% 0.28% 0.25% 0.28% 0.23%
==============================================================
Ratio of net investment income to average
net assets 1.81% 1.74% 1.99% 2.19% 1.95%
==============================================================
Portfolio turnover rate 22% 22% 24% 14% 18%
==============================================================
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(1) Returns shown do not reflect the deductions of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
(2) Per share data calculated using the average shares method.
CLASS II
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
FOR THE YEAR ENDED : 2012 2011 2010 2009 2008
------------------------------------------------------------------------------------------------------------------------------------
Net asset value - beginning of year $9.14 $8.63 $7.59 $7.04 $11.21
------------------------------------------------------------------------------------------------------------------------------------
Net investment income(2) 0.17 0.16 0.16 0.14 0.18
Net realized and unrealized gain (loss) 1.18 0.53 1.04 0.56 (4.16)
on investments(2)
------------------------------------------------------------------------------------------------------------------------------------
Total from operations 1.35 0.69 1.20 0.70 (3.98)
Dividends from net investment income (0.17) (0.18) (0.16) (0.15) (0.19)
------------------------------------------------------------------------------------------------------------------------------------
Total dividends (0.17) (0.18) (0.16) (0.15) (0.19)
Net asset value -- end of year $10.32 $9.14 $8.63 $7.59 $7.04
------------------------------------------------------------------------------------------------------------------------------------
Total Return(1) 14.89%(3) 7.98%(3) 15.95%(3) 10.25%(3) (35.96)%(3)
====================================================================================================================================
Net assets -- end of year (000) $26,938 $28,099 $28,867 $26,184 $23,453
===================================================================================================================================
Ratio of expenses to average net assets 0.44% 0.34% 0.30% 0.33% 0.28%
===================================================================================================================================
Ratio of expenses to average net assets 0.49% 0.39% 0.35% 0.38% 0.33%
(Excluding Waivers and Fees Paid
Indirectly)
====================================================================================================================================
Ratio of net investment income to 1.76% 1.67% 1.95% 2.16% 1.90%
average net assets
====================================================================================================================================
Portfolio turnover rate 22% 22% 24% 14% 18%
====================================================================================================================================
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(1) Returns shown do not reflect the deductions of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
(2) Per share data calculated using the average shares method.
(3) Total Return would have been lower had the Distributor not waived a portion of its fee.
THE ADVISORS' INNER CIRCLE FUND
THE UNITED ASSOCIATION S&P 500 INDEX FUND
You can request other information, including the Fund's SAI, Annual Report, or Semi-Annual Report, free of charge, by contacting the Fund at 1-888-766-8043 or by writing to United Association Funds, P.O. Box 8635, Boston, MA 02266-8635. These documents are also available on the Fund's website at WWW.UAFUND.COM. In the Fund's Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during the last fiscal year.
The SAI, dated March 1, 2013, provides detailed information about the Fund and is incorporated into this Prospectus by reference, which means that it is legally part of this Prospectus. You may review and copy, upon payment of a duplicating fee, the Fund's SAI, at the SEC's Public Reference Room in Washington, D.C. You also can obtain this information, upon payment of a duplicating fee, by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-1520. Copies of this information may also be obtained upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
The SEC also maintains a Web site located at HTTP://WWW.SEC.GOV that contains the SAI, material incorporated herein by reference, and other information regarding the Fund. For more information about the operation of the Public Reference Room, please call the SEC at 1-202-551-8090.
ADMINISTRATOR
SEI Investments Global Funds Services
One Freedom Valley Drive
Oaks, Pennsylvania 19456
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
The Trust's Investment Company Act File No. is 811-06400.
UAF-PS-018-0600
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
WESTWOOD LARGECAP VALUE FUND
TICKER SYMBOL: WWLAX
WESTWOOD INCOME OPPORTUNITY FUND
TICKER SYMBOL: WWIAX
WESTWOOD SHORT DURATION HIGH YIELD FUND
TICKER SYMBOL:
WESTWOOD GLOBAL EQUITY FUND
TICKER SYMBOL:
WESTWOOD GLOBAL DIVIDEND FUND
TICKER SYMBOL:
WESTWOOD EMERGING MARKETS FUND
TICKER SYMBOL: WWEAX
WESTWOOD EMERGING MARKETS PLUS FUND
TICKER SYMBOL:
A CLASS SHARES
INVESTMENT ADVISER:
WESTWOOD MANAGEMENT CORP.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
This prospectus has been arranged into different sections so that you can easily review this important information. For detailed information about each Fund, please see:
PAGE
WESTWOOD LARGECAP VALUE FUND .............................................. 1
FUND INVESTMENT OBJECTIVE ............................................ 1
FUND FEES AND EXPENSES ............................................... 1
PRINCIPAL INVESTMENT STRATEGIES ...................................... 2
PRINCIPAL RISKS ...................................................... 2
PERFORMANCE INFORMATION .............................................. 4
INVESTMENT ADVISER ................................................... 5
PORTFOLIO MANAGERS ................................................... 5
PURCHASE AND SALE OF FUND SHARES ..................................... 5
WESTWOOD INCOME OPPORTUNITY FUND .......................................... 7
FUND INVESTMENT OBJECTIVE ............................................ 7
FUND FEES AND EXPENSES ............................................... 7
PRINCIPAL INVESTMENT STRATEGIES ...................................... 8
PRINCIPAL RISKS ...................................................... 9
PERFORMANCE INFORMATION .............................................. 11
INVESTMENT ADVISER ................................................... 12
PORTFOLIO MANAGERS ................................................... 12
PURCHASE AND SALE OF FUND SHARES ..................................... 12
WESTWOOD SHORT DURATION HIGH YIELD FUND ................................... 13
FUND INVESTMENT OBJECTIVE ............................................ 13
FUND FEES AND EXPENSES ............................................... 13
PRINCIPAL INVESTMENT STRATEGIES ...................................... 14
PRINCIPAL RISKS ...................................................... 15
PERFORMANCE INFORMATION .............................................. 17
INVESTMENT ADVISER ................................................... 18
PORTFOLIO MANAGER .................................................... 18
PURCHASE AND SALE OF FUND SHARES ..................................... 18
WESTWOOD GLOBAL EQUITY FUND ............................................... 19
FUND INVESTMENT OBJECTIVE ............................................ 19
FUND FEES AND EXPENSES ............................................... 19
PRINCIPAL INVESTMENT STRATEGIES ...................................... 20
PRINCIPAL RISKS ...................................................... 21
PERFORMANCE INFORMATION .............................................. 23
INVESTMENT ADVISER ................................................... 23
PORTFOLIO MANAGERS ................................................... 23
PURCHASE AND SALE OF FUND SHARES ..................................... 23
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WESTWOOD GLOBAL DIVIDEND FUND ............................................. 24
FUND INVESTMENT OBJECTIVE ............................................ 24
FUND FEES AND EXPENSES ............................................... 24
PRINCIPAL INVESTMENT STRATEGIES ...................................... 25
PRINCIPAL RISKS ...................................................... 26
PERFORMANCE INFORMATION .............................................. 28
INVESTMENT ADVISER ................................................... 28
PORTFOLIO MANAGER .................................................... 28
PURCHASE AND SALE OF FUND SHARES ..................................... 28
WESTWOOD EMERGING MARKETS FUND ............................................ 29
FUND INVESTMENT OBJECTIVE ............................................ 29
FUND FEES AND EXPENSES ............................................... 29
PRINCIPAL INVESTMENT STRATEGIES ...................................... 30
PRINCIPAL RISKS ...................................................... 31
PERFORMANCE INFORMATION .............................................. 33
INVESTMENT ADVISER ................................................... 33
PORTFOLIO MANAGER .................................................... 33
PURCHASE AND SALE OF FUND SHARES ..................................... 33
WESTWOOD EMERGING MARKETS PLUS FUND ....................................... 34
FUND INVESTMENT OBJECTIVE ............................................ 34
FUND FEES AND EXPENSES ............................................... 34
PRINCIPAL INVESTMENT STRATEGIES ...................................... 35
PRINCIPAL RISKS ...................................................... 36
PERFORMANCE INFORMATION .............................................. 38
INVESTMENT ADVISER ................................................... 38
PORTFOLIO MANAGER .................................................... 38
PURCHASE AND SALE OF FUND SHARES ..................................... 38
SUMMARY INFORMATION ABOUT TAXES
AND FINANCIAL INTERMEDIARY COMPENSATION ................................. 39
MORE INFORMATION ABOUT RISK ............................................... 40
MORE INFORMATION ABOUT FUND INVESTMENTS ................................... 42
INFORMATION ABOUT PORTFOLIO HOLDINGS ...................................... 42
INVESTMENT ADVISER ........................................................ 42
INVESTMENT SUB-ADVISER .................................................... 44
PORTFOLIO MANAGERS ........................................................ 44
RELATED PERFORMANCE DATA OF THE ADVISER ................................... 47
COMPARABLE FUND PERFORMANCE ............................................... 51
PURCHASING, SELLING AND EXCHANGING FUND SHARES ............................ 53
DISTRIBUTION OF FUND SHARES ............................................... 63
SHAREHOLDER SERVICING ARRANGEMENTS ........................................ 63
PAYMENTS TO FINANCIAL INTERMEDIARIES ...................................... 64
OTHER POLICIES ............................................................ 64
DIVIDENDS AND DISTRIBUTIONS ............................................... 67
TAXES ..................................................................... 67
FINANCIAL HIGHLIGHTS ...................................................... 69
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUNDS ...................... Back Cover
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A Class Shares of the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund and the Westwood Emerging Markets Plus Fund are currently not available for purchase.
WESTWOOD LARGECAP VALUE FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood LargeCap Value Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold A Class Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in the Fund. More information about these and other discounts is available from your financial professional and in the section "Sales Charges" on page 60 of this prospectus.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.00% -------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None -------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Reinvested Dividends and Other Distributions None (as a percentage of offering price) -------------------------------------------------------------------------------- Redemption Fee (as a percentage of amount redeemed, if applicable) None -------------------------------------------------------------------------------- |
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% -------------------------------------------------------------------------------- Other Expenses 0.17% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.17% -------------------------------------------------------------------------------- Plus Management Fees Recovered 0.04% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses Plus Management 1.21% Fees Recovered(1) -------------------------------------------------------------------------------- |
(1) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses for A Class Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.25% of the Fund's A Class Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$617 $865 $1,132 $1,893
--------------------------------------------------------------------------------
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 40% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in common stocks and other equity securities of large capitalization companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers large capitalization companies to be companies that have market capitalizations of greater than $5 billion at the time of initial purchase. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in equity securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). In the event that the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investments in such securities would normally represent less than 25% of the Fund's assets.
The Fund invests in approximately 40-60 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target or a change to a company's fundamentals that negatively impacts the original investment thesis. The Adviser will not necessarily sell a security that has depreciated below the stated market capitalization defined above.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the
value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
INVESTMENT STYLE RISK -- The Fund pursues a "value style" of investing. Value investing focuses on companies with stocks that appear undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or its prospects for exceeding earnings expectations or market conditions is inaccurate, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
rising interest rates or competition overbuilding; zoning changes; and losses
from casualty or condemnation. REITs typically incur fees that are separate
from those of the Fund. Accordingly, the Fund's investments in REITs will
result in the layering of expenses such that shareholders will indirectly bear
a proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. The Fund's investment in royalty trusts may result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
MLP RISK -- MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the U.S. Securities and Exchange Commission (the "SEC") and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries or other natural resources, but they also may finance other projects. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation. For example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers
located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in A Class Shares of the Fund by showing changes in the Fund's A Class Shares' performance from year to year and by showing how the Fund's A Class Shares' average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. The bar chart figures do not include sales charges that may have been paid when investors bought and sold A Class Shares of the Fund. If sales charges were included, the returns would be lower. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at WWW.WESTWOODFUNDS.COM or by calling 1-877-FUND-WHG (1-877-386-3944).
2008 (31.87)%
2009 13.55%
2010 11.85%
2011 (1.09)%
2012 15.72%
BEST QUARTER WORST QUARTER
13.18% (19.33)%
(12/31/2011) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Returns after taxes on distributions and sale of Fund shares may be higher than before tax returns when a net capital loss occurs upon the redemption of Fund shares.
SINCE
INCEPTION
WESTWOOD LARGECAP VALUE FUND -- A CLASS 1 YEAR 5 YEARS (12/31/2007)
---------------------------------------------------------------------------------------------
FUND RETURNS BEFORE TAXES 9.89% (1.21)% (1.21)%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 8.38% (1.59)% (1.59)%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND 8.42% (1.05)% (1.05)%
SALE OF FUND SHARES
RUSSELL 1000 VALUE INDEX (REFLECTS NO DEDUCTION 17.51% 0.59% 0.59%
FOR FEES, EXPENSES, OR TAXES)
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INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. Jay K. Singhania, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since April 2008.
Mr. Mark R. Freeman, CFA, Executive Vice President and Chief Investment Officer, has managed the Fund since its inception.
Mr. Scott D. Lawson, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
Ms. Lisa Dong, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since April 2008.
Mr. Todd L. Williams, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since April 2008.
Mr. Matthew Lockridge, Vice President and Portfolio Manager, has managed the Fund since December 2012.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA") or other tax qualified account, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 39 OF THE PROSPECTUS.
WESTWOOD INCOME OPPORTUNITY FUND
FUND INVESTMENT OBJECTIVE
The primary investment objective of the Westwood Income Opportunity Fund (the "Fund") is to provide current income. A secondary objective of the Fund is to provide the opportunity for long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold A Class Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in the Fund. More information about these and other discounts is available from your financial professional and in the section "Sales Charges" on page 60 of this prospectus.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.00% -------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None -------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Reinvested Dividends and Other Distributions (as a percentage of offering price) None -------------------------------------------------------------------------------- Redemption Fee (as a percentage of amount redeemed, if applicable) None -------------------------------------------------------------------------------- |
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% -------------------------------------------------------------------------------- Other Expenses 0.12% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses(1) 1.13% -------------------------------------------------------------------------------- Plus Management Fees Recovered 0.03% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses Plus 1.16% Management Fees Recovered (1,2) -------------------------------------------------------------------------------- |
(1) The Total Annual Fund Operating Expenses in this fee table, both before and after management fees recovered, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses for A Class Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.15% of the Fund's A Class Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$612 $850 $1,106 $1,839
--------------------------------------------------------------------------------
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 24% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund seeks to meet its investment objective by investing generally more than 80% of its assets, plus any borrowings for investment purposes, in dividend-paying and/or interest-bearing securities. By utilizing income-producing securities from diverse asset classes, the Fund also seeks to maintain a lower volatility profile than traditional equity-only products. The Fund aims to invest in securities of companies with a strong and improving cash flow sufficient to support a sustainable or rising income stream for investors. In selecting securities for the Fund, the Adviser chooses among a diversified group of income-producing asset classes. Equity securities may include dividend-paying common stocks, preferred stocks, convertible securities and warrants. Fixed income securities may include bonds and other debt securities, and money market instruments. Other types of income-producing securities may include interests in royalty trusts and master limited partnerships ("MLPs"), securities of real estate investment trusts ("REITs"), and shares of exchange-traded funds ("ETFs"). The Fund generally invests in securities of domestic companies, but may also invest in securities of foreign companies and American Depositary Receipts ("ADRs"). In the event the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investments in such securities would normally represent less than 25% of the Fund's assets.
The Fund is permitted to invest in companies of any capitalization range. The Fund's fixed income investments are, in the aggregate, of investment grade (i.e., those rated in one of the three highest rating categories by a rating agency), but may at times include securities rated below investment grade (high yield or "junk" bonds). In addition, the Fund's fixed income securities may include unrated securities, if deemed by the Adviser to be of comparable quality to investment grade.
The Fund seeks to provide a higher level of current income than that offered by traditional fixed income products such as U.S. government bonds and money market securities. The Adviser's investment process incorporates relative value analysis among capital instruments, as well as among asset classes, to determine where downside potential can be limited to achieve the goal of generating an attractive level of
current income along with capital appreciation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FIXED INCOME 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. Generally, the Fund's fixed income securities will decrease in value if interest rates rise and vice versa, and the volatility of lower-rated securities is even greater than that of higher-rated securities. Also, longer-term securities are generally more volatile, so the average maturity or duration of these securities affects risk. Credit risk is the possibility that an issuer will fail to make timely payments of interest or principal or go bankrupt. The lower the ratings of such debt securities, the greater their risks. In addition, these risks are often magnified for securities rated below investment grade, often referred to as "junk bonds," and adverse changes in economic conditions or market perception are likely to cause issuers of these securities to be unable to meet their obligations to repay principal and interest to investors.
HIGH YIELD BOND RISK -- High yield, or "junk," bonds are highly speculative securities that are usually issued by smaller, less creditworthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds are considered to carry a greater degree of risk and are considered to be less likely to make payments of interest and principal. In particular, lower-quality high yield bonds (rated CCC, CC, C, or unrated securities judged to be of comparable quality) are subject to a greater degree of credit risk than higher-quality high yield bonds and may be near default. High yield bonds rated D are in default. Market developments and the financial and business conditions of the corporation issuing these securities generally influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
MICRO-CAPITALIZATION COMPANY RISK -- Micro-capitalization companies may be newly formed or in the early stages of development with limited product lines, markets or financial resources. Therefore, micro-capitalization companies may be less financially secure than large-, mid- and small- capitalization companies and may be more vulnerable to key personnel losses due to reliance on a smaller number of management personnel. In addition, there may be less public information available about these companies. Micro cap stock prices may be more volatile than large-, mid- and small- capitalization companies and such stocks may be more thinly traded and thus difficult for the Fund to buy and sell in the market.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
rising interest rates or competition overbuilding; zoning changes; and losses
from casualty or condemnation. REITs typically incur fees that are separate
from those of the Fund. Accordingly, the Fund's investments in REITs will
result in the layering of expenses such that shareholders will indirectly bear
a proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. The Fund's investment in royalty trusts may result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
MLP RISK -- MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the SEC and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries or other natural resources, but they also may finance other projects. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation. For example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in
the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in A Class Shares of the Fund by showing changes in the Fund's A Class Shares' performance from year to year and by showing how the Fund's A Class Shares' average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. The bar chart figures do not include sales charges that may have been paid when investors bought and sold A Class Shares of the Fund. If sales charges were included, the returns would be lower. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at WWW.WESTWOODFUNDS.COM or by calling 1-877-FUND-WHG (1-877-386-3944).
2008 (4.72)%
2009 11.89%
2010 13.34%
2011 6.97%
2012 7.61%
BEST QUARTER WORST QUARTER
8.23% (5.63)%
(12/31/2011) (09/30/2011)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your
tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
WESTWOOD INCOME OPPORTUNITY FUND -- A SINCE INCEPTION CLASS 1 YEAR 5 YEARS (12/31/07) -------------------------------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 2.23% 5.72% 5.72% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 1.88% 5.03% 5.03% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 1.70% 4.58% 4.58% CITIGROUP 10-YEAR TREASURY INDEX (REFLECTS NO DEDUCTION FOR FEES, 4.23% 7.39% 7.39% EXPENSES OR TAXES) CITIGROUP 3-MONTH TREASURY BILL INDEX (REFLECTS NO DEDUCTION FOR 0.07% 0.45% 0.45% FEES, EXPENSES OR TAXES) S&P 500 INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES OR TAXES) 16.00% 1.66% 1.66% FTSE NAREIT U.S. EQUITY INDEX (REFLECTS NO DEDUCTION FOR FEES, 19.70% 5.74% 5.74% EXPENSES, OR TAXES) 25/25/25/25 BLENDED BENCHMARK INDEX (REFLECTS NO DEDUCTION FOR 9.97% 5.02% 5.02% FEES, EXPENSES OR TAXES) |
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. Mark R. Freeman, CFA, Chief Investment Officer and Senior Portfolio Manager, has managed the Fund since its inception.
Mr. Todd L. Williams, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA") or other tax qualified account, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 39 OF THE PROSPECTUS.
WESTWOOD SHORT DURATION HIGH YIELD FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Short Duration High Yield Fund (the "Fund") is to generate a high level of current income while experiencing lower volatility than the broader high yield market.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold A Class Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $100,000 in the Fund. More information about these and other discounts is available from your financial professional and in the section "Sales Charges" on page 60 of the prospectus.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 2.25% -------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None -------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Reinvested Dividends and Other Distributions (as a percentage of offering price) None -------------------------------------------------------------------------------- Redemption Fee (as a percentage of amount redeemed, if applicable) None -------------------------------------------------------------------------------- |
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% -------------------------------------------------------------------------------- Other Expenses 0.69% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.69% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.54)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 1.15% Reductions and/or Expense Reimbursements(1) -------------------------------------------------------------------------------- |
(1) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for A Class Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.15% of the Fund's A Class Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$611 $846 $1,214 $2,245
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. For the period from December 28, 2011 (the date that the Fund commenced operations) to October 31, 2012, the Fund's portfolio turnover rate was 52% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in high yield securities. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. High yield securities, also referred to as "junk" bonds, are securities rated BB+, Ba1 or below by independent rating agencies at the time of purchase by the Fund, or securities that are unrated but judged to be of comparable quality by SKY Harbor Capital Management, LLC (the "Sub-Adviser"). The Fund may invest in securities of any rating, including securities that are in default.
In seeking to achieve the Fund's objective, the Sub-Adviser generally invests in a portfolio of high yield securities of U.S. companies, as described in further detail below. While the Sub-Adviser may purchase securities of any maturity, under normal market conditions, the Sub-Adviser generally expects to invest in high yield securities, including privately placed securities, that have an expected redemption through maturity, call or other corporate action within three years or less, although this may vary if, in the Sub-Adviser's opinion, it is warranted by current market conditions. While there is no maximum duration on individual securities, the average maximum "duration to worst" of the Fund is expected to be under three years. "Duration to worst" is the duration of a bond computed using the bond's nearest call date or maturity, whichever comes first. The Sub-Adviser believes such a portfolio serves to reduce volatility and preserve capital when compared to traditional high yield portfolios. In the Sub-Adviser's view, traditional high yield portfolios generally possess durations to worst of longer than three years. Portfolios with longer durations to worst are generally more sensitive to interest rate changes and other market risks. Accordingly, the Sub-Adviser seeks to achieve less volatility and better preservation of capital for the Fund relative to traditional high yield portfolios by maintaining a duration to worst for the Fund that is significanlty shorter than that of traditional high yield portfolios. The Fund also invests in high yield securities of non-U.S. companies, and the Sub-Adviser expects that the Fund's investments in non-U.S. companies will normally represent less than 25% of the Fund's assets, and may include investments in emerging markets.
In selecting securities for the Fund's portfolio, the Sub-Adviser seeks issuers that exhibit attractive characteristics including, but not limited to: stable businesses with projectable cash flows; positive year-over-year cash flow comparisons supported by stable industry conditions; generation of cash in excess of corporate and financial obligations; and management intentions for use of cash flows favorable to bond holders. In making
investment decisions, the Sub-Adviser utilizes an investment process that is
based on fundamental analysis of issuers, markets, and general macro-economic
conditions and supported by quantitative valuation and risk monitoring tools.
The goal of the investment process is to identify high yield securities with
attractively priced income streams and to achieve superior long term returns
from investments. The Sub-Adviser employs an established selling discipline and
may generally sell a security for one of three non-exclusive reasons: (i) there
is a negative change in the Sub-Adviser's fundamental assessment of a security;
(ii) the security becomes overvalued relative to other opportunities; or (iii)
the Sub-Adviser is shifting the portfolio from one sector or risk segment to
another.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
HIGH YIELD BOND RISK -- High yield, or "junk," bonds are highly speculative securities that are usually issued by smaller, less creditworthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds are considered to carry a greater degree of risk and are considered to be less likely to make payments of interest and principal. In particular, lower-quality high yield bonds (rated CCC, CC, C, or unrated securities judged to be of comparable quality) are subject to a greater degree of credit risk than higher-quality high yield bonds and may be near default. High yield bonds rated D are in default. Market developments and the financial and business conditions of the corporation issuing these securities generally influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities.
LIQUIDITY RISK -- Insufficient liquidity in the non-investment grade bond market may make it more difficult to dispose of non-investment grade bonds and may cause the Fund to experience sudden and substantial price declines.
VALUATION RISK -- A lack of reliable, objective data or market quotations may make it more difficult to value non-investment grade bonds accurately.
CREDIT RISK. The credit rating or financial condition of an issuer may affect the value of a fixed income debt security. Generally, the lower the credit quality of a security, the greater the perceived risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults or becomes unable to honor its financial obligations, the security may lose some or all of its value. The issuer of an investment-grade security is considered by the rating agency or the Sub-Adviser to be more likely to pay interest and repay principal than an issuer of a lower quality bond. Adverse economic conditions or changing circumstances may weaken the capacity of the issuer to pay interest and repay principal.
INTEREST RATE RISK -- As with most funds that invest in fixed income securities, changes in interest rates are a factor that could affect the value of your investment. Rising interest rates tend to cause the prices of fixed income securities (especially those with longer maturities) and the Fund's share price to fall.
The concept of duration is useful in assessing the sensitivity of a fixed income fund to interest rate movements, which are usually the main source of risk for most fixed-income funds. Duration measures price volatility by estimating the change in price of a debt security for a 1% change in its yield. For example, a duration of five years means the price of a debt security will change about 5% for every 1% change in its yield. Thus, the longer the duration, the more volatile the security.
Fixed income debt securities have a stated maturity date when the issuer must repay the principal amount of the bond. Some fixed income debt securities, known as callable bonds, may repay the principal earlier than the stated maturity date. Fixed income debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate.
PRIVATE PLACEMENTS RISK -- Investment in privately placed securities may be less liquid than in publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Fund or less than what may be considered the fair value of such securities. Further, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that might be applicable if their securities were publicly traded.
FOREIGN SECURITIES RISK -- Investing in securities of foreign issuers poses additional risks since political and economic events unique to a country or region will affect foreign securities markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in securities of foreign issuers are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. In an attempt to reduce currency risk associated with non-U.S. denominated securities, the Fund intends to hedge its foreign currency exposure by entering into forward currency contracts. A forward currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price, thereby fixing the exchange rate for a specified time in the future. However, the Sub-Adviser has limited ability to direct or control foreign exchange execution rates, and there is no guarantee that such hedging strategies will be successful in reducing the currency risk associated with investing in foreign securities. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly.
The Fund may invest in securities of European issuers. The European financial markets have recently experienced volatility and adverse trends due to concerns about rising government debt levels of certain European countries, each of which may require external assistance to meet its obligations and run the risk of default on its debt, possible bail-out by the rest of the European Union ("EU") or debt restructuring. Assistance given to an EU member state may be dependent on a country's implementation of reforms in order to curb the risk of default on its debt, and a failure to implement these reforms or increase revenues could result in a deep economic downturn. These events may adversely affect the economic and market environment in Europe, which in turn may adversely affect the price or liquidity of high yield securities issued by European issuers and therefore may adversely affect the Fund and its investments in such securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund by showing how the Fund's average annual returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at WWW.WESTWOODFUNDS.COM or by calling 1-877-FUND-WHG (1-877-386-3944).
A Class Shares of the Fund have not yet commenced operations. Consequently, the bar chart shows the performance of the Fund's Institutional Class Shares for the 2012 calendar year and the performance table compares the average annual total returns of the Fund's Institutional Class Shares to those of a broad measure of market performance. The Fund's Institutional Class Shares are offered in a separate prospectus. A Class Shares of the Fund would have substantially similar performance as Institutional Class Shares because the shares are invested in the same portfolio of securities and the annual returns would differ only to the extent that the expenses of A Class Shares are higher than the expenses of the Institutional Class Shares and, therefore, returns for the A Class Shares would be lower than those of the Institutional Class Shares. Institutional Class Shares performance presented has been adjusted to reflect the Distribution (12b-1) fees and, for the performance table, the Maximum Sales Charge (Load), applicable to A Class Shares. Institutional Class Shares first became available on December 28, 2011.
2012 6.08%
BEST QUARTER WORST QUARTER
2.37% 0.87%
(09/30/2012) (03/31/2012)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
WESTWOOD SHORT DURATION HIGH YIELD FUND -- A SINCE INCEPTION CLASS 1 YEAR (12/28/11) -------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 6.08% 6.03% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 4.31% 4.28% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 3.92% 4.11% BOFA MERRILL LYNCH U.S. HIGH YIELD MASTER II INDEX (REFLECTS NO 15.58% 15.58% DEDUCTION FOR FEES, EXPENSES, OR TAXES) |
INVESTMENT ADVISER
Westwood Management Corp. ("Westwood") serves as investment adviser to the Fund. SKY Harbor Capital Management, LLC serves as investment sub-adviser to the Fund.
PORTFOLIO MANAGER
Anne Yobage, CFA, Lead Portfolio Manager and co-founder of SKY Harbor Capital Management, LLC, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
A Class Shares of the Fund are currently not available for purchase.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 39 OF THE PROSPECTUS.
WESTWOOD GLOBAL EQUITY FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Global Equity Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold A Class Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in the Fund. More information about these and other discounts is available from your financial professional and in the section "Sales Charges" on page 60 of this prospectus.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.00% -------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None -------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Reinvested Dividends and Other Distributions None (as a percentage of offering price) -------------------------------------------------------------------------------- Redemption Fee (as a percentage of amount redeemed, if applicable) None -------------------------------------------------------------------------------- |
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.80% -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% -------------------------------------------------------------------------------- Other Expenses(1) 1.05% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 2.11% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.86)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee Reductions 1.25% and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for A Class Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.25% of the Fund's A Class Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$621 $877
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies organized or located throughout the world, including the United States. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $1 billion. The Fund invests at least 40% of its net assets, plus any borrowings for investment purposes, in companies organized or located or doing a substantial amount of business outside the United States in both developed and emerging market countries, and will generally have exposure to the United States, the United Kingdom and Japan.
The Fund invests in approximately 65-85 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund commenced operations on December 26, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Thomas Pinto Basto, CFA, Vice President and Portfolio Manager, and Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, have managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
A Class Shares of the Fund are currently not available for purchase.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 39 OF THE PROSPECTUS.
WESTWOOD GLOBAL DIVIDEND FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Global Dividend Fund (the "Fund") is to seek long-term capital appreciation and dividend income.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold A Class Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in the Fund. More information about these and other discounts is available from your financial professional and in the section "Sales Charges" on page 60 of this prospectus.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.00% -------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None -------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Reinvested Dividends and Other Distributions (as a percentage of offering price) None -------------------------------------------------------------------------------- Redemption Fee (as a percentage of amount redeemed, if applicable) None -------------------------------------------------------------------------------- |
Management Fees 0.80% -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% -------------------------------------------------------------------------------- Other Expenses(1) 1.05% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 2.11% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.86)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee Reductions 1.25% and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for A Class Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.25% of the Fund's A Class Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$621 $875
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying equity securities of companies organized or located throughout the world, including the United States. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $500 million. The Fund invests at least 40% of its net assets, plus any borrowings for investment purposes, in companies organized or located or doing a substantial amount of business outside the United States in both developed and emerging market countries, and will generally have exposure to the United States, the United Kingdom and Japan.
The Fund invests in approximately 65-90 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market, offer an attractive opportunity for price appreciation and dividend growth, and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation, consistency of earnings growth and the ability, or prospective ability, to pay dividends. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
DIVIDEND PAYING STOCKS RISK -- The Fund's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such company.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more
established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund commenced operations on December 26, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGER
Thomas Pinto Basto, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
A Class Shares of the Fund are currently not available for purchase.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 39 OF THE PROSPECTUS.
WESTWOOD EMERGING MARKETS FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Emerging Markets Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold A Class Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in the Fund. More information about these and other discounts is available from your financial professional and in the section "Sales Charges" on page 60 of this prospectus.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.00% -------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None -------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Reinvested Dividends and Other Distributions None (as a percentage of offering price) -------------------------------------------------------------------------------- Redemption Fee (as a percentage of amount redeemed, if applicable) None -------------------------------------------------------------------------------- |
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.95% -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% -------------------------------------------------------------------------------- Other Expenses(1) 1.06% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 2.27% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.81)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee Reductions 1.46% and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for A Class Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.45% of the Fund's A Class Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$641 $936
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers a company to be an emerging market company if (i) at least 50% of the company's assets are located in emerging markets; (ii) at least 50% of the company's revenues are generated in emerging markets; or (iii) the company is domiciled in an emerging market. "Emerging markets" include countries in the MSCI Emerging Markets Index, and other countries that the Fund considers to be equivalent to those in that index based on their level of economic development or the size and experience of their securities markets. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $500 million.
The Fund invests in approximately 70-90 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund commenced operations on December 26, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGER
Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, including an initial purchase through an individual retirement account ("IRA") or other tax qualified account, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 39 OF THE PROSPECTUS.
WESTWOOD EMERGING MARKETS PLUS FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Emerging Markets Plus Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold A Class Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in the Fund. More information about these and other discounts is available from your financial professional and in the section "Sales Charges" on page 60 of this prospectus.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.00% -------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None -------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Reinvested Dividends and Other Distributions None (as a percentage of offering price) -------------------------------------------------------------------------------- Redemption Fee (as a percentage of amount redeemed, if applicable) None -------------------------------------------------------------------------------- |
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.95% -------------------------------------------------------------------------------- Distribution (12b-1) Fees 0.25% -------------------------------------------------------------------------------- Other Expenses(1) 1.06% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 2.27% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.81)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee Reductions 1.46% and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for A Class Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.45% of the Fund's A Class Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$641 $936
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers a company to be an emerging market company if (i) at least 50% of the company's assets are located in emerging markets; (ii) at least 50% of the company's revenues are generated in emerging markets; or (iii) the company is domiciled in an emerging market. "Emerging markets" include countries in the MSCI Emerging Markets Index, and other countries that the Fund considers to be equivalent to those in that index based on their level of economic development or the size and experience of their securities markets. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $1.5 billion.
The Fund invests in approximately 50-70 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund has not commenced operations and therefore has no performance history. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGER
Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, is expected to manage the Fund upon its inception.
PURCHASE AND SALE OF FUND SHARES
A Class Shares of the Fund are currently not available for purchase.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 39 OF THE PROSPECTUS.
SUMMARY INFORMATION ABOUT THE TAXES AND FINANCIAL INTERMEDIARY COMPENSATION
TAX INFORMATION
Each Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Funds through a broker-dealer or other financial intermediary (such as a bank), the Funds and their 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 intermediary and your salesperson to recommend the Funds over another investment. Ask your salesperson or visit your financial intermediary's web site for more information.
MORE INFORMATION ABOUT RISK
Investing in each Fund involves risk and there is no guarantee that each Fund will achieve its goals. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in a Fund, just as you could with similar investments.
The value of your investment in a Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
EQUITY RISK (ALL FUNDS) -- Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, interests in MLPs and royalty trusts, shares of REITs, ADRs and GDRs, as well as shares of ETFs that attempt to track the price movement of equity indices. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of such securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
WARRANTS RISK (WESTWOOD INCOME OPPORTUNITY FUND, WESTWOOD GLOBAL EQUITY FUND, WESTWOOD GLOBAL DIVIDEND FUND, WESTWOOD EMERGING MARKETS FUND AND WESTWOOD EMERGING MARKETS PLUS FUND) -- Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Warrants may be more speculative than other types of investments. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. A warrant ceases to have value if it is not exercised prior to its expiration date.
FIXED INCOME RISK (WESTWOOD INCOME OPPORTUNITY FUND AND WESTWOOD SHORT DURATION HIGH YIELD FUND) -- The market value of fixed income investments change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. During periods of falling interest rates, certain debt obligations with high interest rates may be prepaid (or "called") by the issuer prior to maturity. In addition to these risks, fixed income securities may be subject to credit risk, which is the possibility that an issuer will be unable or unwilling to make timely payments of either principal or interest.
FOREIGN/EMERGING MARKET SECURITY RISK (ALL FUNDS) -- Investments in securities
of foreign companies (including direct investments as well as investments
through ADRs and GDRs) can be more volatile than investments in U.S. companies.
Diplomatic, political, or economic developments, including nationalization or
appropriation, could affect investments in foreign companies. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets. In addition, the value of securities denominated in foreign
currencies, and of dividends from such securities, can change significantly
when foreign currencies strengthen or weaken relative to the U.S. dollar.
Financial statements of foreign issuers are governed by different accounting,
auditing, and financial reporting standards than U.S. issuers and may be less
transparent and uniform than in the United States. Thus, there may be less
information publicly available about foreign issuers than about most U.S.
issuers. Transaction costs are generally higher than those in the United States
and expenses for custodial arrangements of foreign securities may be somewhat
greater than typical expenses for custodial arrangements of similar U.S.
securities. Some foreign governments levy withholding taxes against dividend
and interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion will reduce the income received from the
securities comprising the portfolio. These risks may be heightened with respect
to emerging market countries since political turmoil and rapid changes in
economic conditions are more likely to occur in these countries.
FOREIGN CURRENCY RISK (ALL FUNDS) -- Because non-U.S. securities are usually denominated in currencies other than the dollar, the value of a Fund's portfolio may be influenced by currency exchange rates and exchange control regulations. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by a Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
HIGH YIELD ("JUNK") BOND RISK (WESTWOOD INCOME OPPORTUNITY FUND AND WESTWOOD SHORT DURATION HIGH YIELD FUND) -- High yield bonds, also referred to as "junk" bonds, involve greater risks of default or downgrade and are more volatile than investment grade securities. High yield bonds involve greater risk of price declines than investment grade securities due to actual or perceived changes in an issuer's creditworthiness. In addition, issuers of high yield bonds may be more susceptible than other issuers to economic downturns. High yield bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the security. The volatility of high yield bonds is even greater since the prospects for repayment of principal and interest of many of these securities is speculative. Some may even be in default.
DERIVATIVES RISK (WESTWOOD GLOBAL EQUITY FUND, WESTWOOD GLOBAL DIVIDEND FUND, WESTWOOD EMERGING MARKETS FUND AND WESTWOOD EMERGING MARKETS PLUS FUND) -- A Fund's use of participatory notes is subject to derivatives risk. Derivatives are often more volatile than other investments and may magnify a Fund's gains or losses. There are various factors that affect a Fund's ability to achieve its investment objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. A Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
The lack of a liquid secondary market for a derivative may prevent a Fund from closing its derivative positions and could adversely impact its ability to achieve its investment objective or to realize profits or limit losses.
Additionally, derivative instruments are subject to counterparty risk, meaning that the party that issues the derivative may experience a significant credit event and may be unwilling or unable to make timely settlement payments or otherwise honor its obligations.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investment objective of the Westwood LargeCap Value Fund is to seek long-term capital appreciation. The primary investment objective of the Westwood Income Opportunity Fund is to provide current income. A secondary objective of the Westwood Income Opportunity Fund is to provide the opportunity for long-term capital appreciation. The investment objective of the Westwood Short Duration High Yield Fund is to generate a high level of current income while experiencing lower volatility than the broader high yield market. The investment objective of the Westwood Global Equity Fund, Westwood Emerging Markets Fund and Westwood Emerging Markets Plus Fund is to seek long-term capital appreciation. The investment objective of Westwood Global Dividend Fund is to seek long-term capital appreciation and dividend income. The investment objective of the Westwood LargeCap Value Fund is fundamental and cannot be changed without shareholder approval. The investment objectives of the Westwood Income Opportunity Fund, Westwood Short Duration High Yield Fund, Westwood Global Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund and Westwood Emerging Markets Plus Fund may be changed without shareholder approval, upon 60 days' prior notice to shareholders.
The investments and strategies described in 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 money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objectives. If a Fund invests in this manner, it may not achieve its investment objective. The Funds will only do so if the Adviser believes that the risk of loss outweighs the opportunity for capital appreciation or current income.
This prospectus describes the Funds' principal investment strategies, and the Funds will normally invest in the types of securities and other investments described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, each Fund also may invest to a lesser extent in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Funds' Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that a Fund will achieve its investment goals.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Funds' policy and procedures with respect to the
circumstances under which the Funds disclose their portfolio securities is
available in the SAI. Within 10 days of the end of each calendar quarter, each
Fund, except for the Westwood Short Duration High Yield Fund, will post its
complete portfolio holdings on the internet at WWW.WESTWOODFUNDS.COM. The
Westwood Short Duration High Yield Fund will post its top 10 holdings within 10
days of the end of each calendar quarter on the internet at
WWW.WESTWOODFUNDS.COM.
INVESTMENT ADVISER
Westwood Management Corp., a New York corporation formed in 1983, serves as the investment adviser to the Funds. The Adviser's principal place of business is located at 200 Crescent Court, Suite 1200,
Dallas, Texas 75201. The Adviser is a wholly owned subsidiary of Westwood Holdings Group, Inc., an institutional asset management company. As of December 31, 2012, the Adviser had approximately $11.9 billion in assets under management.
The Adviser makes investment decisions for the Funds, except for the Westwood Short Duration High Yield Fund, and continuously reviews, supervises and administers each Fund's investment program. In addition, the Adviser oversees the Sub-Adviser to ensure its compliance with the investment policies and guidelines of the Westwood Short Duration High Yield Fund, and monitors the Sub-Adviser's adherence to its investment style. The Adviser pays the Sub-Adviser out of the advisory fee it receives from the Westwood Short Duration High Yield Fund. The Trust's Board of Trustees (the "Board") supervises the Adviser and Sub-Adviser and establishes policies that the Adviser and Sub-Adviser must follow in their management activities.
In rendering investment advisory services to the Westwood Global Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund and Westwood Emerging Markets Plus Fund, the Adviser may use the portfolio management, research and other resources of Westwood International Advisors Inc. ("Westwood International"), an affiliate of the Adviser. Westwood International is not registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. Westwood International has entered into a Memorandum of Understanding ("MOU") with the Adviser pursuant to which Westwood International is considered a "participating affiliate" of the Adviser as that term is used in relief granted by the staff of the SEC allowing U.S. registered investment advisers to use portfolio management or research resources of advisory affiliates subject to the supervision of a registered adviser. Investment professionals from Westwood International may render portfolio management, research and other services to the Funds under the MOU and are subject to supervision by the Adviser.
For its advisory services to the Funds, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.75% of the average daily net assets of the Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund and the Westwood Short Duration High Yield Fund; 0.80% of the average daily net assets of the Westwood Global Equity Fund and the Westwood Global Dividend Fund; and 0.95% of the average daily net assets of the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund.
The Adviser has contractually agreed to reduce its fees and reimburse expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) ("excluded expenses") from exceeding the amounts listed in the table below, as a percentage of average daily net assets of each Fund until February 28, 2016:
Westwood LargeCap Value Fund 1.25% Westwood Income Opportunity Fund 1.15% Westwood Short Duration High Yield Fund 1.15% Westwood Global Equity Fund 1.25% Westwood Global Dividend Fund 1.25% Westwood Emerging Markets Fund 1.45% Westwood Emerging Markets Plus Fund 1.45% |
If at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between total annual Fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place.
For the fiscal year ended October 31, 2012, the Adviser received advisory fees (after fee reductions) as a percentage of average daily net assets of each Fund as follows:
Westwood LargeCap Value Fund 0.79%(1) Westwood Income Opportunity Fund 0.78%(2) Westwood Short Duration High Yield Fund N/A%(3) Westwood Global Equity Fund N/A%(3) Westwood Global Dividend Fund N/A%(3) Westwood Emerging Markets Fund N/A%(3) Westwood Emerging Markets Plus Fund N/A%(3) |
(1) Includes 0.04% of previously waived fees recovered.
(2) Includes 0.03% of previously waived fees recovered.
(3) A Class Shares not in operation during the fiscal year ended October 31, 2012.
A discussion regarding the basis for the Board's approval of the Westwood LargeCap Value, Westwood Income Opportunity and Westwood Short Duration High Yield Funds' investment advisory agreement is available in the Funds' Annual Report dated October 31, 2012, which covers the period from November 1, 2011 to October 31, 2012. A discussion regarding the basis for the Board's approval of the Westwood Global Equity, Westwood Global Dividend, Westwood Emerging Markets and Westwood Emerging Markets Plus Funds' investment advisory agreement will be available in the Funds' Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
INVESTMENT SUB-ADVISER
SKY Harbor Capital Management, LLC (the "Sub-Adviser"), a Delaware limited liability company established in 2011 and registered with the SEC under the Advisers Act, serves as the Sub-Adviser to the Westwood Short Duration High Yield Fund and is responsible for the day-to-day management of the Fund's investments. SKY Harbor Capital Management, LLC's principal place of business is located at 20 Horseneck Lane, Greenwich, CT 06830. As of December 31, 2012, SKY Harbor Capital Management, LLC had approximately $2.97 billion in assets under management.
PORTFOLIO MANAGERS
The Westwood LargeCap Value Fund and the Westwood Income Opportunity Fund are each managed by a portfolio management team. The Adviser also manages institutional separate accounts and is the sub-adviser to other mutual funds with similar strategies as these Funds. The investment process for these Funds is the same for similar accounts and is driven by proprietary team-oriented, in-depth, fundamental research. The investment research team is organized by industry coverage and supports all of the accounts managed in each of the Adviser's investment strategies. Weekly research meetings provide a forum where the Adviser's investment professionals discuss current investment ideas within their assigned industries. Generally, the entire portfolio management team, or a sub-set of the team, then debates the merits of recommendations, taking into account the prevailing market environment, the portfolio's current composition, and the relative value of alternative investments. Investment decisions are generally made by majority agreement of the portfolio management team. The Adviser has identified the following team members as those with the most significant responsibility for each Fund's assets. This list does not include all members of the investment team.
Mr. Mark R. Freeman, CFA, has served as Executive Vice President and Chief Investment Officer for the Adviser since February 2012. Prior to this appointment, he served as Executive Vice President and Co-Chief Investment Officer for the Adviser from December 2010 until 2012, and as Senior Vice President and Portfolio Manager from 2006 to 2010. He joined the Adviser in 1999 and served as Vice President and Portfolio Manager from July 2000 to July 2006. Mr. Freeman has served on the portfolio team for the Westwood LargeCap Value Fund and the Westwood Income Opportunity Fund since each Fund's inception. Mr. Freeman participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Freeman has more than 24 years of investment experience.
Mr. Scott D. Lawson, CFA, has served as Vice President and Portfolio Manager since joining the Adviser in October 2003. Mr. Lawson has served on the portfolio team for the Westwood LargeCap Value Fund since its inception. Prior to joining the Adviser, Mr. Lawson was an Assistant Portfolio Manager at Bank of America from 2000 to 2003. From 1995 to 2000, he was a Research Analyst with Mississippi Valley Advisors, specializing in the Technology and Industrial sectors. Mr. Lawson participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. Lawson has more than 23 years of investment experience.
Mr. Jay K. Singhania, CFA, has served as Senior Vice President and Portfolio Manager for the Adviser since December 2010. Prior to this appointment, he served as Vice President and Portfolio Manager for the Adviser from June 2004 to December 2010. He joined the Adviser in 2001 and served as Assistant Vice President and Research Analyst from July 2002 to June 2004. Mr. Singhania has served on the portfolio team for the Westwood LargeCap Value Fund since April 2008. Prior to joining the Adviser, Mr. Singhania spent two years at Bank of America as an analyst in its Retail Industry Group where he was also involved with due diligence and financial modeling. He participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. Singhania has more than 14 years of investment experience.
Mr. Todd L. Williams, CFA, has served as Senior Vice President and Portfolio Manager for the Adviser since February 2012. Prior to this appointment, he served as Vice President and Portfolio Manager for the Adviser from 2005 until 2012, as Assistant Vice President and Research Analyst from July 2003 to July 2005, and as Research Analyst from November 2002 to July 2003. Before joining the Adviser, Mr. Williams was a portfolio manager and analyst with AMR Investments, Inc. Mr. Williams has served on the portfolio team for the Westwood Income Opportunity Fund since its inception. He has served on the portfolio team for the Westwood LargeCap Value Fund since April 2008. He participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Williams has more than 17 years of investment experience.
Ms. Lisa Dong, CFA, has served as Senior Vice President and Portfolio Manager for the Adviser since December 2010. Prior to this appointment, she served as Vice President and Portfolio Manager for the Adviser from June 2005 to December 2010. She joined the Adviser in 2000 and served as Assistant Vice President and Research Analyst from October 2001 to July 2005. Ms. Dong has served on the portfolio team for the Westwood LargeCap Value Fund since April 2008. Ms. Dong participates in the investment decision process. She has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Ms. Dong has more than 15 years of investment experience.
Mr. Matthew R. Lockridge has served as Vice President and Portfolio Manager since joining the Adviser in May 2010. He has served on the portfolio team for the Westwood LargeCap Value Fund since December 2012. Prior to joining the Adviser, Mr. Lockridge was a Managing Director at Dearborn
Partners, L.L.C. from 2004 to 2010, and he was with Deloitte Consulting, L.L.P. from 2001 to 2004, where he worked as a Senior Consultant. He participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. Lockridge has more than 11 years of investment experience.
The Westwood Short Duration High Yield Fund is managed by Ms. Anne Yobage, CFA, co-founder of the Sub-Adviser. The Sub-Adviser also manages institutional separate accounts. The investment process for the Westwood Short Duration High Yield Fund is the same for similar accounts and is driven by fundamental analysis of issuers, markets, and general macro-economic conditions and supported by quantitative valuation and risk monitoring tools.
Ms. Anne Yobage, CFA has served as the lead portfolio manager for the Westwood Short Duration High Yield Fund since its inception in 2011. Prior to co-founding SKY Harbor Capital Management, LLC, she was a senior portfolio manager at AXA Investment Managers ("AXA IM") from September 2001 to June 2011. Prior to joining AXA IM, Ms. Yobage co-founded Cardinal Capital Management ("Cardinal") in March 1995, a small cap value and high yield asset management firm located in Greenwich, Connecticut, where she was the co-head of the high yield group. Before founding Cardinal, Ms. Yobage worked at Deltec Asset Management ("Deltec") from 1990 to 1995, where she served as co-head of the high yield group. Ms. Yobage began her career in 1987 as a credit analyst in Kidder Peabody's high yield research group. Ms. Yobage participates in the investment decision process during the portfolio team meetings in which the team decides the bond/weight selection for the model portfolio. She has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Ms. Yobage has more than 24 years of high yield investment experience.
The Westwood Global Equity, Westwood Global Dividend and Westwood Emerging Markets Funds are, and, upon its inception, the Westwood Emerging Markets Plus Fund is expected to be, managed by the following individuals. Ms. Patricia Perez-Coutts, CFA serves as the lead portfolio manager of the Westwood Emerging Markets Fund and is expected to serve as lead portfolio manager of the Westwood Emerging Markets Plus Fund upon its inception. Mr. Thomas Pinto Basto, CFA serves as the lead portfolio manager of the Westwood Global Dividend Fund. Ms. Perez-Coutts and Mr. Pinto Basto serve as co-lead portfolio managers of the Westwood Global Equity Fund. The Adviser also manages institutional separate accounts and is the sub-adviser to other mutual funds with similar strategies as these Funds. The investment process for these Funds is the same for similar accounts and, while the portfolio managers are ultimately responsible for the investment decisions in the strategies, the investment process is driven by proprietary team-oriented, in-depth, fundamental research. To that end, each research analyst on the global research team is able to assume responsibility as a sector portfolio manager and support all of the accounts managed in each of the Adviser's global and emerging markets investment strategies.
Ms. Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, joined the Adviser in May 2012 and moved to Westwood International in August 2012 after having managed emerging markets portfolios for eleven years for AGF Investments, Inc. Prior to 2001, she served as Vice President and Portfolio Manager for AIM Trimark Investments, Vice President of Research for First Mercantile Corporation and as Economist for Peru's Institute of Foreign Trade. She earned an Honors BA in Economics from Pontifica Universidad del Peru and a BA in Mathematics for Commerce from York University. Ms. Perez-Coutts participates in the investment decision process. She has authority to direct trading for the Funds and is also responsible for representing the Funds to investors. Ms. Perez-Coutts has more than 27 years of investment experience.
Mr. Thomas Pinto Basto, CFA, Vice President and Portfolio Manager, joined Westwood International in May 2012 after having served on the global equity and emerging markets investment teams for over six years for AGF Investments, Inc. Prior to 2005, he served as a corporate strategy consultant with Deloitte Consulting in Canada and Hong Kong and as a Global Analyst for both fixed income and equities with Altamira Management. Mr. Pinto Basto earned a BA in Economics from Carleton University. He is a
member of the CFA Institute and the Toronto Society of Financial Analysts. Mr. Pinto Basto participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Pinto Basto has more than 19 years of investment experience.
The Funds' SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
RELATED PERFORMANCE DATA OF THE ADVISER
The following tables give the related performance of actual, fee-paying separate accounts, each referred to as a "Composite," managed by the Adviser that have investment objectives, policies, strategies and risks substantially similar to those of each Fund. None of the Composites reflect all of the firm's assets under management. Complete lists and descriptions of the firm's composites are available upon request. The data illustrates the past performance of the Adviser in managing substantially similar accounts. The data does not represent the performance of the Funds. Moreover, the performance shown does not represent the future performance of the Funds or of the Adviser.
The manner in which the performance was calculated for the Composites differs from that of registered mutual funds such as the Funds. All returns presented were calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of investment management fees, brokerage commissions, and execution costs paid by the accounts included in the Composites, without taking into account federal or state income taxes. Custodial fees, if any, were not included in the calculations. Securities are valued as of trade-date. Accounts in each Composite were under management for the entire reporting period. Beginning January 1, 2006, the minimum portfolio size for inclusion in a Composite is $5 million. The exclusion of accounts with portfolio sizes below $5 million had no material effect on the performance of the Composites. Prior to January 1, 2006, there was no minimum asset size for inclusion in the Composites.
The currency used to express performance in each Composite is U.S. dollars. Performance results are presented both net of fees and gross of fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular account. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The performance of the Composites (net of fees) reflects the Adviser's applicable account fees and expenses; however, each Fund's fees and expenses are generally expected to be higher than those of the accounts included in the respective Composite. If the Funds' fees and expenses had been imposed on the accounts included in the respective Composite, the performance shown below would have been lower. The accounts that are included in each Composite are not subject to the same type of expenses to which the Funds are subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for each Composite could have been adversely affected if the accounts in the Composite were subject to the same federal securities and tax laws as the Funds.
The investment results for each Composite presented below are not intended to predict or suggest the future returns of the Funds. The performance data shown below should not be considered a substitute for the Funds' own performance information. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
PERFORMANCE INFORMATION FOR THE ADVISER'S LARGECAP VALUE STRATEGY COMPOSITE(1)
(JANUARY 1, 2003 THROUGH DECEMBER 31, 2012)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE ADVISER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD LARGECAP VALUE FUND.
--------------------------------------------------------------------------------------------------------
TOTAL TOTAL RUSSELL TOTAL ASSETS PERCENTAGE OF
RETURN RETURN 1000 NUMBER AT END OF FIRM ASSETS
YEAR (NET OF (GROSS OF VALUE OF DISPERSION(4) PERIOD
FEES) FEES) INDEX(2,3) PORTFOLIOS ($ MILLIONS)
--------------------------------------------------------------------------------------------------------
2012 16.4% 16.8% 17.5% 39 0.3 $4,500.2 34.2%
--------------------------------------------------------------------------------------------------------
2011 -0.3% 0.0% 0.4% 42 0.3 $4,982.2 41.6%
--------------------------------------------------------------------------------------------------------
2010 13.3% 13.7% 15.5% 47 0.3 $5,057.0 48.0%
--------------------------------------------------------------------------------------------------------
2009 14.2% 14.5% 19.7% 46 0.5 $4,375.5 46.9%
--------------------------------------------------------------------------------------------------------
2008 -32.7% -32.4% -36.9% 36 0.3 $3,142.0 48.1%
--------------------------------------------------------------------------------------------------------
2007 12.9% 13.3% -0.2% 34 0.3 $2,921.7 41.1%
--------------------------------------------------------------------------------------------------------
2006 19.5% 19.9% 22.3% 32 0.1 $2,368.8 43.4%
--------------------------------------------------------------------------------------------------------
2005 15.3% 15.8% 7.1% 32 0.3 $2,656.2 57.7%
--------------------------------------------------------------------------------------------------------
2004 13.7% 14.2% 16.5% 39 0.3 $2,572.6 67.7%
--------------------------------------------------------------------------------------------------------
2003 24.3% 24.8% 30.0% 42 0.5 $2,341.3 61.4%
--------------------------------------------------------------------------------------------------------
|
AVERAGE ANNUAL TOTAL RETURNS (SINCE INCEPTION THROUGH 12/31/2012)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
RUSSELL 1000
TIME PERIOD NET OF FEES GROSS OF FEES VALUE INDEX(2,3)
--------------------------------------------------------------------------------
1 Year 16.4% 16.8% 17.5%
--------------------------------------------------------------------------------
2 Years 7.8% 8.1% 8.6%
--------------------------------------------------------------------------------
3 Years 9.7% 9.9% 10.9%
--------------------------------------------------------------------------------
4 Years 10.7% 11.1% 13.0%
--------------------------------------------------------------------------------
5 Years 0.2% 0.6% 0.6%
--------------------------------------------------------------------------------
6 Years 2.2% 2.6% 0.5%
--------------------------------------------------------------------------------
7 Years 4.5% 4.9% 3.3%
--------------------------------------------------------------------------------
8 Years 5.8% 6.2% 3.8%
--------------------------------------------------------------------------------
9 Years 6.7% 7.1% 5.1%
--------------------------------------------------------------------------------
10 Years 8.3% 8.7% 7.4%
--------------------------------------------------------------------------------
11 Years 5.8% 6.2% 5.1%
--------------------------------------------------------------------------------
12 Years 4.5% 4.9% 4.1%
--------------------------------------------------------------------------------
13 Years 5.2% 5.6% 4.4%
--------------------------------------------------------------------------------
14 Years 5.7% 6.2% 4.6%
--------------------------------------------------------------------------------
15 Years 6.7% 7.1% 5.3%
--------------------------------------------------------------------------------
16 Years 8.1% 8.6% 6.9%
--------------------------------------------------------------------------------
17 Years 9.2% 9.7% 7.7%
--------------------------------------------------------------------------------
18 Years 10.6% 11.2% 9.3%
--------------------------------------------------------------------------------
19 Years 10.2% 10.8% 8.6%
--------------------------------------------------------------------------------
20 Years 10.6% 11.2% 9.1%
--------------------------------------------------------------------------------
21 Years 10.5% 11.1% 9.3%
--------------------------------------------------------------------------------
22 Years 11.0% 11.6% 10.0%
--------------------------------------------------------------------------------
23 Years 10.0% 10.6% 9.1%
--------------------------------------------------------------------------------
24 Years 10.9% 11.5% 9.7%
--------------------------------------------------------------------------------
25 Years 11.0% 11.6% 10.2%
--------------------------------------------------------------------------------
26 Years(5) 10.8% 11.5% 9.8%
--------------------------------------------------------------------------------
|
(1) The calculation of returns is computed on a monthly basis starting January 1, 1987 for the Composite; including accrued dividends and interest income. Actual results may vary depending on level of assets and fee schedule. Performance results net of fees reflect the actual rate of fees paid by the accounts included in the Composite. Westwood's fee schedules are as follows for the LargeCap Value strategy: 0.75% on the first $25 million and negotiable thereafter. All fees are stated in annual rates and are typically billed quarterly. Westwood claims compliance with GIPS(R) and has prepared and presented this report in compliance with the GIPS(R) standards. Westwood has been independently verified for the periods January 1, 1995 through December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS(R) standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS(R) standards. The LargeCap Value Strategy Composite has been examined for the periods January 1, 1995 through December 31, 2011. The verification and performance examination reports are available upon request.
(2) The Russell 1000 Value Index is an unmanaged index which measures the performance of the large- capitalization sector of the U.S. equity markets. It contains those Russell 1000 Index companies with lower-price-to-book ratios and lower forecasted growth values.
(3) The comparative benchmark returns include interest and dividend income but do not include taxes, potential transaction costs or management fees.
(4) Dispersion is measured using the asset-weighted standard deviation of accounts managed for the entire year. Standard deviation is a statistical measure of the degree to which an individual portfolio's return varies from the median return for the composite. Greater deviation means greater risk to the investor.
(5) Inception date of the LargeCap Value Composite is January 1, 1987.
PERFORMANCE INFORMATION FOR THE ADVISER'S INCOME OPPORTUNITY STRATEGY
COMPOSITE(1)
(JANUARY 1, 2003 THROUGH DECEMBER 31, 2012)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE ADVISER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD INCOME OPPORTUNITY FUND.
----------------------------------------------------------------------------------------------
YEAR TOTAL TOTAL CITIGROUP CITIGROUP S&P 500 NAREIT BLENDED
RETURN RETURN TREASURY 3-MONTH INDEX(4,7) U.S. BENCHMARK(6,7)
(NET OF (GROSS OF 10-YEAR TREASURY EQUITY
FEES) FEES) INDEX(2,7) BILL INDEX(5,7)
INDEX(3,7)
----------------------------------------------------------------------------------------------
2012 8.7% 9.1% 4.2% 0.1% 16.0% 19.7% 10.0%
----------------------------------------------------------------------------------------------
2011 7.4% 8.1% 17.0% 0.1% 2.1% 8.3% 7.3%
----------------------------------------------------------------------------------------------
2010 14.5% 15.2% 8.1% 0.1% 15.1% 28.0% 13.1%
----------------------------------------------------------------------------------------------
2009 13.3% 13.9% -9.9% 0.2% 26.5% 28.0% 12.0%
----------------------------------------------------------------------------------------------
2008 -7.1% -6.7% 20.3% 1.8% -37.0% -37.7% -14.6%
----------------------------------------------------------------------------------------------
2007 0.2% 0.8% 9.8% 4.7% 5.5% -15.7% 1.0%
----------------------------------------------------------------------------------------------
2006 13.5% 14.1% 1.4% 4.8% 15.8% 35.1% 13.7%
----------------------------------------------------------------------------------------------
2005 5.4% 5.7% 2.0% 3.0% 4.9% 12.2% 5.7%
----------------------------------------------------------------------------------------------
2004 16.3% 16.8% 4.9% 1.2% 10.9% 31.6% 12.0%
----------------------------------------------------------------------------------------------
2003 23.2% 23.5% 1.3% 1.1% 28.7% 37.1% 16.3%
----------------------------------------------------------------------------------------------
|
---------------------------------------------------------------------
YEAR NUMBER DISPERSION(8) TOTAL PERCENT-
OF ASSETS AT AGE OF
PORTFOLIOS END OF FIRM
PERIOD ASSETS
($ MILLIONS)
---------------------------------------------------------------------
2012 9 0.4 $1,279.5 9.7%
---------------------------------------------------------------------
2011 5 0.3 $759.8 6.3%
---------------------------------------------------------------------
2010 3 0.8 $313.2 3.0%
---------------------------------------------------------------------
2009 3 1.3 $203.5 2.2%
---------------------------------------------------------------------
2008 3 4.3 $144.1 2.2%
---------------------------------------------------------------------
2007 3 1.1 $190.6 2.7%
---------------------------------------------------------------------
2006 5 0.2 $235.0 4.3%
---------------------------------------------------------------------
2005 20 0.3 $119.6 2.6%
---------------------------------------------------------------------
2004 2 0.3 $32.7 0.9%
---------------------------------------------------------------------
2003 2 0.2 $18.9 0.5%
---------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (SINCE INCEPTION THROUGH 12/31/2012)
-------------------------------------------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
-------------------------------------------------------------------------------------------------------------------
CITIGROUP CITIGROUP S&P NAREIT
TREASURY 3-MONTH 500 U.S. BLENDED
TIME PERIOD NET OF FEES GROSS OF FEES 10-YEAR TREASURY INDEX(4,7) EQUITY BENCHMARK(6,7)
INDEX(2,7) BILL INDEX(5,7)
INDEX(3,7)
-------------------------------------------------------------------------------------------------------------------
1 Year 8.7% 9.1% 4.2% 0.1% 16.0% 19.7% 10.0%
-------------------------------------------------------------------------------------------------------------------
2 Years 8.0% 8.6% 10.4% 0.1% 8.8% 13.9% 8.6%
-------------------------------------------------------------------------------------------------------------------
3 Years 10.1% 10.7% 9.7% 0.1% 10.9% 18.4% 10.1%
-------------------------------------------------------------------------------------------------------------------
4 Years 10.9% 11.5% 4.4% 0.1% 14.6% 20.7% 10.6%
-------------------------------------------------------------------------------------------------------------------
5 Years 7.1% 7.6% 7.4% 0.5% 1.7% 5.7% 5.0%
-------------------------------------------------------------------------------------------------------------------
6 Years 5.9% 6.4% 7.8% 1.2% 2.3% 1.8% 4.4%
-------------------------------------------------------------------------------------------------------------------
7 Years 6.9% 7.5% 6.8% 1.7% 4.1% 6.0% 5.6%
-------------------------------------------------------------------------------------------------------------------
8 Years 6.7% 7.3% 6.2% 1.8% 4.2% 6.8% 5.7%
-------------------------------------------------------------------------------------------------------------------
9 Years 7.8% 8.3% 6.1% 1.8% 4.9% 9.3% 6.3%
-------------------------------------------------------------------------------------------------------------------
10 Years(9) 9.2% 9.7% 5.6% 1.7% 7.1% 11.7% 7.3%
-------------------------------------------------------------------------------------------------------------------
|
(1) The calculation of returns is computed on a monthly basis starting January 1, 2003 for the Composite; including accrued dividends and interest income. Actual results may vary depending on level of assets and fee schedule. Performance results net of fees reflect the actual rate of fees paid by the accounts included in the Composite. Westwood's fee schedule for the Income Opportunity strategy: 0.80% on the first $25 million and negotiable thereafter. All fees are stated in annual rates and are typically billed quarterly. Westwood claims compliance with GIPS(R) and has prepared and presented this report in compliance with the GIPS(R) standards. Westwood has been independently verified for the periods January 1, 1995 through December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS(R) standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS(R) standards. The Income Opportunity Strategy Composite has been examined for the periods January 1, 2003 through December 31, 2011. The verification and performance examination reports are available upon request.
(2) The Citigroup Treasury 10-Year Index computes returns for the current Treasury Notes with a maturity of 10 years or less. Treasury Notes are fixed income securities whose interest and principal payments are backed by the full faith and credit of the U.S. government.
(3) The Citigroup 3-Month Treasury Bill Index computes returns for the current Treasury Bills with a maturity of 90 days or less.
(4) The S&P((R)) 500 Index is a widely recognized, market value weighted (higher market value stocks have more influence that lower market value stocks) index of 500 stocks designed to mimic the overall U.S. equity market's industry weightings.
(5) The NAREIT U.S. Equity Index is an unmanaged index of all tax qualified REITs listed on the NYSE, AMEX and NASDAQ which have 75% or more of their gross invested book assets invested directly or indirectly in the equity ownership of real estate.
(6) The blended benchmark is comprised of the following: 25% S&P 500 Index / 25% NAREIT U.S. Equity Index / 25% Citigroup 3-Month Treasury Bill Index / 25% Citigroup 10-Yr. Treasury Note Index.
(7) The comparative benchmark returns include interest and dividend income but do not include taxes, potential transaction costs or management fees.
(8) Dispersion is measured using the asset-weighted standard deviation of accounts managed for the entire year. Standard deviation is a statistical measure of the degree to which an individual portfolio's return varies from the median return for the composite. Greater deviation means greater risk to the investor.
(9) Inception date of the Income Opportunity Composite is January 1, 2003.
COMPARABLE FUND PERFORMANCE
WESTWOOD SHORT DURATION HIGH YIELD FUND
Anne Yobage, CFA (the "Portfolio Manager") is a co-founding member of SKY Harbor Capital Management, LLC, and is primarily responsible for the day-to-day management of the Westwood Short Duration High Yield Fund's portfolio. The Portfolio Manager previously was primarily responsible for the day-to-day management of the portfolio of the U.S. Short Duration High Yield Fund (the "Comparable Fund") from its inception date April 2004, through May 2011 (the "Relevant Period"). The Comparable Fund, referred to as a "sub-fund," is a stand-alone fund constituting a separate investment portfolio of the AXA IM Fixed Income Investment Strategies. AXA IM Fixed Income Investment Strategies is incorporated in Luxembourg as an open-ended investment company and qualifies as a UCITS fund (Undertakings for Collective Investment in Transferable Securities). UCITS is a regulatory regime governing the marketing and distribution of securities within the European Union. During the Relevant Period, the Portfolio Manager exercised final decision-making authority over all material aspects concerning the investment objective, policies, strategies, and security selection decisions of the Comparable Fund, and the Portfolio Manager exercises the same level of authority and discretion in managing the Westwood Short Duration High Yield Fund. The investment objective, policies and strategies of the Comparable Fund are substantially similar in all material respects to those of the Westwood Short Duration High Yield Fund.
The following table sets forth performance data relating to the historical performance of the A USD share class of the Comparable Fund. The data provided, which is net of all actual fees and expenses (including any sales loads and account fees) of the Comparable Fund, illustrates the past performance of the Portfolio Manager in managing a substantially similar fund as the Westwood Short Duration High Yield Fund as measured against the Bank of America Merrill Lynch US High Yield Master II Index (the "Index"), which is a representative index of the broader U.S. publicly issued corporate high yield market, which has, among other characteristics, a longer duration than both the Comparable Fund and the Westwood Short Duration High Yield Fund. The Comparable Fund is not subject to the same types of expenses to which the Westwood Short Duration High Yield Fund is subject, nor the specific tax restrictions and investment limitations imposed by the Investment Company Act or Subchapter M of the Internal Revenue Code. Consequently, the performance results for the Comparable Fund expressed below could have been adversely affected if the Comparable Fund had been regulated as an investment company under the Federal securities and tax laws. In addition, the performance information shown below was not calculated in accordance with SEC standardized performance methodology. If the performance information was calculated in accordance with SEC standardized performance methodology, the performance results may have been different. The Comparable Fund is a separate fund and its historical performance is not indicative of the potential future performance of the Westwood Short Duration High Yield Fund. The expenses of the Westwood Short Duration High Yield Fund (gross and net of waivers and reimbursements) are estimated to be higher than the expenses of the Comparable Fund. If the Westwood Short Duration High Yield Fund's fees and expenses had been imposed on the Comparable Fund, the performance shown below would have been lower. During the Relevant Period, the Portfolio Manager also managed other accounts with investment objectives, policies and strategies substantially similar to those of the Westwood Short Duration High Yield Fund. Performance results for these other accounts have not been provided due to lack of supporting records. However, the composite performance of these other accounts is not materially different than the Comparable Fund performance.
COMPARABLE FUND PERFORMANCE
(APRIL 1, 2004 THROUGH MAY 31, 2011)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE PORTFOLIO MANAGER IN MANAGING THE COMPARABLE FUND AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD SHORT DURATION HIGH YIELD FUND.
-------------------------------------------------------------------------------- CALENDAR YEAR TOTAL PRE-TAX RETURNS(1) 2005 2006 2007 2008 2009 2010 -------------------------------------------------------------------------------- Comparable Fund(2) 2.87% 7.26% 4.58% -9.01% 20.60% 9.20% -------------------------------------------------------------------------------- Index(3) 2.74% 11.77% 2.15% -26.39% 57.51% 15.19% -------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------- AS OF 5/31/2011 AVERAGE ANNUAL TOTAL SINCE PRE-TAX RETURNS(1) 1 YEAR 3 YEARS 5 YEARS INCEPTION(4) -------------------------------------------------------------------------------- COMPARABLE FUND(2) 10.02% 6.47% 6.08% 5.70% -------------------------------------------------------------------------------- INDEX(3) 18.09% 11.75% 9.34% 8.56% -------------------------------------------------------------------------------- |
(1) After tax returns would be lower than those shown.
(2) The U.S. Short Duration High Yield Fund, a substantially similar fund previously managed by the Westwood Short Duration High Yield Fund's portfolio manager, commenced operations on April 1, 2004.
(3) The BofA Merrill Lynch U.S. High Yield Master II Index ("Index") is a representative index of the broader U.S. publicly issued corporate high yield market, and is included solely for the purpose of comparing the Comparable Fund's historical performance against the performance of the broader high yield market, which has, other characteristics a longer duration than both the Comparable Fund and the Westwood Short Duration High Yield Fund. The Comparable Fund, however, was not and the Westwood Short Duration High Yield Fund is not managed towards the Index or any other benchmark.
(4) Returns are shown from April 1, 2004 through May 31, 2011.
WESTWOOD EMERGING MARKETS FUND
Patricia Perez-Coutts, CFA (the "Portfolio Manager") is primarily responsible for the day-to-day management of the Westwood Emerging Markets Fund's portfolio. The Portfolio Manager previously was primarily responsible for the day-to-day management of the portfolio of the AGF Emerging Markets Fund (the "Comparable Fund") from its inception date June 2003, through April 2012 (the "Relevant Period"). The Comparable Fund belongs to the AGF Group of Funds, which are Canadian open-end mutual funds established under the laws of Ontario and managed by AGF Investments, Inc. Throughout the Relevant Period, the Portfolio Manager was identified to Comparable Fund shareholders as being responsible for exercising final decision-making authority over all material aspects concerning the investment objective, policies, strategies, and security selection decisions of the Comparable Fund and the Portfolio Manager will exercise the same level of authority and discretion in managing the Westwood Emerging Markets Fund. The investment objective, policies and strategies of the Comparable Fund are substantially similar in all material respects to those of the Westwood Emerging Markets Fund. During the Relevant Period, the Portfolio Manager also managed other accounts with investment objectives, policies and strategies substantially similar to those of the Westwood Emerging Markets Fund. Performance results for these other accounts have not been provided due to lack of supporting records. However, the composite performance of these other accounts is not materially different than the Comparable Fund performance.
The following tables set forth performance data relating to the historical performance of the MF Series class of the Comparable Fund. The data provided, which is net of all actual fees and expenses (including any sales loads and account fees) of the Comparable Fund, illustrates the past performance of the Portfolio Manager in managing a substantially similar fund as measured against the MSCI Emerging Markets Index (the "Comparable Index"). The Comparable Fund is not subject to the same types of expenses to which the Westwood Emerging Markets Fund is subject, nor the specific tax restrictions and investment limitations imposed by the Investment Company Act of 1940, as amended, or Subchapter M of the Internal Revenue Code. Consequently, the performance results for the Comparable Fund expressed below could have been adversely affected if the Comparable Fund had been regulated as an investment company under the Federal securities and tax laws. In addition, the performance information shown below was not calculated in accordance with SEC standardized performance methodology. If the performance information was calculated in accordance with SEC standardized performance methodology, the performance results may have been different. The Comparable Fund is a separate fund and its historical
performance is not indicative of the potential future performance of the Westwood Emerging Markets Fund. The expenses of the Westwood Emerging Markets Fund (gross and net of waivers and reimbursements) are estimated to be higher than the expenses of the Comparable Fund. If the Westwood Emerging Markets Fund's fees and expenses had been imposed on the Comparable Fund, the performance shown below would have been lower.
The performance results are calculated using Canadian dollars.
COMPARABLE FUND PERFORMANCE
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE PORTFOLIO MANAGER IN MANAGING THE COMPARABLE FUND AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD EMERGING MARKETS FUND.
-------------------------------------------------------------------------------- CALENDAR YEAR TOTAL PRE-TAX RETURNS(1) 2004 2005 2006 2007 2008 2009 2010 2011 -------------------------------------------------------------------------------- Comparable Fund(2) 16.6% 35.3% 40.4% 12.4% -35.3% 60.3% 15.3% -14.6% Comparable Index(3) 16.8% 31.2% 32.1% 18.6% -41.4% 52.0% 13.0% -16.2% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AS OF 4/30/12 SINCE AVERAGE ANNUAL TOTAL 1 YEAR 3 YEARS 5 YEARS INCEPTION(4) PRE-TAX RETURNS(1) -------------------------------------------------------------------------------- Comparable Fund(2) -4.38% 15.25% 4.05% 15.47% -------------------------------------------------------------------------------- Comparable Index(3) -8.73% 11.59% 1.47% 12.51% -------------------------------------------------------------------------------- |
(1) After-tax returns would be lower than those shown.
(2) The AGF Emerging Markets Fund, a substantially similar fund previously managed by the Portfolio Manager, commenced operations on June 16, 2003.
(3) The MSCI Emerging Markets Index ("Comparable Index") is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Comparable Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The Comparable Fund was benchmarked against the Comparable Index, and the Adviser will benchmark the Westwood Emerging Markets Fund to the Comparable Index.
(4) Returns are shown from July 1, 2003 through April 1, 2012.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase, sell (sometimes called "redeem") and exchange A Class Shares of the Funds.
A Class Shares are for individual and institutional investors.
The Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund and the Westwood Emerging Markets Fund also offer Institutional Shares that are not subject to sales charges or distribution (12b-1) fees with a minimum initial investment of $100,000. Because Institutional Shares will always be a more favorable investment than A Class Shares for investments of $100,000 or more, the Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund and the Westwood Emerging Markets
Fund will generally not accept a purchase order for A Class Shares in the amount of $100,000 or more. While the Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund and the Westwood Emerging Markets Fund will take reasonable steps to prevent investments of $100,000 or more in A Class Shares, they may not be able to identify such investments made through certain financial intermediaries or omnibus accounts. Although Institutional Shares may not be offered by your financial intermediary, you can purchase Institutional Shares directly from the Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund and the Westwood Emerging Markets Fund.
For information regarding the federal income tax consequences of transactions in shares of the Funds, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
You will ordinarily submit your purchase orders through your securities broker or other financial intermediary through which you opened your shareholder account. To purchase shares directly from the Funds through their transfer agent, complete and send in the application. If you need an application or have questions, please call 1-877-FUND-WHG (1-877-386-3944) or log on to the Funds' website at WWW.WESTWOODFUNDS.COM.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Funds do not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Funds reserve the right to reject any specific purchase order for any reason. The Funds are not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Funds' policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. Please contact the Funds for more information.
BY MAIL
REGULAR MAIL ADDRESS
Westwood Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Westwood Funds
c/o DST Systems, Inc.
430 W. 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-877-FUND-WHG (1-877-386-3944) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA#: 101000695
Westwood Funds
DDA# 9871063178
Ref: Fund name/account name/account number
GENERAL INFORMATION
You may purchase shares on any day that the NYSE is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. Each Fund's price per share will be the net asset value per share ("NAV") next determined after the Fund or an authorized institution receives your purchase order in proper form, plus the front-end sales charge. "Proper form" means that the Funds were provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
Each Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, a Fund or authorized institution must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Funds reserve the right to calculate NAV as of the earlier closing time. The Funds will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Funds may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Funds through their transfer agent, you may also buy or sell shares of the Funds through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Funds prior to the time the Funds calculate their NAV that day. Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Funds on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Funds after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Funds with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Funds with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Funds. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUNDS CALCULATE NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund. In calculating NAV, each Fund generally values its investment portfolio at market price. If market prices are not readily available or a Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Funds' Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Funds' Board, these methods are implemented through the Funds' Fair Value Pricing Committee, members of which are appointed by the Board. A Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
There may be limited circumstances in which the Funds would price securities at fair value for stocks of U.S. companies that are traded on U.S. exchanges -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Funds calculated their NAV.
With respect to any non-U.S. securities held by the Funds, the Funds may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Funds may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Funds price their shares, the value the Funds assign to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Funds may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, or securities market movements in the United States, or other relevant information as related to the securities.
When valuing fixed income securities with remaining maturities of more than 60 days, the Funds use the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security, securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Funds use the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
PURCHASES IN-KIND
Subject to the approval of the Funds, an investor may purchase shares of a Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Funds reserve the right to amend or terminate this practice at any time.
MINIMUM PURCHASES
You can open an account with the Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund and the Westwood Emerging Markets Fund, including an initial purchase through an individual retirement account ("IRA") or other tax qualified account, with a minimum initial investment of $5,000. A Class Shares of the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund and the Westwood Emerging Markets Plus Fund are currently not available for purchase. There is no minimum for subsequent investments. Each Fund may accept initial investments of smaller amounts in its sole discretion.
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Funds. These purchases can be made monthly, quarterly, semi-annually and annually in amounts of at least $25 per Fund. To cancel or change a plan, write to the Funds at: Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
FUND CODES
The reference information listed below will be helpful to you when you contact the Funds to purchase A Class Shares of a Fund, check daily NAV or obtain additional information. Because shares of the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund and the Westwood Emerging Markets Plus Fund are currently not available to investors, these Funds do not have a ticker symbol, CUSIP or Fund Code.
FUND NAME TICKER SYMBOL CUSIP FUND CODE -------------------------------------------------------------------------------- Westwood LargeCap Value Fund WWLAX 0075W0635 2685 -------------------------------------------------------------------------------- Westwood Income Opportunity Fund WWIAX 0075W0643 2686 -------------------------------------------------------------------------------- Westwood Emerging Markets Fund WWEAX 0075W0478 3985 -------------------------------------------------------------------------------- |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may redeem your shares on any Business Day by contacting the Funds directly by mail or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Funds.
If you would like to have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Funds in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before it grants a redemption request, the Funds may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Funds participate in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-877-386-3944 for more information.
The sale price will be the NAV per share next determined after the Funds receive your request.
BY MAIL
To redeem shares by mail, please send a letter to a Fund signed by all registered parties on the account specifying:
o The Fund name;
o The Share class;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
Westwood Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Westwood Funds
c/o DST Systems, Inc.
430 W. 7th Street
Kansas City, MO 64105
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-877-FUND-WHG (1-877-386-3944) to redeem your shares. Based on your instructions, a Fund will mail your proceeds to you, or send them to your bank via wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Funds.
RECEIVING YOUR MONEY
Normally, a Fund will send your sale proceeds within seven days after the Fund receives your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via ACH to your bank account once you have established banking instructions with the Funds. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
The Funds generally pay sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Funds' remaining shareholders, the Funds might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $5,000 because of redemptions, you may be required to sell your shares. The Funds will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Funds may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More information about this is in the SAI.
HOW TO EXCHANGE FUND SHARES
At no charge, you may exchange A Class Shares of one Westwood Fund for A Class Shares of another Westwood Fund by writing to or calling the Funds. You may only exchange shares between accounts with identical registrations (i.e., the same names and addresses).
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Funds may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Funds. For more information about the Funds' policy on excessive trading, see "Excessive Trading Policies and Procedures."
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely convenient, but not without risk. Although the Funds have certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Funds are not responsible for any losses or costs incurred by following telephone instructions they reasonably believe to be genuine. If you or your financial institution transact with the Funds over the telephone, you will generally bear the risk of any loss.
SALES CHARGES
FRONT-END SALES CHARGES -- A CLASS SHARES
The offering price of A Class Shares is the NAV next calculated after the Funds receive your request, plus the front-end sales charge. The amount of any front-end sales charge included in your offering price varies depending on the amount of your investment.
For the Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund, the sales charges below apply:
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YOUR SALES CHARGE AS A YOUR SALES CHARGE AS A DEALER REALLOWANCE
PERCENTAGE OF PERCENTAGE OF YOUR AS PERCENTAGE OF
IF YOUR INVESTMENT IS: OFFERING PRICE NET INVESTMENT OFFERING PRICE
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Less than $50,000 5.00% 5.26% 5.00%
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$50,000 but less than $100,000 4.00% 4.17% 4.00%
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$100,000 but less than $250,000 3.00% 3.09% 3.00%
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$250,000 but less than $500,000 2.50% 2.56% 2.50%
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$500,000 and over 2.00% 2.04% 2.00%
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For the Westwood Short Duration High Yield Fund, the sales charges below apply:
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YOUR SALES CHARGE AS A YOUR SALES CHARGE AS A DEALER
PERCENTAGE OF PERCENTAGE OF YOUR REALLOWANCE AS
IF YOUR INVESTMENT IS: OFFERING PRICE NET INVESTMENT PERCENTAGE OF
OFFERING PRICE
------------------------------------------------------------------------------------------------
Less than $100,000 2.25% 2.30% 2.00%
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$100,000 but less than 2.00% 2.04% 1.75%
$250,000
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$250,000 but less than 1.50% 1.52% 1.25%
$500,000
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$500,000 and over 1.25% 1.27% 1.10%
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You may qualify for reduced sales charges or sales charge waivers. If you believe that you may qualify for a reduction or waiver of the sales charge, you should discuss this matter with your broker or other financial intermediary. To qualify for these reductions or waivers, you or your financial intermediary must provide sufficient information at the time of purchase to verify that your purchase qualifies for such treatment. This information could be used to aggregate, for example, holdings in personal or retirement accounts, Fund shares owned by your family members, and holdings in accounts at other brokers or financial intermediaries. The Funds or your financial intermediary may request documentation from you in order to verify your eligibility for a breakpoint discount. This information may include account statements and records regarding Fund shares held at all financial intermediaries by you and members of your family. In addition to breakpoint discounts, the following sections describe other circumstances in which sales charges are waived or otherwise may be reduced.
WAIVER OF FRONT-END SALES CHARGE -- A CLASS SHARES
Certain investors may be eligible for a waiver of the sales loads due to the nature of the investors and/or the reduced sales efforts necessary to obtain their investments. The front-end sales charge will be waived on A Class Shares purchased:
o Through reinvestment of dividends and distributions;
o Through an account advised or sub-advised by the Adviser or its affiliates;
o By persons repurchasing shares they redeemed within the last 90 days (see "Repurchase of A Class Shares");
o By employees, officers and directors, and members of their family, of the Adviser and its affiliates;
o By persons reinvesting distributions from qualified employee benefit retirement plans and rollovers from IRAs as long as the plan was previously invested in one or more Westwood Funds;
o By investors who purchase shares with redemption proceeds (but only to the extent of such redemption proceeds) from another investment company within 30 days of such redemption, provided that the investors paid either a front-end or contingent deferred sales charge on the original shares redeemed;
o Through dealers, retirement plans, asset allocation programs and financial institutions that, under their dealer agreements with the distributor or otherwise, do not receive any portion of the front- end sales charge;
o Purchases by registered representatives and other employees of certain financial intermediaries (and their family members) having selling agreements with the Adviser or distributor;
o Broker-dealer sponsored wrap program accounts and/or fee-based accounts maintained for clients of certain financial intermediaries who have entered into selling agreements with the distributor; and
o Certain other investors as deemed appropriate by the Adviser.
REPURCHASE OF A CLASS SHARES
You may repurchase any amount of A Class Shares of any Fund at NAV (without the normal front-end sales charge), up to the limit of the value of any amount of A Class Shares (other than those which were purchased with reinvested dividends and distributions) that you redeemed within the past 90 days. In
effect, this allows you to reacquire shares that you may have had to redeem, without repaying the front-end sales charge. To exercise this privilege, a Fund must receive your purchase order within 90 days of your redemption. In addition, you must notify your investment professional or institution when you send in your purchase order that you are repurchasing shares. Certain tax rules may limit your ability to recognize a loss on the redemption of your A Class Shares, and you should consult your tax advisor if recognizing such a loss is important to you.
RIGHTS OF ACCUMULATION
In calculating the appropriate sales charge rate, this right allows you to add the value of the A Class Shares you already own to the amount that you are currently purchasing. The Funds will combine the value of your current purchases with the current value of any A Class Shares you purchased previously for (i) your account, (ii) your spouse's account, (iii) a joint account with your spouse, or (iv) your minor children's trust or custodial accounts. A fiduciary purchasing shares for the same fiduciary account, trust or estate may also use this right of accumulation. If your investment qualifies for a reduced sales load due to accumulation of purchases, you must notify the transfer agent at the time of purchase of the existence of other accounts and/or holdings eligible to be aggregated to reduce or eliminate the sales load. You may be required to provide records, such as account statements, regarding Fund shares held by you or related accounts at the Fund or at other financial intermediaries in order to verify your eligibility for a breakpoint discount. You will receive the reduced sales load only on the additional purchases and not retroactively on previous purchases. The Fund may amend or terminate this right of accumulation at any time.
LETTER OF INTENT
You may purchase A Class Shares at the sales charge rate applicable to the total amount of the purchases you intend to make over a 13-month period. In other words, a Letter of Intent allows you to purchase A Class Shares of a Fund over a 13-month period and receive the same sales charge as if you had purchased all the shares at the same time. The Fund will only consider the value of A Class Shares sold subject to a sales charge. As a result, shares of the A Class Shares purchased with dividends or distributions will not be included in the calculation. To be entitled to a reduced sales charge on the purchase of A Class Shares based on shares you intend to purchase over the 13-month period, you must send the Fund a Letter of Intent. In calculating the total amount of purchases, you may include in your Letter purchases made up to 90 days before the date of the Letter. Purchases resulting from the reinvestment of dividends and capital gains do not apply toward fulfillment of the Letter. The 13-month period begins on the date of the first purchase, including those purchases made in the 90-day period before the date of the Letter. Please note that the purchase price of these prior purchases will not be adjusted.
You are not legally bound by the terms of your Letter of Intent to purchase the amount of your shares stated in the Letter. The Letter does, however, authorize the Fund to hold in escrow 5% of the total amount you intend to purchase. If you do not complete the total intended purchase of A Class Shares at the end of the 13-month period, the Fund's transfer agent will redeem the necessary portion of the escrowed shares to make up the difference between the reduced rate sales charge (based on the amount you intended to purchase) and the sales charge that would normally apply (based on the actual amount you purchased).
COMBINED PURCHASE/QUANTITY DISCOUNT PRIVILEGE
When calculating the appropriate sales charge rate, a Fund will combine same-day purchases of A Class Shares (that are subject to a sales charge) made by you, your spouse and your minor children (under age 21). This combination also applies to A Class Shares you purchase with a Letter of Intent.
GENERAL INFORMATION ABOUT SALES CHARGES
Your securities dealer is paid a commission when you buy your shares and is paid a servicing fee as long as you hold your shares. From time to time, some financial institutions may be reallowed up to the entire sales charge. Firms that receive a reallowance of the entire sales charge may be considered underwriters for the purpose of federal securities law.
The Funds' distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs for dealers, which will be paid for by the Funds' distributor from any sales charge it receives or from any other source available to it. Under any such program, the Funds' distributor may provide cash or non-cash compensation as recognition for past sales or encouragement for future sales that may include merchandise, travel expenses, prizes, meals, lodgings, and gifts that do not exceed $100 per year, per individual.
Information regarding the Funds' sales charges may be obtained free of charge by calling toll-free 1-877-FUND-WHG (1-877-386-3944).
DISTRIBUTION OF FUND SHARES
The Funds have adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, for A Class Shares that allows the Funds to pay distribution and/or service fees for the sale and distribution of their shares, and for services provided to shareholders. Because these fees are paid out of the Funds' assets continuously, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The maximum annual distribution and/or service fee for A Class Shares of each Fund is 0.25%.
SHAREHOLDER SERVICING ARRANGEMENTS
The Funds may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, their service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Funds generally pay financial intermediaries a fee that is based on the assets of each Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Funds, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Funds do not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by each Fund, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to Fund shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may make payments to certain affiliated or unaffiliated financial intermediaries to compensate them for the costs associated with distribution, marketing, administration and shareholder servicing support. These payments may be in addition to any Rule 12b-1 fees that are reflected in the fee table sections of this prospectus. These payments are sometimes characterized as "revenue sharing" payments and are made out of the Adviser's and/or its affiliates' own legitimate profits or other resources, and are not paid by the Funds. A financial intermediary may provide these services with respect to Fund shares sold or held through programs such as retirement plans, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (E.G., individual or group annuity) programs. In addition, financial intermediaries may receive payments for making shares of the Funds available to their customers or registered representatives, including providing the Funds with "shelf space," placing it on a preferred or recommended fund list, or promoting the Funds in certain sales programs that are sponsored by financial intermediaries. To the extent permitted by SEC and Financial Industry Regulatory Authority ("FINRA") rules and other applicable laws and regulations, the Adviser and/or its affiliates may pay or allow other promotional incentives or payments to financial intermediaries. For more information please see "Payments to Financial Intermediaries" and "Shareholder Services" in the Funds' SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of the Fund shares, the amount of the Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Funds' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of the Fund shares or the provision of services to the Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Funds are intended for long-term investment purposes only and discourage shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Funds may present risks to the Funds' long-term shareholders and could adversely affect
shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Funds' investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Funds to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because the Funds may invest in foreign securities traded primarily on markets that close prior to the time a Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by a Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of their Fund's shares if the price of the Fund's foreign securities do not reflect their fair value. Although the Funds have procedures designed to determine the fair value of foreign securities for purposes of calculating their NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage.
In addition, because the Westwood Income Opportunity Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund invest in small- and mid-cap securities, which often trade in lower volumes and may be less liquid, these Funds may be more susceptible to the risks posed by frequent trading because frequent transactions in the Funds' shares may have a greater impact on the market prices of these types of securities.
The Funds' service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Funds' policies and procedures described in this prospectus and approved by the Funds' Board. For purposes of applying these policies, the Funds' service providers may consider the trading history of accounts under common ownership or control. The Funds' policies and procedures include:
o Shareholders are restricted from making more than 4 "round trips" into or out of any Fund over any rolling 12 month period. If a shareholder exceeds this amount, the Funds and/or their service providers may, at their discretion, reject any additional purchase orders. The Funds define a "round trip" as a purchase into a Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o Each Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Funds and/or their service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Funds' long-term shareholders. The Funds do not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Funds will occur.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Funds for their customers through which transactions are placed. The Funds have entered into "information sharing agreements" with these financial intermediaries, which permit the Funds to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Funds. If the Funds or their service providers identify omnibus account level trading patterns that have the potential to be detrimental to the Funds, the Funds or their service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Funds or their service providers determine that the trading activity of any customer may be detrimental to the Funds, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Funds by that customer. If the Funds are not satisfied that the intermediary has taken appropriate action, the Funds may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Funds' shares is requested by the Funds and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Funds have an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Funds, to restrict or prohibit the indirect intermediary from purchasing shares of the Funds on behalf of other persons.
The Funds and their service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Funds. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Funds to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Funds will ask your name, address, date of birth, and other information that will allow the Funds to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Funds are required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Funds are required to collect documents to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Funds, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the next-determined NAV per share.
The Funds reserve the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if they are unable to verify your identity. Attempts to verify your identity will
be performed within a reasonable timeframe established in the sole discretion of the Funds. Further, the Funds reserve the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Funds' overall obligation to deter money laundering under federal law. The Funds have adopted an anti-money laundering compliance program designed to prevent the Funds from being used for money laundering or the financing of illegal activities. In this regard, the Funds reserve the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Funds or in cases when the Funds are requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Westwood LargeCap Value, Westwood Global Equity, Westwood Global Dividend, Westwood Emerging Markets and Westwood Emerging Markets Plus Funds distribute their net investment income and make distributions of their net realized capital gains, if any, at least annually. The Westwood Income Opportunity Fund distributes its net investment income quarterly and makes distributions of its net realized capital gains, if any, at least annually. The Westwood Short Duration High Yield Fund distributes its net investment income monthly and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on a Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Funds in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Funds receive your written notice. To cancel your election, simply send the Funds written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Funds and their shareholders. This summary is based on current tax laws, which may change.
Certain Funds intend to invest in royalty trusts. Depending on the U.S. federal income tax classification of these royalty trusts in which a Fund invests, securities issued by certain royalty trusts (such as royalty trusts which are grantor trusts for U.S. federal income tax purposes) may not produce qualifying income for purposes of the requirements to be treated as a Regulated Investment Company under the Internal Revenue Code of 1986, as amended. Additionally, a Fund may be deemed to directly own the assets of each royalty trust, and would need to look to such assets when determining its compliance with the diversification requirements under the Internal Revenue Code. Certain Canadian royalty trusts may be treated as a corporation for U.S. federal income tax purposes and distributions from such may be qualifying income when received by a Fund. Each Fund will monitor its investments in royalty trusts with the objective of maintaining its continued qualification as a Regulated Investment Company under the Internal Revenue Code.
Each Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, depending upon your tax situation. Distributions you receive from each Fund may be taxable whether or not you reinvest them. Dividend distributions, including distributions of short-term capital gains are generally taxable at ordinary income tax rates. Distributions of long-term capital gains and distributions of qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. The gain or loss on the sale of Fund shares generally will be treated as a short term capital gain or loss if you held the shares for 12 months or less or a long term capital gain or loss if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) will be subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012 and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, a Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, a Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, a Fund will use the average basis method as the default cost basis method. The cost basis method elected by a Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Because the Funds may invest in foreign securities, they may be subject to foreign withholding taxes with respect to dividends or interest that the Funds receive from sources in foreign countries. The Funds may be able to make an election to pass along a tax credit for foreign income taxes it pays. The Funds will notify you if it makes this decision.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the A Class Shares of the Funds. This information is intended to help you understand each Fund's financial performance for the period of the Funds' A Class Shares' operations. Some of this information reflects financial information for a single Fund share. The total returns in the tables represent the rate that you would have earned (or lost) on an investment in a Fund, assuming you reinvested all of your dividends and distributions. The information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Funds. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Funds, which is available upon request by calling the Funds at 1-877-386-3944.
WESTWOOD LARGECAP VALUE FUND -- A
CLASS SHARES
SELECTED PER SHARES DATA & RATIOS FOR A SHARE
OUTSTANDING THROUGHOUT THE PERIOD
PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2012 2011 2010 2009 2008(1)
NET ASSET VALUE, BEGINNING OF PERIOD
INCOME (LOSS) FROM OPERATIONS $10.13 $9.67 $8.63 $8.73 $ 12.10
------ ------ ------ ------- --------
Net Investment Income(2) 0.12 0.10 0.07 0.08 0.10
Net Realized and Unrealized Gains 1.15 0.42 1.05 (0.11) (3.47)
(Losses) on Investments ------ ------ ------ ------- --------
Total from Operations 1.27 0.52 1.12 (0.03) (3.37)
------ ------ ------ ------- --------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment Income (0.12) (0.06) (0.08) (0.07) --
------ ------ ------ ------- --------
Total Dividends and Distributions (0.12) (0.06) (0.08) (0.07) --
------ ------ ------ ------- --------
NET ASSET VALUE, END OF PERIOD $11.28 $10.13 $9.67 $8.63 $ 8.73
====== ====== ====== ======= ========
TOTAL RETURN(3) 12.67% 5.37% 12.99% (0.25)%(7) (27.85)%(7)
====== ====== ====== ======= ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $4,595 $4,352 $5,320 $5,251 $ 673
Ratio of Expenses to Average Net Assets 1.21% 1.25%(6) 1.25%(6) 1.25% 1.25%(4)
Ratio of Expenses to Average Net Assets
(Excluding Waivers and Recovered Fees) 1.17% 1.16% 1.22% 1.35% 1.65%(4)
Ratio of Net Investment Income (Loss) to
Average Net Assets 1.15% 1.02% 0.73% 0.95% 1.14%(4)
Portfolio Turnover Rate 40% 42% 57% 89% 70%(5)
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Amounts designated as "--" are $0 or have been rounded to $0.
(1) Commenced operations on December 31, 2007.
(2) Calculation performed using average shares for the period.
(3) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemptions of Fund shares.
(4) Annualized.
(5) Portfolio turnover rate is for the Fund for the year ended October 31, 2008.
(6) Ratio includes previously waived investment advisory fees recaptured. The impact of the recaptured fees may cause a higher net expense ratio.
(7) Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period.
WESTWOOD INCOME OPPORTUNITY
FUND -- A CLASS SHARES
SELECTED PER SHARES DATA & RATIOS FOR A SHARE
OUTSTANDING THROUGHOUT THE PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2012 2011 2010 2009 2008(1)
NET ASSET VALUE, BEGINNING OF
PERIOD
INCOME (LOSS) FROM OPERATIONS: $11.40 $11.07 $9.73 $9.32 $ 9.99
------ ------ ------ ------ -------
Net Investment Income (Loss)(2) 0.28 0.30 0.27 0.27 0.25
Net Realized and Unrealized 0.87 0.26 1.41 0.39 (0.71)
Gains (Losses) on Investments ------ ------ ------ ------ -------
Total from Operations 1.15 0.56 1.68 0.66 (0.46)
------ ------ ------ ------ -------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment (0.23) (0.23) (0.34) (0.25)
------ ------ ------ ------ -------
Income (0.21)
Total Dividends and Distributions (0.23) (0.23) 0.34 (0.25) (0.21)
------ ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $12.32 $11.40 $11.07 $9.73 $ 9.32
====== ====== ====== ====== =======
TOTAL RETURN(3) 10.22% 5.13% 17.55%(7) 7.23%(7) (4.69)%(7)
====== ====== ====== ====== =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $61,662 $25,262 $6,856 $543 $ 482
Ratio of Expenses to Average Net 1.15%(6) 1.15%(6) 1.15% 1.25%
Assets 1.25%(4)
Ratio of Expenses to Average Net
Assets (Excluding Waivers and 1.12% 1.14% 1.20% 1.38% 1.47%(4)
Recovered Fees)
Ratio of Net Investment Income
(Loss) to Average Net Assets 2.37% 2.66% 2.59% 2.88% 3.04%(4)
Portfolio Turnover Rate 24% 26% 34% 91% 99%(5)
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(1) Commenced operations on December 31, 2007.
(2) Calculation performed using average shares for the period.
(3) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemptions of Fund shares.
(4) Annualized.
(5) Portfolio turnover rate is for the Fund for the year ended October 31, 2008.
(6) Ratio includes previously waived investment advisory fees recaptured. The impact of the recaptured fees may cause a higher net expense ratio.
(7) Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period.
WESTWOOD SHORT DURATION HIGH YIELD FUND, WESTWOOD GLOBAL EQUITY FUND, WESTWOOD GLOBAL DIVIDEND FUND, WESTWOOD EMERGING MARKETS FUND AND WESTWOOD EMERGING MARKETS PLUS FUND -- A CLASS SHARES
Because A Class Shares of these Funds had not commenced operations during the fiscal year ended October 31, 2012, financial highlights are not available.
THE ADVISORS' INNER CIRCLE FUND
WESTWOOD FUNDS
INVESTMENT ADVISER
Westwood Management Corp.
200 Crescent Court, Suite 1200
Dallas, Texas 75201
SUB-ADVISER (Westwood Short Duration High Yield Fund)
SKY Harbor Capital Management, LLC
20 Horseneck Lane
Greenwich, Connecticut 06830
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
MORE INFORMATION ABOUT THE FUNDS IS AVAILABLE, WITHOUT CHARGE, THROUGH THE FOLLOWING:
STATEMENT OF ADDITIONAL INFORMATION: The SAI, dated March 1, 2013, includes detailed information about the Westwood Funds and The Advisors' Inner Circle Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Funds' holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on the Fund performance. The reports also contain detailed financial information about the Funds.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-877-FUND-WHG (1-877-386-3944)
BY MAIL: Westwood Funds
P.O. Box 219009
Kansas City, MO 64121-9009
BY INTERNET: WWW.WESTWOODFUNDS.COM
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FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: HTTP://WWW.SEC.GOV. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520.
You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: PUBLICINFO@SEC.GOV.
THE ADVISORS' INNER CIRCLE FUND'S INVESTMENT COMPANY ACT REGISTRATION NUMBER IS
811-06400.
WHG-PS-007-0700
THE ADVISORS' INNER CIRCLE FUND
PROSPECTUS
MARCH 1, 2013
WESTWOOD LARGECAP VALUE FUND
TICKER SYMBOL: WHGLX
WESTWOOD DIVIDEND GROWTH FUND
TICKER SYMBOL: WHGDX
WESTWOOD SMIDCAP PLUS FUND
TICKER SYMBOL: WHGPX
WESTWOOD SMIDCAP FUND
TICKER SYMBOL: WHGMX
WESTWOOD SMALLCAP VALUE FUND
TICKER SYMBOL: WHGSX
WESTWOOD INCOME OPPORTUNITY FUND
TICKER SYMBOL: WHGIX
WESTWOOD SHORT DURATION HIGH YIELD FUND
TICKER SYMBOL: WHGHX
WESTWOOD GLOBAL EQUITY FUND
TICKER SYMBOL: WWGEX
WESTWOOD GLOBAL DIVIDEND FUND
TICKER SYMBOL: WWGDX
WESTWOOD EMERGING MARKETS FUND
TICKER SYMBOL: WWEMX
WESTWOOD EMERGING MARKETS PLUS FUND
TICKER SYMBOL:
INSTITUTIONAL SHARES
INVESTMENT ADVISER:
WESTWOOD MANAGEMENT CORP.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT EACH FUND, PLEASE SEE:
PAGE
WESTWOOD LARGECAP VALUE FUND .............................................. 1
FUND INVESTMENT OBJECTIVE ............................................ 1
FUND FEES AND EXPENSES ............................................... 1
PRINCIPAL INVESTMENT STRATEGIES ...................................... 2
PRINCIPAL RISKS ...................................................... 2
PERFORMANCE INFORMATION .............................................. 4
INVESTMENT ADVISER ................................................... 5
PORTFOLIO MANAGERS ................................................... 5
PURCHASE AND SALE OF FUND SHARES ..................................... 5
WESTWOOD DIVIDEND GROWTH FUND ............................................. 7
FUND INVESTMENT OBJECTIVE ............................................ 7
FUND FEES AND EXPENSES ............................................... 7
PRINCIPAL INVESTMENT STRATEGIES ...................................... 8
PRINCIPAL RISKS ...................................................... 8
PERFORMANCE INFORMATION .............................................. 10
INVESTMENT ADVISER ................................................... 11
PORTFOLIO MANAGERS ................................................... 11
PURCHASE AND SALE OF FUND SHARES ..................................... 11
WESTWOOD SMIDCAP PLUS FUND ................................................ 12
FUND INVESTMENT OBJECTIVE ............................................ 12
FUND FEES AND EXPENSES ............................................... 12
PRINCIPAL INVESTMENT STRATEGIES ...................................... 13
PRINCIPAL RISKS ...................................................... 13
PERFORMANCE INFORMATION .............................................. 15
INVESTMENT ADVISER ................................................... 16
PORTFOLIO MANAGERS ................................................... 16
PURCHASE AND SALE OF FUND SHARES ..................................... 16
WESTWOOD SMIDCAP FUND ..................................................... 18
FUND INVESTMENT OBJECTIVE ............................................ 18
FUND FEES AND EXPENSES ............................................... 18
PRINCIPAL INVESTMENT STRATEGIES ...................................... 19
PRINCIPAL RISKS ...................................................... 19
PERFORMANCE INFORMATION .............................................. 21
INVESTMENT ADVISER ................................................... 22
PORTFOLIO MANAGERS ................................................... 22
PURCHASE AND SALE OF FUND SHARES ..................................... 22
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WESTWOOD SMALLCAP VALUE FUND .............................................. 24
FUND INVESTMENT OBJECTIVE ............................................ 24
FUND FEES AND EXPENSES ............................................... 24
PRINCIPAL INVESTMENT STRATEGIES ...................................... 25
PRINCIPAL RISKS ...................................................... 25
PERFORMANCE INFORMATION .............................................. 27
INVESTMENT ADVISER ................................................... 28
PORTFOLIO MANAGERS ................................................... 28
PURCHASE AND SALE OF FUND SHARES ..................................... 28
WESTWOOD INCOME OPPORTUNITY FUND .......................................... 30
FUND INVESTMENT OBJECTIVE ............................................ 30
FUND FEES AND EXPENSES ............................................... 30
PRINCIPAL INVESTMENT STRATEGIES ...................................... 31
PRINCIPAL RISKS ...................................................... 32
PERFORMANCE INFORMATION .............................................. 34
INVESTMENT ADVISER ................................................... 35
PORTFOLIO MANAGERS ................................................... 35
PURCHASE AND SALE OF FUND SHARES ..................................... 35
WESTWOOD SHORT DURATION HIGH YIELD FUND ................................... 36
FUND INVESTMENT OBJECTIVE ............................................ 36
FUND FEES AND EXPENSES ............................................... 36
PRINCIPAL INVESTMENT STRATEGIES ...................................... 37
PRINCIPAL RISKS ...................................................... 38
PERFORMANCE INFORMATION .............................................. 39
INVESTMENT ADVISER ................................................... 40
PORTFOLIO MANAGER .................................................... 40
PURCHASE AND SALE OF FUND SHARES ..................................... 40
WESTWOOD GLOBAL EQUITY FUND ............................................... 42
FUND INVESTMENT OBJECTIVE ............................................ 42
FUND FEES AND EXPENSES ............................................... 42
PRINCIPAL INVESTMENT STRATEGIES ...................................... 43
PRINCIPAL RISKS ...................................................... 43
PERFORMANCE INFORMATION .............................................. 45
INVESTMENT ADVISER ................................................... 45
PORTFOLIO MANAGERS ................................................... 45
PURCHASE AND SALE OF FUND SHARES ..................................... 46
WESTWOOD GLOBAL DIVIDEND FUND ............................................. 47
FUND INVESTMENT OBJECTIVE ............................................ 47
FUND FEES AND EXPENSES ............................................... 47
PRINCIPAL INVESTMENT STRATEGIES ...................................... 48
PRINCIPAL RISKS ...................................................... 48
PERFORMANCE INFORMATION .............................................. 50
INVESTMENT ADVISER ................................................... 51
PORTFOLIO MANAGER .................................................... 51
PURCHASE AND SALE OF FUND SHARES ..................................... 51
WESTWOOD EMERGING MARKETS FUND ............................................ 52
FUND INVESTMENT OBJECTIVE ............................................ 52
FUND FEES AND EXPENSES ............................................... 52
PRINCIPAL INVESTMENT STRATEGIES ...................................... 53
PRINCIPAL RISKS ...................................................... 53
PERFORMANCE INFORMATION .............................................. 55
INVESTMENT ADVISER ................................................... 55
PORTFOLIO MANAGER .................................................... 55
PURCHASE AND SALE OF FUND SHARES ..................................... 56
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WESTWOOD EMERGING MARKETS PLUS FUND ....................................... 57
FUND INVESTMENT OBJECTIVE ............................................ 57
FUND FEES AND EXPENSES ............................................... 57
PRINCIPAL INVESTMENT STRATEGIES ...................................... 58
PRINCIPAL RISKS ...................................................... 58
PERFORMANCE INFORMATION .............................................. 60
INVESTMENT ADVISER ................................................... 60
PORTFOLIO MANAGER .................................................... 60
PURCHASE AND SALE OF FUND SHARES ..................................... 61
SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL
INTERMEDIARY COMPENSATION ............................................... 62
MORE INFORMATION ABOUT RISK ............................................... 63
MORE INFORMATION ABOUT FUND INVESTMENTS ................................... 65
INFORMATION ABOUT PORTFOLIO HOLDINGS ...................................... 65
INVESTMENT ADVISER ........................................................ 66
INVESTMENT SUB-ADVISER .................................................... 68
PORTFOLIO MANAGERS ........................................................ 68
RELATED PERFORMANCE DATA OF THE ADVISER ................................... 72
COMPARABLE FUND PERFORMANCE ............................................... 78
PURCHASING, SELLING AND EXCHANGING FUND SHARES ............................ 81
SHAREHOLDER SERVICING ARRANGEMENTS ........................................ 87
PAYMENTS TO FINANCIAL INTERMEDIARIES ...................................... 88
OTHER POLICIES ............................................................ 88
DIVIDENDS AND DISTRIBUTIONS ............................................... 91
TAXES ..................................................................... 91
FINANCIAL HIGHLIGHTS ...................................................... 93
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUNDS ..................... Back Cover
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Institutional Class Shares of the Westwood SMidCap Fund are currently not available to new investors. Existing shareholders of the Fund may continue to make additional investments and reinvest dividends and capital gains distributions in the Fund. Institutional Class Shares of the Westwood Emerging Markets Plus Fund are currently not available for purchase.
WESTWOOD LARGECAP VALUE FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood LargeCap Value Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Other Expenses 0.17% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.92% -------------------------------------------------------------------------------- Plus Management Fees Recovered 0.04% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses Plus 0.96% Management Fees Recovered (1) -------------------------------------------------------------------------------- |
(1) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses for Institutional Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$98 $306 $531 $1,178
--------------------------------------------------------------------------------
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 40% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in common stocks and other equity securities of large capitalization companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers large capitalization companies to be companies that have market capitalizations of greater than $5 billion at the time of initial purchase. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in equity securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). In the event that the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investments in such securities would normally represent less than 25% of the Fund's assets.
The Fund invests in approximately 40-60 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target or a change to a company's fundamentals that negatively impacts the original investment thesis. The Adviser will not necessarily sell a security that has depreciated below the stated market capitalization defined above.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
INVESTMENT STYLE RISK -- The Fund pursues a "value style" of investing. Value investing focuses on companies with stocks that appear undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or its prospects for exceeding earnings expectations or market conditions is inaccurate, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
rising interest rates or competition overbuilding; zoning changes; and losses
from casualty or condemnation. REITs typically incur fees that are separate
from those of the Fund. Accordingly, the Fund's investments in REITs will
result in the layering of expenses such that shareholders will indirectly bear
a proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. The Fund's investment in royalty trusts may result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
MLP RISK -- MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the U.S. Securities and Exchange Commission (the "SEC") and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries or other natural resources, but they also may finance other projects. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation. For example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in Institutional Shares of the Fund by showing changes in the Fund's Institutional Shares' performance from year to year and by showing how the Fund's Institutional Shares' average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.westwoodfunds.com or by calling 1-877-FUND-WHG (1-877-386-3944).
2007 12.52%
2008 (31.81)%
2009 13.84%
2010 12.11%
2011 (0.91)%
2012 16.10%
BEST QUARTER WORST QUARTER
13.13% (19.34)%
(12/31/2011) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
SINCE
WESTWOOD LARGECAP VALUE FUND -- INCEPTION
INSTITUTIONAL CLASS 1 YEAR 5 YEARS (06/28/06)
------------------------------------------------------------------------------------------
FUND RETURNS BEFORE TAXES 16.10% 0.03% 3.46%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 14.46% (0.39)% 3.02%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND 12.61% 0.00% 2.92%
SALE OF FUND SHARES
RUSSELL 1000 VALUE INDEX (REFLECTS NO 17.51% 0.59% 2.57%
DEDUCTION FOR FEES, EXPENSES, OR TAXES)
|
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. Jay K. Singhania, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since April 2008.
Mr. Mark R. Freeman, CFA, Executive Vice President and Chief Investment Officer, has managed the Fund since its inception.
Mr. Scott D. Lawson, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
Ms. Lisa Dong, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since April 2008.
Mr. Todd L. Williams, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since April 2008.
Mr. Matthew Lockridge, Vice President and Portfolio Manager, has managed the Fund since December 2012.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD DIVIDEND GROWTH FUND
FUND INVESTMENT OBJECTIVE
The primary investment objective of the Westwood Dividend Growth Fund (the "Fund") is to seek to provide a growing stream of income over time. A secondary objective of the Fund is to seek to provide long-term capital appreciation and current income.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Other Expenses 0.21% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.96% -------------------------------------------------------------------------------- Plus Management Fees Recovered 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 0.97% Reductions and/or Reimbursements(1) -------------------------------------------------------------------------------- |
(1) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's Institutional Shares' average daily net assets. This contractual arrangement shall continue in effect until February 28, 2016 and shall thereafter continue in effect until its termination by shareholders of the Fund. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$99 $309 $536 $1,190
--------------------------------------------------------------------------------
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 95% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to invest primarily in the stocks of companies of any size, from larger, well-established companies, which are preferred by the Adviser, to smaller companies. Under normal circumstances, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in dividend paying equity securities. For purposes of this policy, dividend paying equity securities include common stock, preferred stock, royalty trusts and trust preferred securities. The Fund may also invest in REITs. The Fund will typically invest up to 5% of its net assets in REITs, but can invest a higher percentage in REITs if REIT valuations and fundamental prospects are compelling. The Fund will not invest more than 20% of its net assets in REITs. The Fund may invest up to 25% of its net assets in the securities of foreign issuers that are publicly traded in the United States or on foreign exchanges, including American Depositary Receipts ("ADRs").
The Adviser pursues the Fund's objective by investing primarily in the stocks of companies that exhibit the potential for significant long-term appreciation and dividend growth. In selecting investments, the portfolio managers seek to identify dividend-paying issuers with strong profitability, solid balance sheets and capital allocation policies that support sustained or increasing dividends. The Adviser generally makes use of fundamental analytical techniques that combine quantitative analysis screens with fundamental analysis by the Adviser's equity investment team to determine which particular stocks to purchase and sell. The Adviser will consider the sale of securities from the Fund's portfolio when the reasons for the original purchase no longer apply.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
DIVIDEND PAYING STOCKS RISK -- The Fund's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs which are traded on U.S. exchanges and represent an ownership interest in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. Royalty trust operating expenses are not reflected in the fee table and example in the Prospectus and the Fund's investment in royalty trusts may result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
TRUST PREFERRED SECURITIES RISK -- Trust preferred securities are preferred stocks issued by a special purpose trust subsidiary backed by subordinated debt of the corporate parent. These securities typically
bear a market rate coupon comparable to interest rates available on debt of a similarly rated company. The securities are generally senior in claim to standard preferred stock but junior to other bondholders. Trust preferred securities are subject to unique risks, which include the fact that dividend payments will only be paid if interest payments on the underlying obligations are made, which interest payments are dependent on the financial condition of the parent corporation and may be deferred for up to 20 consecutive quarters. There is also the risk that the underlying obligations, and thus the trust preferred securities, may be prepaid after a stated call date or as a result of certain tax or regulatory events, resulting in a lower yield to maturity.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in Institutional Shares of the Fund by showing changes in the Fund's Institutional Shares' performance from year to year and by showing how the Fund's Institutional Shares' average annual returns for 1, 5 and 10 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.westwoodfunds.com or by calling 1-877-FUND-WHG (1-877-386-3944). The Fund acquired the assets and assumed the historical performance of another fund (the "Predecessor Fund") on February 5, 2011. The performance shown in the bar chart and performance table for periods prior to that date represents the performance of the Predecessor Fund.
2003 32.26%
2004 11.12%
2005 8.04%
2006 7.13%
2007 1.38%
2008 (31.86)%
2009 36.76%
2010 9.03%
2011 3.49%
2012 10.43%
BEST QUARTER WORST QUARTER
23.00% (21.36)%
(06/30/2003) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
WESTWOOD DIVIDEND GROWTH SINCE INCEPTION FUND -- INSTITUTIONAL CLASS 1 YEAR 5 YEARS 10 YEARS (08/06/01) ----------------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 10.43% 3.03% 7.19% 3.96% FUND RETURNS AFTER TAXES ON 8.87% 2.28% 6.44% 3.32% DISTRIBUTIONS FUND RETURNS AFTER TAXES ON 8.84% 2.50% 6.21% 3.33% DISTRIBUTIONS AND SALE OF FUND SHARES S&P 500 INDEX (REFLECTS NO DEDUCTION 16.00% 1.66% 7.10% 3.46% FOR FEES, EXPENSES, OR TAXES) |
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. Christopher J. MacDonald, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since its inception in 2011.
Mr. Matthew Lockridge, Vice President and Portfolio Manager, has managed the Fund since its inception in 2011.
Mr. Michael Wall, Associate Vice President and Portfolio Manager, has managed the Fund since its inception in 2011. Mr. Wall also assisted with the management of the Predecessor Fund portfolio since 2004.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD SMIDCAP PLUS FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood SMidCap Plus Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Other Expenses 0.61% -------------------------------------------------------------------------------- Shareholder Service Fees 0.10% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses(1) 1.47% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.46)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 1.01% Reductions and/or Expense Reimbursements(1,2) -------------------------------------------------------------------------------- |
(1) The Total Annual Fund Operating Expenses in this fee table, both before and after fee reductions and/or expense reimbursements, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including capped expenses for the period described in the fee table) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$103 $321 $660 $1,619
--------------------------------------------------------------------------------
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 34% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small- and mid-cap companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers small- and mid-cap companies to be those companies with market capitalizations between $2 billion and $15 billion. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). In the event the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investment in such companies would normally represent less than 15% of the Fund's assets.
The Fund invests in approximately 45-65 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund. The Adviser will not necessarily sell a security that has appreciated or depreciated outside the Fund's target capitalization range.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
INVESTMENT STYLE RISK -- The Fund pursues a "value style" of investing. Value investing focuses on companies with stocks that appear undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or its prospects for exceeding earnings expectations or market conditions is inaccurate, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
REIT RISK -- REITs are pooled investment vehicles that own, and usually operate, income-producing real estate. REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest the majority of their assets directly in real property, derive their income primarily from rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs, which invest the majority of their assets in real estate mortgages, derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both Equity REITs and Mortgage REITs. REITs are susceptible to the risks associated with direct ownership of real estate or mortgages, such as the following: declines in property values; increases in property taxes, operating expenses, rising interest rates or competition overbuilding; zoning changes; prepayment of mortgages during periods of declining interest rates; inability of mortgagors/tenants to make loan/rent payments; and losses from casualty or condemnation. REITs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in REITs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the REITs' operating expenses, in addition to paying Fund expenses. REIT operating expenses are not reflected in the fee table and example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. The Fund's investment in royalty trusts may result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
MLP RISK -- MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the U.S. Securities and Exchange Commission (the "SEC") and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries or other natural resources, but they also may finance other projects. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example,
state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation. For example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership interest in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based, and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in Institutional Shares of the Fund by showing how the Fund's Institutional Shares' average annual returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.westwoodfunds.com or by calling 1-877-FUND-WHG (1-877-386-3944).
2012 15.14%
BEST QUARTER WORST QUARTER
11.31% (6.14)%
(03/31/2012) (06/30/2012)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
WESTWOOD SMIDCAP PLUS FUND -- SINCE INCEPTION INSTITUTIONAL CLASS 1 YEAR (03/28/11) -------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 15.14% 2.00% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 15.04% 1.88% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND 9.98% 1.68% SALE OF FUND SHARES RUSSELL 2500 INDEX (REFLECTS NO DEDUCTION FOR FEES, 17.88% 3.23% EXPENSES, OR TAXES) |
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. Ragen R. Stienke, CFA, Senior Vice President and Senior Portfolio Manager, has managed the Fund since its inception.
Mr. Graham Wong, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
Mr. Grant L. Taber, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
Mr. Thomas C. Lieu, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD SMIDCAP FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood SMidCap Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Other Expenses 0.12% -------------------------------------------------------------------------------- Shareholder Service Fees 0.09% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses(1,2) 0.96% -------------------------------------------------------------------------------- |
(1) The Total Annual Fund Operating Expenses in this fee table do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses of less than 0.01%.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.25% of the Fund's average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$98 $306 $531 $1,178
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 37% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small- and mid-cap companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers small- and mid-cap companies to be those companies with market capitalizations between $500 million and $10 billion. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). In the event the Fund invests in foreign securities or ADRs, the Adviser expects that the Fund's investment in such securities would normally represent less than 15% of the Fund's assets.
The Fund invests in approximately 50-65 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund. The Adviser will not necessarily sell a security that has appreciated or depreciated outside the Fund's target capitalization range.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
INVESTMENT STYLE RISK -- The Fund pursues a "value style" of investing. Value investing focuses on companies with stocks that appear undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or its prospects for exceeding earnings expectations or market conditions is inaccurate, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
rising interest rates or competition overbuilding; zoning changes; and losses
from casualty or condemnation. REITs typically incur fees that are separate
from those of the Fund. Accordingly, the Fund's investments in REITs will
result in the layering of expenses such that shareholders will indirectly bear
a proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. The Fund's investment in royalty trusts may result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
MLP RISK -- MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the U.S. Securities and Exchange Commission (the "SEC") and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries or other natural resources, but they also may finance other projects. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation. For example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership interest in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that
do not otherwise affect the value of the security in the issuer's home country.
Differences in tax and accounting standards and difficulties obtaining
information about foreign companies can negatively affect investment decisions.
The Fund's investments in foreign securities are also subject to the risk that
the securities may be difficult to value and/or valued incorrectly. While ADRs
provide an alternative to directly purchasing the underlying foreign securities
in their respective national markets and currencies, investments in ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in Institutional Shares of the Fund by showing changes in the Fund's Institutional Shares' performance from year to year and by showing how the Fund's Institutional Shares' average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.westwoodfunds.com or by calling 1-877-FUND-WHG (1-877-386-3944).
2006 20.60%
2007 10.47%
2008 (27.43)%
2009 34.27%
2010 26.38%
2011 (2.29)%
2012 12.88%
BEST QUARTER WORST QUARTER
16.84% (22.22)%
(09/30/2009) (09/30/2011)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
SINCE
WESTWOOD SMIDCAP FUND -- INSTITUTIONAL INCEPTION
CLASS 1 YEAR 5 YEARS (12/19/05)
---------------------------------------------------------------------------------------
FUND RETURNS BEFORE TAXES 12.88% 6.31% 8.75%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 12.62% 5.57% 8.01%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND 8.71% 5.18% 7.37%
SALE OF FUNDSHARES
RUSSELL 2500 INDEX (REFLECTS NO DEDUCTION FOR 17.88% 4.34% 5.52%
FEES, EXPENSES, OR TAXES)
|
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. Ragen R. Stienke, CFA, Senior Vice President and Senior Portfolio Manager, has managed the Fund since its inception.
Mr. Graham Wong, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
Mr. Grant L. Taber, CFA, Vice President and Portfolio Manager, has managed the Fund since April 2008.
Mr. Thomas C. Lieu, CFA, Vice President and Portfolio Manager, has managed the Fund since December 2010.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD SMALLCAP VALUE FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood SmallCap Value Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.85% -------------------------------------------------------------------------------- Other Expenses 0.31% -------------------------------------------------------------------------------- Shareholder Service Fees 0.17% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.33% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.23)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 1.10% Reductions and/or Expense Reimbursements(1) -------------------------------------------------------------------------------- |
(1) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.10% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$112 $349 $657 $1,532
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 68% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small-cap companies. The Fund considers small-cap companies to be those companies with market capitalizations between $100 million and $2 billion at the time of initial purchase. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in securities of domestic companies, but may also invest in equity securities of foreign companies and American Depository Receipts ("ADRs"). In the event the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investment in such securities would normally represent less than 25% of the Fund's assets.
The Fund invests in approximately 50-70 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund. The Adviser will not necessarily sell a security that has appreciated or depreciated outside the Fund's target capitalization range.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
SMALL-CAPITALIZATION COMPANY RISK -- The small-capitalization companies in which the Fund will invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
INVESTMENT STYLE RISK -- The Fund pursues a "value style" of investing. Value investing focuses on companies with stocks that appear undervalued in light of factors such as the company's earnings, book value, revenues or cash flow. If the Adviser's assessment of a company's value or its prospects for exceeding earnings expectations or market conditions is inaccurate, the Fund could suffer losses or produce poor performance relative to other funds. In addition, "value stocks" can continue to be undervalued by the market for long periods of time.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
rising interest rates or competition overbuilding; zoning changes; and losses
from casualty or condemnation. REITs typically incur fees that are separate
from those of the Fund. Accordingly, the Fund's investments in REITs will
result in the layering of expenses such that shareholders will indirectly bear
a proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. The Fund's investment in royalty trusts may result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
MLP RISK -- MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the U.S. Securities and Exchange Commission (the "SEC") and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries or other natural resources, but they also may finance other projects. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation. For example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership interest in a foreign security, poses
additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in Institutional Shares of the Fund by showing changes in the Fund's Institutional Shares' performance from year to year and by showing how the Fund's Institutional Shares' average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.westwoodfunds.com or by calling 1-877-FUND-WHG (1-877-386-3944).
2008 (32.11)%
2009 20.42%
2010 23.23%
2011 (1.40)%
2012 18.13%
BEST QUARTER WORST QUARTER
19.36% (26.09)%
(12/31/2011) (12/31/2008)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
SINCE
WESTWOOD SMALLCAP VALUE FUND -- INCEPTION
INSTITUTIONAL CLASS 1 YEAR 5 YEARS (04/02/07)
--------------------------------------------------------------------------------------
FUND RETURNS BEFORE TAXES 18.13% 3.25% 2.14%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 17.17% 2.92% 1.83%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND 12.70% 2.73% 1.77%
SALE OF FUND SHARES
RUSSELL 2000 VALUE INDEX (REFLECTS NO DEDUCTION 18.05% 3.55% 0.99%
FOR FEES, EXPENSES, OR TAXES)
|
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. William Costello, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since December 2010.
Ms. Lisa Dong, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since its inception.
Mr. Graham Wong, CFA, Vice President and Portfolio Manager, has managed the Fund since December 2010.
Mr. Matthew Lockridge, Vice President and Portfolio Manager, has managed the Fund since December 2010.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD INCOME OPPORTUNITY FUND
FUND INVESTMENT OBJECTIVES
The primary investment objective of the Westwood Income Opportunity Fund (the "Fund") is to provide current income. A secondary objective of the Fund is to provide the opportunity for long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Other Expenses 0.12% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses(1) 0.88% -------------------------------------------------------------------------------- Plus Management Fees Recovered 0.03% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses Plus 0.91% Management Fees Recovered(1,2) -------------------------------------------------------------------------------- |
(1) The Total Annual Fund Operating Expenses in this fee table, both before and after management fees recovered, do not correlate to the expense ratio in the Fund's Financial Highlights because the Financial Highlights include only the direct operating expenses incurred by the Fund, and exclude Acquired Fund Fees and Expenses.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 0.90% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$93 $290 $504 $1,120
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. During its most recent fiscal year, the Fund's portfolio turnover rate was 24% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund seeks to meet its investment objective by investing generally more than 80% of its assets, plus any borrowings for investment purposes, in dividend-paying and/or interest-bearing securities. By utilizing income-producing securities from diverse asset classes, the Fund also seeks to maintain a lower volatility profile than traditional equity-only products. The Fund aims to invest in securities of companies with strong and improving cash flow sufficient to support a sustainable or rising income stream for investors. In selecting securities for the Fund, the Adviser chooses among a diversified group of income-producing asset classes. Equity securities may include dividend-paying common stocks, preferred stocks, convertible securities and warrants. Fixed income securities may include bonds and other debt securities, and money market instruments. Other types of income-producing securities may include interests in royalty trusts and master limited partnerships ("MLPs"), securities of real estate investment trusts ("REITs"), and shares of exchange-traded funds ("ETFs"). The Fund generally invests in securities of domestic companies, but may also invest in securities of foreign companies and American Depositary Receipts ("ADRs"). In the event the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investments in such securities would normally represent less than 25% of the Fund's assets.
The Fund is permitted to invest in companies of any capitalization range. The Fund's fixed income investments are, in the aggregate, of investment grade (i.e., those rated in one of the three highest rating categories by a rating agency), but may at times include securities rated below investment grade (high yield or "junk" bonds). In addition, the Fund's fixed income securities may include unrated securities, if deemed by the Adviser to be of comparable quality to investment grade.
The Fund seeks to provide a higher level of current income than that offered by traditional fixed income products such as U.S. government bonds and money market securities. The Adviser's investment process incorporates relative value analysis among capital instruments, as well as among asset classes, to determine where downside potential can be limited to achieve the goal of generating an attractive level of current income along with capital appreciation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FIXED INCOME 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. Generally, the Fund's fixed income securities will decrease in value if interest rates rise and vice versa, and the volatility of lower-rated securities is even greater than that of higher-rated securities. Also, longer-term securities are generally more volatile, so the average maturity or duration of these securities affects risk. Credit risk is the possibility that an issuer will fail to make timely payments of interest or principal or go bankrupt. The lower the ratings of such debt securities, the greater their risks. In addition, these risks are often magnified for securities rated below investment grade, often referred to as "junk bonds," and adverse changes in economic conditions or market perception are likely to cause issuers of these securities to be unable to meet their obligations to repay principal and interest to investors.
HIGH YIELD BOND RISK --High yield, or "junk," bonds are highly speculative securities that are usually issued by smaller, less creditworthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds are considered to carry a greater degree of risk and are considered to be less likely to make payments of interest and principal. In particular, lower-quality high yield bonds (rated CCC, CC, C, or unrated securities judged to be of comparable quality) are subject to a greater degree of credit risk than higher-quality high yield bonds and may be near default. High yield bonds rated D are in default. Market developments and the financial and business conditions of the corporation issuing these securities generally influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
MICRO-CAPITALIZATION COMPANY RISK -- Micro-capitalization companies may be newly formed or in the early stages of development with limited product lines, markets or financial resources. Therefore, micro-capitalization companies may be less financially secure than large-, mid- and small-capitalization companies and may be more vulnerable to key personnel losses due to reliance on a smaller number of management personnel. In addition, there may be less public information available about these companies. Micro-cap stock prices may be more volatile than large-, mid- and small-capitalization companies and such stocks may be more thinly traded and thus difficult for the Fund to buy and sell in the market.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
rising interest rates or competition overbuilding; zoning changes; and losses
from casualty or condemnation. REITs typically incur fees that are separate
from those of the Fund. Accordingly, the Fund's investments in REITs will
result in the layering of expenses such that shareholders will indirectly bear
a proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this Prospectus.
ROYALTY TRUST RISK -- The Fund may invest in royalty trusts. A royalty trust generally acquires an interest in natural resource companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields. The Fund's investment in royalty trusts may result in the layering of expenses, such that shareholders will indirectly bear a proportionate share of the royalty trusts' operating expenses, in addition to paying Fund expenses.
MLP RISK -- MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the U.S. Securities and Exchange Commission (the "SEC") and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries or other natural resources, but they also may finance other projects. To the extent that an MLP's interests are all in a particular industry, the MLP will be negatively impacted by economic events adversely impacting that industry. The risks of investing in a MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a MLP than investors in a corporation. For example, investors in MLPs may have limited voting rights or be liable under certain circumstances for amounts greater than the amount of their investment. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs, which are traded on U.S. exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in Institutional Shares of the Fund by showing changes in the Fund's Institutional Shares' performance from year to year and by showing how the Fund's Institutional Shares' average annual returns for 1 and 5 years and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.westwoodfunds.com or by calling 1-877-FUND-WHG (1-877-386-3944).
2006 12.60%
2007 0.43%
2008 (4.58)%
2009 12.18%
2010 13.77%
2011 7.10%
2012 7.95%
BEST QUARTER WORST QUARTER
8.18% (5.49)%
(12/31/2011) (09/30/2011)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
SINCE
WESTWOOD INCOME OPPORTUNITY FUND -- INCEPTION
INSTITUTIONAL CLASS 1 YEAR 5 YEARS (12/19/05)
-----------------------------------------------------------------------------------------------------
FUND RETURNS BEFORE TAXES 7.95% 7.08% 6.74%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 7.53% 6.32% 5.77%
FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE 5.47% 5.73% 5.36%
OF FUND SHARES
CITIGROUP 10-YEAR TREASURY INDEX (REFLECTS NO DEDUCTION FOR 4.23% 7.39% 6.85%
FEES, EXPENSES OR TAXES)
CITIGROUP 3-MONTH TREASURY BILL INDEX (REFLECTS NO DEDUCTION 0.07% 0.45% 1.66%
FOR FEES, EXPENSES OR TAXES)
S&P 500 INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES OR TAXES) 16.00% 1.66% 4.12%
FTSE NAREIT U.S. EQUITY INDEX (REFLECTS NO DEDUCTION FOR FEES, 19.70% 5.74% 6.01%
EXPENSES, OR TAXES)
25/25/25/25 BLENDED BENCHMARK INDEX (REFLECTS NO DEDUCTION FOR 9.97% 5.02% 5.64%
FEES, EXPENSES OR TAXES)
|
* Index returns are shown from December 31, 2005.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Mr. Mark R. Freeman, CFA, Chief Investment Officer and Senior Portfolio Manager, has managed the Fund since its inception.
Mr. Todd L. Williams, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase shares of the Fund for the first time, you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD SHORT DURATION HIGH YIELD FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Short Duration High Yield Fund (the "Fund") is to generate a high level of current income while experiencing lower volatility than the broader high yield market.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.75% -------------------------------------------------------------------------------- Other Expenses 0.69% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.44% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.54)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 0.90% Reductions and/or Expense Reimbursements(1) -------------------------------------------------------------------------------- |
(1) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 0.90% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$92 $286 $619 $1,561
--------------------------------------------------------------------------------
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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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance. For the period from December 28, 2011 (the date that the Fund commenced operations) to October 31, 2012, the Fund's portfolio turnover rate was 52% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in high yield securities. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. High yield securities, also referred to as "junk" bonds, are securities rated BB+, Ba1 or below by independent rating agencies at the time of purchase by the Fund, or securities that are unrated but judged to be of comparable quality by SKY Harbor Capital Management, LLC (the "Sub-Adviser"). The Fund may invest in securities of any rating, including securities that are in default.
In seeking to achieve the Fund's objective, the Sub-Adviser generally invests in a portfolio of high yield securities of U.S. companies, as described in further detail below. While the Sub-Adviser may purchase securities of any maturity, under normal market conditions, the Sub-Adviser generally expects to invest in high yield securities, including privately placed securities, that have an expected redemption through maturity, call or other corporate action within three years or less, although this may vary if, in the Sub-Adviser's opinion, it is warranted by current market conditions. While there is no maximum duration on individual securities, the average maximum "duration to worst" of the Fund is expected to be under three years. "Duration to worst" is the duration of a bond computed using the bond's nearest call date or maturity, whichever comes first. The Sub-Adviser believes such a portfolio serves to reduce volatility and preserve capital when compared to traditional high yield portfolios. In the Sub-Adviser's view, traditional high yield portfolios generally possess durations to worst of longer than three years. Portfolios with longer durations to worst are generally more sensitive to interest rate changes and other market risks. Accordingly, the Sub-Adviser seeks to achieve less volatility and better preservation of capital for the Fund relative to traditional high yield portfolios by maintaining a duration to worst for the Fund that is significantly shorter than that of traditional high yield portfolios. The Fund also invests in high yield securities of non-U.S. companies, and the Sub-Adviser expects that the Fund's investments in non-U.S. companies will normally represent less than 25% of the Fund's assets, and may include investments in emerging markets.
In selecting securities for the Fund's portfolio, the Sub-Adviser seeks issuers that exhibit attractive characteristics including, but not limited to: stable businesses with projectable cash flows; positive year-over-year cash flow comparisons supported by stable industry conditions; generation of cash in excess of corporate and financial obligations; and management intentions for use of cash flows favorable to bond holders. In making investment decisions, the Sub-Adviser utilizes an investment process that is based on fundamental analysis of issuers, markets, and general macro-economic conditions and supported by quantitative valuation and risk monitoring tools. The goal of the investment process is to identify high yield securities with attractively priced income streams and to achieve superior long term returns from investments. The Sub-Adviser employs an established selling discipline and may generally sell a security for one of three non-exclusive reasons: (i) there is a negative change in the Sub-Adviser's fundamental assessment of a security; (ii) the security becomes overvalued relative to other opportunities; or (iii) the Sub-Adviser is shifting the portfolio from one sector or risk segment to another.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
HIGH YIELD BOND RISK -- High yield, or "junk," bonds are highly speculative securities that are usually issued by smaller, less creditworthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds are considered to carry a greater degree of risk and are considered to be less likely to make payments of interest and principal. In particular, lower-quality high yield bonds (rated CCC, CC, C, or unrated securities judged to be of comparable quality) are subject to a greater degree of credit risk than higher-quality high yield bonds and may be near default. High yield bonds rated D are in default. Market developments and the financial and business conditions of the corporation issuing these securities generally influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities.
LIQUIDITY RISK -- Insufficient liquidity in the non-investment grade bond market may make it more difficult to dispose of non-investment grade bonds and may cause the Fund to experience sudden and substantial price declines.
VALUATION RISK -- A lack of reliable, objective data or market quotations may make it more difficult to value non-investment grade bonds accurately.
CREDIT RISK -- The credit rating or financial condition of an issuer may affect the value of a fixed income debt security. Generally, the lower the credit quality of a security, the greater the perceived risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults or becomes unable to honor its financial obligations, the security may lose some or all of its value. The issuer of an investment-grade security is considered by the rating agency or the Sub-Adviser to be more likely to pay interest and repay principal than an issuer of a lower quality bond. Adverse economic conditions or changing circumstances may weaken the capacity of the issuer to pay interest and repay principal.
INTEREST RATE RISK -- As with most funds that invest in fixed income securities, changes in interest rates are a factor that could affect the value of your investment. Rising interest rates tend to cause the prices of fixed income securities (especially those with longer maturities) and the Fund's share price to fall.
The concept of duration is useful in assessing the sensitivity of a fixed income fund to interest rate movements, which are usually the main source of risk for most fixed-income funds. Duration measures price volatility by estimating the change in price of a debt security for a 1% change in its yield. For example, a duration of five years means the price of a debt security will change about 5% for every 1% change in its yield. Thus, the longer the duration, the more volatile the security.
Fixed income debt securities have a stated maturity date when the issuer must repay the principal amount of the bond. Some fixed income debt securities, known as callable bonds, may repay the principal earlier than the stated maturity date. Fixed income debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate.
PRIVATE PLACEMENTS RISK -- Investment in privately placed securities may be less liquid than in publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Fund or less than what may be
considered the fair value of such securities. Further, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that might be applicable if their securities were publicly traded.
FOREIGN SECURITIES RISK -- Investing in securities of foreign issuers poses additional risks since political and economic events unique to a country or region will affect foreign securities markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in securities of foreign issuers are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. In an attempt to reduce currency risk associated with non-U.S. denominated securities, the Fund intends to hedge its foreign currency exposure by entering into forward currency contracts. A forward currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price, thereby fixing the exchange rate for a specified time in the future. However, the Sub-Adviser has limited ability to direct or control foreign exchange execution rates, and there is no guarantee that such hedging strategies will be successful in reducing the currency risk associated with investing in foreign securities. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly.
The Fund may invest in securities of European issuers. The European financial markets have recently experienced volatility and adverse trends due to concerns about rising government debt levels of certain European countries, each of which may require external assistance to meet its obligations and run the risk of default on its debt, possible bail-out by the rest of the European Union ("EU") or debt restructuring. Assistance given to an EU member state may be dependent on a country's implementation of reforms in order to curb the risk of default on its debt, and a failure to implement these reforms or increase revenues could result in a deep economic downturn. These events may adversely affect the economic and market environment in Europe, which in turn may adversely affect the price or liquidity of high yield securities issued by European issuers and therefore may adversely affect the Fund and its investments in such securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund by showing how the Fund's average annual returns for 1 year and since inception compare with those of a broad measure of market performance. Of course, the Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future. Updated performance information is available on the Fund's website at www.westwoodfunds.com or by calling 1-877-FUND-WHG (1-877-386-3944).
2012 6.08%
BEST QUARTER WORST QUARTER
2.37% 0.87%
(09/30/2012) (03/31/2012)
|
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2012
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 actual after-tax returns will depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
WESTWOOD SHORT DURATION HIGH YIELD FUND -- SINCE INCEPTION INSTITUTIONAL CLASS 1 YEAR (12/28/11)(*) ------------------------------------------------------------------------------------- FUND RETURNS BEFORE TAXES 6.08% 6.03% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS 4.31% 4.28% FUND RETURNS AFTER TAXES ON DISTRIBUTIONS AND SALE 3.92% 4.11% OF FUND SHARES BOFA MERRILL LYNCH U.S. HIGH YIELD MASTER II INDEX 15.58% 15.58% (REFLECTS NO DEDUCTION FOR FEES, EXPENSES, OR TAXES) |
* Index return is shown from December 31, 2011.
INVESTMENT ADVISER
Westwood Management Corp. ("Westwood") serves as investment adviser to the Fund. SKY Harbor Capital Management, LLC serves as investment sub-adviser to the Fund.
PORTFOLIO MANAGER
Anne Yobage, CFA, Lead Portfolio Manager and co-founder of SKY Harbor Capital Management, LLC, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Institutional Shares of the Fund for the first time, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD GLOBAL EQUITY FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Global Equity Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.80% -------------------------------------------------------------------------------- Other Expenses(1) 1.05% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.86% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.85)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 1.01% Reductions and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$103 $320
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies organized or located throughout the world, including the United States. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $1 billion. The Fund invests at least 40% of its net assets, plus any borrowings for investment purposes, in companies organized or located or doing a substantial amount of business outside the United States in both developed and emerging market countries, and will generally have exposure to the United States, the United Kingdom and Japan.
The Fund invests in approximately 65-85 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund commenced operations on December 26, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGERS
Thomas Pinto Basto, CFA, Vice President and Portfolio Manager, and Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, have managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Institutional Shares of the Fund for the first time, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD GLOBAL DIVIDEND FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Global Dividend Fund (the "Fund") is to seek long-term capital appreciation and dividend income.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.80% -------------------------------------------------------------------------------- Other Expenses(1) 1.05% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 1.86% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.85)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 1.01% Reductions and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$103 $320
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying equity securities of companies organized or located throughout the world, including the United States. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $500 million. The Fund invests at least 40% of its net assets, plus any borrowings for investment purposes, in companies organized or located or doing a substantial amount of business outside the United States in both developed and emerging market countries, and will generally have exposure to the United States, the United Kingdom and Japan.
The Fund invests in approximately 65-90 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market, offer an attractive opportunity for price appreciation and dividend growth, and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation, consistency of earnings growth and the ability, or prospective ability, to pay dividends. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
DIVIDEND PAYING STOCKS RISK -- The Fund's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such company.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which
the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund commenced operations on December 26, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGER
Thomas Pinto Basto, CFA, Vice President and Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Institutional Shares of the Fund for the first time, you must invest at least $5,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD EMERGING MARKETS FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Emerging Markets Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.95% -------------------------------------------------------------------------------- Other Expenses(1) 1.06% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 2.02% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.81)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 1.21% Reductions and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.20% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$123 $382
--------------------------------------------------------------------------------
|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers a company to be an emerging market company if (i) at least 50% of the company's assets are located in emerging markets; (ii) at least 50% of the company's revenues are generated in emerging markets; or (iii) the company is domiciled in an emerging market. "Emerging markets" include countries in the MSCI Emerging Markets Index, and other countries that the Fund considers to be equivalent to those in that index based on their level of economic development or the size and experience of their securities markets. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $500 million.
The Fund invests in approximately 70-90 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The
prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund commenced operations on December 26, 2012 and therefore does not have performance history for a full calendar year. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGER
Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, has managed the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
To purchase Institutional Shares of the Fund for the first time, you must invest at least $100,000. There is no minimum for subsequent investments.
If you own your shares directly, you may redeem your shares on any day that the New York Stock Exchange is open for business by contacting the Fund directly by mail at Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Fund.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
WESTWOOD EMERGING MARKETS PLUS FUND
FUND INVESTMENT OBJECTIVE
The investment objective of the Westwood Emerging Markets Plus Fund (the "Fund") is to seek long-term capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF YOUR INVESTMENT)
Management Fees 0.95% -------------------------------------------------------------------------------- Other Expenses(1) 1.06% -------------------------------------------------------------------------------- Acquired Fund Fees and Expenses(1) 0.01% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 2.02% -------------------------------------------------------------------------------- Less Fee Reductions and/or Expense Reimbursements (0.81)% -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses After Fee 1.21% Reductions and/or Expense Reimbursements(2) -------------------------------------------------------------------------------- |
(1) Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
(2) The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep Total Annual Fund Operating Expenses After Fee Reductions and/or Expense Reimbursements for Institutional Shares (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.20% of the Fund's Institutional Shares' average daily net assets until February 28, 2016. In addition, if at any point Total Annual Fund Operating Expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the Total Annual Fund Operating Expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on February 28, 2016.
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 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 (including one year of capped expenses in each period) remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
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$123 $382
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|
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 rate 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 total annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers a company to be an emerging market company if (i) at least 50% of the company's assets are located in emerging markets; (ii) at least 50% of the company's revenues are generated in emerging markets; or (iii) the company is domiciled in an emerging market. "Emerging markets" include countries in the MSCI Emerging Markets Index, and other countries that the Fund considers to be equivalent to those in that index based on their level of economic development or the size and experience of their securities markets. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $1.5 billion.
The Fund invests in approximately 50-70 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her investment could lose money. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The principal risk factors affecting shareholders' investments in the Fund are set forth below.
EQUITY RISK -- Since it purchases equity securities, the 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, and the value of the Fund's equity securities may fluctuate drastically from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in the Fund.
FOREIGN COMPANY RISK -- Investing in foreign companies, including direct investments and through ADRs and GDRs, which are traded on exchanges and represent an ownership in a foreign security, poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These risks will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign companies are generally denominated in a 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 occur separately from, and in response to, events that do not otherwise affect the value of the security in the issuer's home country. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions. The Fund's investments in foreign securities are also subject to the risk that the securities may be difficult to value and/or valued incorrectly. While ADRs and GDRs provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs and GDRs continue to be subject to many of the risks associated with investing directly in foreign securities.
EMERGING MARKETS SECURITIES RISK -- Investments in emerging markets securities are considered speculative and subject to heightened risks in addition to the general risks of investing in foreign securities. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed. In addition, the securities markets of emerging market countries may consist of companies with smaller market capitalizations and may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies.
FOREIGN CURRENCY RISK -- As a result of the Fund's investments in securities or other investments denominated in, and/or receiving revenues in, foreign currencies, the Fund will be subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar, in which case, the dollar value of an investment in the Fund would be adversely affected.
SMALL- AND MID-CAPITALIZATION COMPANY RISK -- The small- and mid-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, these small- and mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, small- and mid-cap stocks may be more volatile than those of larger companies. These securities may be traded over-the-counter or listed on an exchange.
ETF RISK -- ETFs are pooled investment vehicles, such as registered investment companies and grantor trusts, whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market. To the extent that the Fund invests in ETFs, the Fund will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based and the value of the Fund's investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those of the Fund. Accordingly, the Fund's investments in ETFs will result in the layering of expenses such that shareholders will indirectly bear a proportionate share of the ETFs' operating expenses, in addition to paying Fund expenses. Because the value of ETF shares depends on the demand in the market, shares may trade at a discount or premium and the Adviser may not be able to liquidate the Fund's holdings at the most optimal time, which could adversely affect the Fund's performance.
REIT RISK -- REITs are pooled investment vehicles that own, and usually
operate, income-producing real estate. REITs are susceptible to the risks
associated with direct ownership of real estate, such as the following:
declines in property values; increases in property taxes, operating expenses,
interest rates or competition; overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from
those of the Fund. Accordingly, the Fund's investments in REITs will result in
the layering of expenses such that shareholders will indirectly bear a
proportionate share of the REITs' operating expenses, in addition to paying
Fund expenses. REIT operating expenses are not reflected in the fee table and
example in this prospectus.
DERIVATIVES RISK -- The Fund's use of participatory notes is subject to market risk, correlation risk, liquidity risk, credit risk and valuation risk. Liquidity risk and credit risk are described below. Market risk is the risk that the market value of an investment may move up and down, sometimes rapidly and unpredictably. Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Valuation risk is the risk that the derivative may be difficult to value and/or valued incorrectly. Each of these risks could cause the Fund to lose more than the principal amount invested in a derivative instrument.
LIQUIDITY RISK -- The risk that certain securities may be difficult or impossible to sell at the time and the price that the Fund would like. The Fund may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund management or performance.
CREDIT RISK -- The risk that the issuer of a security or the counterparty to a contract will default or otherwise become unable to honor a financial obligation.
NEW FUND RISK -- Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy, may not employ a successful investment strategy, or may fail to attract sufficient assets under management to realize economies of scale, any of which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders. Such liquidation could have negative tax consequences for shareholders and will cause shareholders to incur expenses of liquidation.
PERFORMANCE INFORMATION
The Fund has not commenced operations and therefore has no performance history. Once the Fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investing in the Fund by showing the variability of the Fund's return based on net assets and comparing the Fund's performance to a broad measure of market performance.
INVESTMENT ADVISER
Westwood Management Corp.
PORTFOLIO MANAGER
Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, is expected to manage the Fund upon its inception.
PURCHASE AND SALE OF FUND SHARES
Institutional Shares of the Fund are currently not available for purchase.
FOR IMPORTANT INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION, PLEASE TURN TO "SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION" ON PAGE 62 OF THE PROSPECTUS.
SUMMARY INFORMATION ABOUT TAXES AND FINANCIAL INTERMEDIARY COMPENSATION
TAX INFORMATION
Each Fund intends to make distributions that may be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case your distribution will be taxed when withdrawn from the tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Funds through a broker-dealer or other financial intermediary (such as a bank), the Funds and their 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 intermediary and your salesperson to recommend the Funds over another investment. Ask your salesperson or visit your financial intermediary's web site for more information.
MORE INFORMATION ABOUT RISK
Investing in each Fund involves risk and there is no guarantee that each Fund will achieve its goals. The Adviser's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job the Adviser does, you could lose money on your investment in a Fund, just as you could with similar investments.
The value of your investment in a Fund is based on the value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings.
EQUITY RISK (ALL FUNDS) -- Equity securities include public and privately issued equity securities, common and preferred stocks, warrants, rights to subscribe to common stock and convertible securities, interests in MLPs and royalty trusts, shares of REITs, ADRs and GDRs, as well as shares of ETFs that attempt to track the price movement of equity indices. Common stock represents an equity or ownership interest in an issuer. Preferred stock provides a fixed dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also, unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. The value of such securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a mutual fund invests will cause the fund's net asset value to fluctuate. An investment in a portfolio of equity securities may be more suitable for long-term investors who can bear the risk of these share price fluctuations.
WARRANTS RISK (WESTWOOD INCOME OPPORTUNITY FUND, WESTWOOD GLOBAL EQUITY FUND, WESTWOOD GLOBAL DIVIDEND FUND, WESTWOOD EMERGING MARKETS FUND AND WESTWOOD EMERGING MARKETS PLUS FUND) -- Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Warrants may be more speculative than other types of investments. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. A warrant ceases to have value if it is not exercised prior to its expiration date.
FIXED INCOME RISK (WESTWOOD DIVIDEND GROWTH FUND, WESTWOOD INCOME OPPORTUNITY FUND AND WESTWOOD SHORT DURATION HIGH YIELD FUND) -- The market value of fixed income investments change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. During periods of falling interest rates, certain debt obligations with high interest rates may be prepaid (or "called") by the issuer prior to maturity. In addition to these risks, fixed income securities may be subject to credit risk, which is the possibility that an issuer will be unable or unwilling to make timely payments of either principal or interest.
FOREIGN/EMERGING MARKET SECURITY RISK (ALL FUNDS) -- Investments in securities of foreign companies (including direct investments as well as investments through ADRs and GDRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial reporting standards than U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs are generally higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio. These risks may be heightened with respect to emerging market countries since political turmoil and rapid changes in economic conditions are more likely to occur in these countries.
FOREIGN CURRENCY RISK (ALL FUNDS) -- Because non-U.S. securities are usually denominated in currencies other than the dollar, the value of a Fund's portfolio may be influenced by currency exchange rates and exchange control regulations. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by a Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
HIGH YIELD ("JUNK") BOND RISK (WESTWOOD DIVIDEND GROWTH FUND, WESTWOOD INCOME OPPORTUNITY FUND AND WESTWOOD SHORT DURATION HIGH YIELD FUND) -- High yield bonds, also referred to as "junk" bonds, involve greater risks of default or downgrade and are more volatile than investment grade securities. High yield bonds involve greater risk of price declines than investment grade securities due to actual or perceived changes in an issuer's creditworthiness. In addition, issuers of high yield bonds may be more susceptible than other issuers to economic downturns. High yield bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the security. The volatility of high yield bonds is even greater since the prospects for repayment of principal and interest of many of these securities is speculative. Some may even be in default.
DERIVATIVES RISK (WESTWOOD GLOBAL EQUITY FUND, WESTWOOD GLOBAL DIVIDEND FUND, WESTWOOD EMERGING MARKETS FUND AND WESTWOOD EMERGING MARKETS PLUS FUND) -- A Fund's use of participatory notes is subject to derivatives risk. Derivatives are often more volatile than other investments and may magnify a Fund's gains or losses. There are various factors that affect a Fund's ability to achieve its investment objective with derivatives. Successful use of a derivative depends upon the degree to which prices of the underlying assets correlate with price movements in the derivatives the Fund buys or sells. A Fund could be negatively affected if the change in market value of its securities fails to correlate perfectly with the values of the derivatives it purchased or sold.
The lack of a liquid secondary market for a derivative may prevent a Fund from closing its derivative positions and could adversely impact its ability to achieve its investment objective or to realize profits or limit losses.
Additionally, derivative instruments are subject to counterparty risk, meaning that the party that issues the derivative may experience a significant credit event and may be unwilling or unable to make timely settlement payments or otherwise honor its obligations.
MORE INFORMATION ABOUT FUND INVESTMENTS
The investment objective of the Westwood LargeCap Value Fund, Westwood SMidCap Plus Fund, Westwood SMidCap Fund and Westwood SmallCap Value Fund is to seek long-term capital appreciation. The primary investment objective of the Westwood Dividend Growth Fund is to seek to provide a growing stream of income over time. A secondary objective of the Westwood Dividend Growth Fund is to seek to provide long-term capital appreciation and current income. The primary investment objective of the Westwood Income Opportunity Fund is to provide current income. A secondary objective of the Westwood Income Opportunity Fund is to provide the opportunity for long-term capital appreciation. The investment objective of the Westwood Short Duration High Yield Fund is to generate a high level of current income while experiencing lower volatility than the broader high yield market. The investment objective of the Westwood Global Equity Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund is to seek long-term capital appreciation. The investment objective of the Westwood Global Dividend Fund is to seek long-term capital appreciation and dividend income. The investment objectives of the Westwood LargeCap Value Fund, Westwood SMidCap Fund and Westwood SmallCap Value Fund are fundamental and cannot be changed without shareholder approval. The investment objective for the Westwood Dividend Growth Fund, Westwood SMidCap Plus Fund, Westwood Income Opportunity Fund, Westwood Short Duration High Yield Fund, Westwood Global Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund and Westwood Emerging Markets Plus Fund may be changed without shareholder approval, upon 60 days' prior notice to shareholders.
The investments and strategies described in 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 money market instruments and other cash equivalents that would not ordinarily be consistent with its investment objectives. If a Fund invests in this manner, it may not achieve its investment objective. The Funds will only do so if the Adviser believes that the risk of loss outweighs the opportunity for capital appreciation or current income.
This prospectus describes the Funds' principal investment strategies, and the Funds will normally invest in the types of securities and other investments described in this prospectus. In addition to the securities and other investments and strategies described in this prospectus, each Fund also may invest to a lesser extent in other securities, use other strategies and engage in other investment practices that are not part of its principal investment strategies. These investments and strategies, as well as those described in this prospectus, are described in detail in the Funds' Statement of Additional Information ("SAI") (for information on how to obtain a copy of the SAI see the back cover of this prospectus). Of course, there is no guarantee that a Fund will achieve its investment goals.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Funds' policy and procedures with respect to the circumstances under which the Funds disclose their portfolio securities is available in the SAI. Within 10 days of the end of each calendar quarter, each Fund, except for the Westwood Short Duration High Yield Fund, will post its complete portfolio holdings on the internet at www.westwoodfunds.com. The Westwood Short Duration High Yield Fund will post its top 10 holdings within 10 days of the end of each calendar quarter on the internet at www.westwoodfunds.com.
INVESTMENT ADVISER
Westwood Management Corp., a New York corporation formed in 1983, serves as the investment adviser to the Funds. The Adviser's principal place of business is located at 200 Crescent Court, Suite 1200, Dallas, Texas 75201. The Adviser is a wholly owned subsidiary of Westwood Holdings Group, Inc., an institutional asset management company. As of December 31, 2012, the Adviser had approximately $11.9 billion in assets under management.
The Adviser makes investment decisions for the Funds, except for the Westwood Short Duration High Yield Fund, and continuously reviews, supervises and administers each Fund's investment program. In addition, the Adviser oversees the Sub-Adviser to ensure its compliance with the investment policies and guidelines of the Westwood Short Duration High Yield Fund, and monitors the Sub-Adviser's adherence to its investment style. The Adviser pays the Sub-Adviser out of the advisory fee it receives from the Westwood Short Duration High Yield Fund. The Trust's Board of Trustees (the "Board") supervises the Adviser and Sub-Adviser and establishes policies that the Adviser and Sub-Adviser must follow in their management activities.
In rendering investment advisory services to the Westwood Global Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund and Westwood Emerging Markets Plus Fund, the Adviser may use the portfolio management, research and other resources of Westwood International Advisors Inc. ("Westwood International"), an affiliate of the Adviser. Westwood International is not registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. Westwood International has entered into a Memorandum of Understanding ("MOU") with the Adviser pursuant to which Westwood International is considered a "participating affiliate" of the Adviser as that term is used in relief granted by the staff of the SEC allowing U.S. registered investment advisers to use portfolio management or research resources of advisory affiliates subject to the supervision of a registered adviser. Investment professionals from Westwood International may render portfolio management, research and other services to the Funds under the MOU and are subject to supervision by the Adviser.
For its advisory services to the Funds, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.75% of the average daily net assets of the Westwood LargeCap Value Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund, the Westwood SMidCap Fund, the Westwood Income Opportunity and the Westwood Short Duration High Yield Fund; 0.80% of the average daily net assets of the Westwood Global Equity Fund and the Westwood Global Dividend Fund; 0.85% of the average daily net assets of the Westwood SmallCap Value Fund; and 0.95% of the average daily net assets of the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund.
The Adviser has contractually agreed to reduce its fees and reimburse expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) ("excluded expenses") from exceeding the amounts listed in the table below, as a percentage of average daily net assets of each Fund until February 28, 2016:
WESTWOOD LARGECAP VALUE FUND 1.00% WESTWOOD SMIDCAP PLUS FUND 1.00% WESTWOOD SMIDCAP FUND 1.25% WESTWOOD SMALLCAP VALUE FUND 1.10% WESTWOOD INCOME OPPORTUNITY FUND 0.90% WESTWOOD SHORT DURATION HIGH YIELD FUND 0.90% |
WESTWOOD GLOBAL EQUITY FUND 1.00% WESTWOOD GLOBAL DIVIDEND FUND 1.00% WESTWOOD EMERGING MARKETS FUND 1.20% WESTWOOD EMERGING MARKETS PLUS FUND 1.20% |
In addition, the Adviser has contractually agreed to reduce its fees and reimburse expenses in order to keep net operating expenses (not including excluded expenses) from exceeding 1.00% of the Westwood Dividend Growth Fund's average daily net assets. This contractual arrangement shall continue in effect uuntil February 28, 2016 and shall thereafter continue in effect until its termination by shareholders of the Westwood Dividend Growth Fund.
If at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between total annual Fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this Agreement was in place.
For the fiscal year ended October 31, 2012, the Adviser received advisory fees (after fee reductions) as a percentage of average daily net assets of each Fund as follows:
WESTWOOD LARGECAP VALUE FUND 0.79%(1) WESTWOOD DIVIDEND GROWTH FUND 0.77%(2) WESTWOOD SMIDCAP PLUS FUND 0.29% WESTWOOD SMIDCAP FUND 0.75% WESTWOOD SMALLCAP VALUE FUND 0.77% WESTWOOD INCOME OPPORTUNITY FUND 0.78%(3) WESTWOOD SHORT DURATION HIGH YIELD FUND 0.17%(4) WESTWOOD GLOBAL EQUITY FUND N/A(5) WESTWOOD GLOBAL DIVIDEND FUND N/A(5) WESTWOOD EMERGING MARKETS FUND N/A(5) WESTWOOD EMERGING MARKETS PLUS FUND N/A(5) |
(1) Includes 0.04% of previously waived fees recovered.
(2) Includes 0.01% of previously waived fees recovered.
(3) Includes 0.03% of previously waived fees recovered.
(4) Reflects the fees received for the fiscal period December 28, 2011 (commencement of Fund operations) to October 31, 2012.
(5) Not in operation during the fiscal year ended October 31, 2012.
A discussion regarding the basis for the Board's approval of the Westwood LargeCap Value, Westwood Dividend Growth, Westwood SMidCap Plus, Westwood SMidCap, Westwood SmallCap Value, Westwood Income Opportunity and Westwood Short Duration High Yield Funds' investment advisory agreement is available in the Funds' Annual Report dated October 31, 2012, which covers the period from November 1, 2011 to October 31, 2012. A discussion regarding the basis for the Board's approval of the Westwood Global Equity, Westwood Global Dividend, Westwood Emerging Markets and Westwood Emerging Markets Plus Funds' investment advisory agreement will be available in the Funds' Semi-Annual Report dated April 30, 2013, which will cover the period from November 1, 2012 to April 30, 2013.
INVESTMENT SUB-ADVISER
SKY Harbor Capital Management, LLC (the "Sub-Adviser"), a Delaware limited liability company established in 2011 and registered with the SEC under the Advisers Act, serves as the Sub-Adviser to the Westwood Short Duration High Yield Fund and is responsible for the day-to-day management of the Fund's investments. SKY Harbor Capital Management, LLC's principal place of business is located at 20 Horseneck Lane, Greenwich, CT 06830. As of December 31, 2012, SKY Harbor Capital Management, LLC had approximately $2.97 billion in assets under management.
PORTFOLIO MANAGERS
The Westwood LargeCap Value Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund, the Westwood SMidCap Fund, the Westwood SmallCap Value Fund and the Westwood Income Opportunity Fund are each managed by a portfolio management team. The Adviser also manages institutional separate accounts and is the sub-adviser to other mutual funds with similar strategies as these Funds. The investment process for these Funds is the same for similar accounts and is driven by proprietary team-oriented, in-depth, fundamental research. The investment research team is organized by industry coverage and supports all of the accounts managed in each of the Adviser's investment strategies. Weekly research meetings provide a forum where the Adviser's investment professionals discuss current investment ideas within their assigned industries. Generally, the entire portfolio management team, or a sub-set of the team, then debates the merits of recommendations, taking into account the prevailing market environment, the portfolio's current composition, and the relative value of alternative investments. Investment decisions are generally made by majority agreement of the portfolio management team. The Adviser has identified the following team members as those with the most significant responsibility for each Fund's assets. This list does not include all members of the investment team.
Mr. Mark R. Freeman, CFA, has served as Executive Vice President and Chief Investment Officer for the Adviser since February 2012. Prior to this appointment, he served as Executive Vice President and Co-Chief Investment Officer for the Adviser from December 2010 until 2012, and as Senior Vice President and Portfolio Manager from 2006 to 2010. He joined the Adviser in 1999 and served as Vice President and Portfolio Manager from July 2000 to July 2006. Mr. Freeman has served on the portfolio team for the Westwood LargeCap Value Fund and the Westwood Income Opportunity Fund since each Fund's inception. Mr. Freeman participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Freeman has more than 24 years of investment experience.
Mr. Scott D. Lawson, CFA, has served as Vice President and Portfolio Manager since joining the Adviser in October 2003. Mr. Lawson has served on the portfolio team for the Westwood LargeCap Value Fund since the Fund's inception. Prior to joining the Adviser, Mr. Lawson was an Assistant Portfolio Manager at Bank of America from 2000 to 2003. From 1995 to 2000, he was a Research Analyst with Mississippi Valley Advisors, specializing in the Technology and Industrial sectors. Mr. Lawson participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. Lawson has more than 23 years of investment experience.
Mr. Jay K. Singhania, CFA, has served as Senior Vice President and Portfolio Manager for the Adviser since December 2010. Prior to this appointment, he served as Vice President and Portfolio Manager for the Adviser from June 2004 to December 2010. He joined the Adviser in 2001 and served as Assistant Vice President and Research Analyst from July 2002 to June 2004. Mr. Singhania has served on the portfolio team for the Westwood LargeCap Value Fund since April 2008. Prior to joining the Adviser, Mr. Singhania spent two years at Bank of America as an analyst in its Retail Industry Group where he was also involved with due diligence and financial modeling. He participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. Singhania has more than 14 years of investment experience.
Mr. Todd L. Williams, CFA, has served as Senior Vice President and Portfolio Manager for the Adviser since February 2012. Prior to this appointment, he served as Vice President and Portfolio Manager for the Adviser from 2005 until 2012, as Assistant Vice President and Research Analyst from July 2003 to July 2005, and as Research Analyst from November 2002 to July 2003. Before joining the Adviser, Mr. Williams was a portfolio manager and analyst with AMR Investments, Inc. Mr. Williams has served on the portfolio team for the Westwood Income Opportunity Fund since the Fund's inception. He has served on the portfolio team for the Westwood LargeCap Value Fund since April 2008. He participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Williams has more than 17 years of investment experience.
Ms. Lisa Dong, CFA, has served as Senior Vice President and Portfolio Manager for the Adviser since December 2010. Prior to this appointment, she served as Vice President and Portfolio Manager for the Adviser from June 2005 to December 2010. She joined the Adviser in 2000 and served as Assistant Vice President and Research Analyst from October 2001 to July 2005. Ms. Dong has served on the portfolio team for the Westwood LargeCap Value Fund since April 2008, and she has served on the portfolio team for the Westwood SmallCap Value Fund since the Fund's inception. Ms. Dong participates in the investment decision process. She has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Ms. Dong has more than 15 years of investment experience.
Mr. Ragen R. Stienke, CFA, has served as Senior Vice President and Senior Portfolio Manager for the Adviser since February 2012. Prior to this appointment, he served as Senior Vice President and Portfolio Manager for the Adviser from 2010 until 2012, as Vice President and Portfolio Manager for the Adviser from July 2006 to December 2010, and served as Assistant Vice President and Research Analyst from November 2004, when he joined the Adviser, until July 2006. Prior to joining the Adviser, he worked for UBS Investment Bank in the research department, where he spent 3 years as a software strategist and 2 years as a U.S. equity strategist. Mr. Stienke has served on the portfolio team for the Westwood SMidCap Fund and the SMidCap Plus Fund since each Fund's inception. He participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Stienke has more than 16 years of investment experience.
Mr. William E. Costello, CFA, has served as Senior Vice President and Portfolio Manager since joining the Adviser in July 2010. He has served on the portfolio team for the Westwood SmallCap Value Fund since December 2010. Prior to joining the Adviser, Mr. Costello was a Portfolio Manager and Director of Research at the Boston Company, where he worked from 1997 to 2009, and he worked at Delphi Management as a generalist equity analyst from 1992 until 1997. He participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. Costello has more than 25 years of investment experience.
Mr. Graham Wong, CFA, has served as Vice President and Portfolio Manager since December 2010. Prior to this appointment, he served as Assistant Vice President from 2006 to 2010. He joined the Adviser in 2002 as an Assistant Research Analyst. He has served on the portfolio team for the Westwood SMidCap Fund and the SMidCap Plus Fund since each Fund's inception. He has served on the portfolio team for the Westwood SmallCap Value Fund since December 2010. He participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Wong has more than 11 years of investment experience.
Mr. Grant L. Taber, CFA, has served as Vice President and Portfolio Manager since joining the Adviser in March 2008. He has served on the portfolio team for the Westwood SMidCap Fund since April 2008 and the SMidCap Plus Fund since its inception. Prior to joining the Adviser, Mr. Taber worked at Bessemer Trust Company from 2004 until 2008, where he served as Vice President, Large Cap Research Analyst. He worked at Bear Stearns from 2001 until 2004, where he served as Senior Associate. He participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Taber has more than 13 years of investment experience.
Mr. Thomas C. Lieu, CFA, has served as Vice President and Portfolio Manager since joining the Adviser in August 2010. He has served on the portfolio team for the Westwood SMidCap Fund since December 2010 and the SMidCap Plus Fund since its inception. Prior to joining the Adviser, Mr. Lieu worked as a Senior Analyst at Persistency Capital from 2006 to 2010. From 2000 until 2006, he was employed at Banc of America Securities as a Senior Associate, and he worked as an analyst at Lazard Asset Management from 1997 to 2000. He participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Lieu has more than 15 years of investment experience.
Mr. Matthew R. Lockridge, has served as Vice President and Portfolio Manager since joining the Adviser in May 2010. He has served on the portfolio team for the Westwood LargeCap Value Fund since December 2012, the Westwood Dividend Growth Fund since its inception in 2011 and the Westwood SmallCap Value Fund since December 2010. Prior to joining the Adviser, Mr. Lockridge was a Managing Director at Dearborn Partners, L.L.C. from 2004 to 2010, and he was with Deloitte Consulting, L.L.P. from 2001 to 2004, where he worked as a Senior Consultant. He participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Lockridge has more than 11 years of investment experience.
Mr. Christopher J. MacDonald, CFA, has served as Senior Vice President and Portfolio Manager since 2011. Prior to this appointment, he served the Adviser as Vice President, Research Analyst from 1997 to 2011. He joined the Advisor in 1994 as a Research Analyst. Mr. MacDonald has served on the portfolio team for the Westwood Dividend Growth Fund since its inception in 2011. He participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. MacDonald has more than 23 years of investment experience.
Mr. Michael Wall, has served as Associate Vice President, Research Analyst since joining the Advisor in November 2010, when the Advisor acquired McCarthy Group Advisors (MGA). He has served on the portfolio team for the Westwood Dividend Growth Fund since its inception in 2011. Mr. Wall joined MGA in 2004 as Research Analyst, where he assisted with the management of the Predecessor Fund. He participates in the investment decision process. He has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Mr. Wall has more than 16 years of investment experience.
The Westwood Short Duration High Yield Fund is managed by Ms. Anne Yobage, CFA, co-founder of the Sub-Adviser. The Sub-Adviser also manages institutional separate accounts. The investment process for the Westwood Short Duration High Yield Fund is the same for similar accounts and is driven by fundamental analysis of issuers, markets, and general macro-economic conditions and supported by quantitative valuation and risk monitoring tools.
Ms. Anne Yobage, CFA has served as the lead portfolio manager for the Westwood Short Duration High Yield Fund since its inception in 2011. Prior to co-founding SKY Harbor Capital Management, LLC, she was a senior portfolio manager at AXA Investment Managers ("AXA IM") from September 2001 to June 2011. Prior to joining AXA IM, Ms. Yobage co-founded Cardinal Capital Management ("Cardinal") in March 1995, a small cap value and high yield asset management firm located in Greenwich, Connecticut, where she was the co-head of the high yield group. Before founding Cardinal, Ms. Yobage worked at Deltec Asset Management ("Deltec") from 1990 to 1995, where she served as co-head of the high yield group. Ms. Yobage began her career in 1987 as a credit analyst in Kidder Peabody's high yield research group. Ms. Yobage participates in the investment decision process during the portfolio team meetings in which the team decides the bond/weight selection for the model portfolio. She has authority to direct trading activity for the Fund and is also responsible for representing the Fund to investors. Ms. Yobage has more than 24 years of high yield investment experience.
The Westwood Global Equity, Westwood Global Dividend and Westwood Emerging Markets Funds are, and, upon its inception, the Westwood Emerging Markets Plus Fund is expected to be, managed by the following individuals. Ms. Patricia Perez-Coutts, CFA serves as the lead portfolio manager of the Westwood Emerging Markets Fund and is expected to serve as lead portfolio manager of the Westwood Emerging Markets Plus Fund upon its inception. Mr. Thomas Pinto Basto, CFA serves as the lead portfolio manager of the Westwood Global Dividend Fund. Ms. Perez-Coutts and Mr. Pinto Basto serve as co-lead portfolio managers of the Westwood Global Equity Fund. The Adviser also manages institutional separate accounts and is the sub-adviser to other mutual funds with similar strategies as these Funds. The investment process for these Funds is the same for similar accounts and, while the portfolio managers are ultimately responsible for the investment decisions in the strategies, the investment process is driven by proprietary team-oriented, in-depth, fundamental research. To that end, each research analyst on the global research team is able to assume responsibility as a sector portfolio manager and support all of the accounts managed in each of the Adviser's global and emerging markets investment strategies.
Ms. Patricia Perez-Coutts, CFA, Senior Vice President and Portfolio Manager, joined the Adviser in May 2012 and moved to Westwood International in August 2012 after having managed emerging markets portfolios for eleven years for AGF Investments, Inc. Prior to 2001, she served as Vice President and Portfolio Manager for AIM Trimark Investments, Vice President of Research for First Mercantile Corporation and as Economist for Peru's Institute of Foreign Trade. She earned an Honors BA in Economics from Pontifica Universidad del Peru and a BA in Mathematics for Commerce from York University. Ms. Perez-Coutts participates in the investment decision process. She has authority to direct trading for the Funds and is also responsible for representing the Funds to investors. Ms. Perez-Coutts has more than 27 years of investment experience.
Mr. Thomas Pinto Basto, CFA, Vice President and Portfolio Manager, joined Westwood International in May 2012 after having served on the global equity and emerging markets investment teams for over six years for AGF Investments, Inc. Prior to 2005, he served as a corporate strategy consultant with Deloitte Consulting in Canada and Hong Kong and as a Global Analyst for both fixed income and equities with Altamira Management. Mr. Pinto Basto earned a BA in Economics from Carleton University. He is a member of the CFA Institute and the Toronto Society of Financial Analysts. Mr. Pinto Basto participates in the investment decision process. He has authority to direct trading activity for the Funds and is also responsible for representing the Funds to investors. Mr. Pinto Basto has more than 19 years of investment experience.
The Funds' SAI provides additional information about the portfolio managers' compensation, other accounts managed, and ownership of Fund shares.
RELATED PERFORMANCE DATA OF THE ADVISER
The following tables give the related performance of actual, fee-paying separate accounts, each referred to as a "Composite," managed by the Adviser that have investment objectives, policies, strategies and risks substantially similar to those of each Fund. None of the Composites reflect all of the firm's assets under management. Complete lists and descriptions of the firm's composites are available upon request. The data illustrates the past performance of the Adviser in managing substantially similar accounts. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUNDS. Moreover, the performance shown does not represent the future performance of the Funds or of the Adviser.
The manner in which the performance was calculated for the Composites differs from that of registered mutual funds such as the Funds. All returns presented were calculated on a total return basis and include all dividends and interest, accrued income, and realized and unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of investment management fees, brokerage commissions, and execution costs paid by the accounts included in the Composites, without taking into account federal or state income taxes. Custodial fees, if any, were not included in the calculations. Securities are valued as of trade-date. Accounts in each Composite were under management for the entire reporting period. Beginning January 1, 2006, the minimum portfolio size for inclusion in a Composite is $5 million. The exclusion of accounts with portfolio sizes below $5 million had no material effect on the performance of the Composites. Prior to January 1, 2006, there was no minimum asset size for inclusion in the Composites.
The currency used to express performance in each Composite is U.S. dollars. Performance results are presented both net of fees and gross of fees. Because of variation in fee levels, the "net of fees" Composite returns may not be reflective of performance in any one particular account. Therefore, the performance information shown below is not necessarily representative of the performance information that typically would be shown for a registered mutual fund.
The performance of the Composites (net of fees) reflects the Adviser's applicable account fees and expenses; however, each Fund's fees and expenses are generally expected to be higher than those of the accounts included in the respective Composite. If the Funds' fees and expenses had been imposed on the accounts included in the respective Composite, the performance shown below would have been lower. The accounts that are included in each Composite are not subject to the same type of expenses to which the Funds are subject and are not subject to the diversification requirements, specific tax restrictions, and investment limitations imposed by the federal securities and tax laws. Consequently, the performance results for each Composite could have been adversely affected if the accounts in the Composite were subject to the same federal securities and tax laws as the Funds.
The investment results for each Composite presented below are not intended to predict or suggest the future returns of the Funds. The performance data shown below should not be considered a substitute for the Funds' own performance information. Investors should be aware that the use of a methodology different than that used below to calculate performance could result in different performance data.
PERFORMANCE INFORMATION FOR THE ADVISER'S LARGECAP VALUE STRATEGY COMPOSITE(1)
(JANUARY 1, 2003 THROUGH DECEMBER 31, 2012)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE ADVISER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD LARGECAP VALUE FUND.
--------------------------------------------------------------------------------------------------------------
TOTAL TOTAL RUSSELL TOTAL ASSETS PERCENTAGE OF
RETURN (NET RETURN 1000 NUMBER AT END OF FIRM ASSETS
YEAR OF FEES) (GROSS OF VALUE OF DISPERSION(4) PERIOD
FEES) INDEX(2,3) PORTFOLIOS ($ MILLIONS)
--------------------------------------------------------------------------------------------------------------
2012 16.4% 16.8% 17.5% 39 0.3 $4,500.2 34.2%
--------------------------------------------------------------------------------------------------------------
2011 -0.3% 0.0% 0.4% 42 0.3 $4,982.2 41.6%
--------------------------------------------------------------------------------------------------------------
2010 13.3% 13.7% 15.5% 47 0.3 $5,057.0 48.0%
--------------------------------------------------------------------------------------------------------------
2009 14.2% 14.5% 19.7% 46 0.5 $4,375.5 46.9%
--------------------------------------------------------------------------------------------------------------
2008 -32.7% -32.4% -36.9% 36 0.3 $3,142.0 48.1%
--------------------------------------------------------------------------------------------------------------
2007 12.9% 13.3% -0.2% 34 0.3 $2,921.7 41.1%
--------------------------------------------------------------------------------------------------------------
2006 19.5% 19.9% 22.3% 32 0.1 $2,368.8 43.4%
--------------------------------------------------------------------------------------------------------------
2005 15.3% 15.8% 7.1% 32 0.3 $2,656.2 57.7%
--------------------------------------------------------------------------------------------------------------
2004 13.7% 14.2% 16.5% 39 0.3 $2,572.6 67.7%
--------------------------------------------------------------------------------------------------------------
2003 24.3% 24.8% 30.0% 42 0.5 $2,341.3 61.4%
--------------------------------------------------------------------------------------------------------------
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AVERAGE ANNUAL TOTAL RETURNS (SINCE INCEPTION THROUGH 12/31/2012)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
TIME PERIOD NET OF FEES GROSS OF FEES RUSSELL 1000 VALUE
INDEX(2,3)
--------------------------------------------------------------------------------
1 Year 16.4% 16.8% 17.5%
--------------------------------------------------------------------------------
2 Years 7.8% 8.1% 8.6%
--------------------------------------------------------------------------------
3 Years 9.7% 9.9% 10.9%
--------------------------------------------------------------------------------
4 Years 10.7% 11.1% 13.0%
--------------------------------------------------------------------------------
5 Years 0.2% 0.6% 0.6%
--------------------------------------------------------------------------------
6 Years 2.2% 2.6% 0.5%
--------------------------------------------------------------------------------
7 Years 4.5% 4.9% 3.3%
--------------------------------------------------------------------------------
8 Years 5.8% 6.2% 3.8%
--------------------------------------------------------------------------------
9 Years 6.7% 7.1% 5.1%
--------------------------------------------------------------------------------
10 Years 8.3% 8.7% 7.4%
--------------------------------------------------------------------------------
11 Years 5.8% 6.2% 5.1%
--------------------------------------------------------------------------------
12 Years 4.5% 4.9% 4.1%
--------------------------------------------------------------------------------
13 Years 5.2% 5.6% 4.4%
--------------------------------------------------------------------------------
14 Years 5.7% 6.2% 4.6%
--------------------------------------------------------------------------------
15 Years 6.7% 7.1% 5.3%
--------------------------------------------------------------------------------
16 Years 8.1% 8.6% 6.9%
--------------------------------------------------------------------------------
17 Years 9.2% 9.7% 7.7%
--------------------------------------------------------------------------------
18 Years 10.6% 11.2% 9.3%
--------------------------------------------------------------------------------
19 Years 10.2% 10.8% 8.6%
--------------------------------------------------------------------------------
20 Years 10.6% 11.2% 9.1%
--------------------------------------------------------------------------------
21 Years 10.5% 11.1% 9.3%
--------------------------------------------------------------------------------
22 Years 11.0% 11.6% 10.0%
--------------------------------------------------------------------------------
23 Years 10.0% 10.6% 9.1%
--------------------------------------------------------------------------------
24 Years 10.9% 11.5% 9.7%
--------------------------------------------------------------------------------
25 Years 11.0% 11.6% 10.2%
--------------------------------------------------------------------------------
26 Years(5) 10.8% 11.5% 9.8%
--------------------------------------------------------------------------------
|
(1) The calculation of returns is computed on a monthly basis starting January 1, 1987 for the Composite; including accrued dividends and interest income. Actual results may vary depending on level of assets and fee schedule. Performance results net of fees reflect the actual rate of fees paid by the accounts included in the Composite. Westwood's fee schedules are as follows for the LargeCap Value strategy: 0.75% on the first $25 million and negotiable thereafter. All fees are stated in annual rates and are typically billed quarterly. Westwood claims compliance with GIPS(R) and has prepared and presented this report in compliance with the GIPS(R) standards. Westwood has been independently verified for the periods January 1, 1995 through December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS(R) standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS(R) standards. The LargeCap Value Strategy Composite has been examined for the periods January 1, 1995 through December 31, 2011. The verification and performance examination reports are available upon request.
(2) The Russell 1000 Value Index is an unmanaged index which measures the performance of the large- capitalization sector of the U.S. equity markets. It contains those Russell 1000 Index companies with lower-price-to-book ratios and lower forecasted growth values.
(3) The comparative benchmark returns include interest and dividend income but do not include taxes, potential transaction costs or management fees.
(4) Dispersion is measured using the asset-weighted standard deviation of accounts managed for the entire year. Standard deviation is a statistical measure of the degree to which an individual portfolio's return varies from the median return for the composite. Greater deviation means greater risk to the investor.
(5) Inception date of the LargeCap Value Composite is January 1, 1987.
PERFORMANCE INFORMATION FOR THE ADVISER'S SMIDCAP STRATEGY COMPOSITE(1)
(JANUARY 1, 2003 THROUGH DECEMBER 31, 2012)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE ADVISER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD SMIDCAP FUND.
--------------------------------------------------------------------------------------------------------
YEAR TOTAL TOTAL RUSSELL NUMBER DISPERSION(4) TOTAL PERCENTAGE
RETURN (NET RETURN 2500 OF ASSETS AT OF FIRM
OF FEES) (GROSS OF INDEX(2,3) PORTFOLIOS END OF ASSETS
FEES) PERIOD
($ MILLIONS)
--------------------------------------------------------------------------------------------------------
2012 13.8% 14.2% 17.9% 21 0.4 $1,914.3 14.6%
--------------------------------------------------------------------------------------------------------
2011 -1.8% -1.2% -2.5% 22 0.2 $1,959.6 16.4%
--------------------------------------------------------------------------------------------------------
2010 27.2% 28.1% 26.7% 23 0.4 $1,877.2 17.8%
--------------------------------------------------------------------------------------------------------
2009 34.3% 35.0% 34.4% 21 0.5 $1,559.7 16.7%
--------------------------------------------------------------------------------------------------------
2008 -26.7% -26.4% -36.8% 16 0.2 $917.4 14.0%
--------------------------------------------------------------------------------------------------------
2007 11.7% 12.3% 1.4% 14 0.3 $1,091.2 15.3%
--------------------------------------------------------------------------------------------------------
2006 21.6% 22.2% 16.2% 9 0.2 $784.5 14.4%
--------------------------------------------------------------------------------------------------------
2005 20.5% 20.8% 8.1% 4 0.1 $554.9 12.0%
--------------------------------------------------------------------------------------------------------
2004 27.6% 28.1% 18.3% 2 0.1 $77.9 2.1%
--------------------------------------------------------------------------------------------------------
2003 33.6% 34.1% 45.5% 2 0.3 $50.5 1.3%
--------------------------------------------------------------------------------------------------------
|
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (SINCE INCEPTION THROUGH 12/31/2012)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
TIME PERIOD NET OF FEES GROSS OF FEES RUSSELL
2500 INDEX(2,3)
--------------------------------------------------------------------------------
1 Year 13.8% 14.2% 17.9%
--------------------------------------------------------------------------------
2 Years 5.7% 6.2% 7.2%
--------------------------------------------------------------------------------
3 Years 12.4% 13.1% 13.3%
--------------------------------------------------------------------------------
4 Years 17.5% 18.2% 18.3%
--------------------------------------------------------------------------------
5 Years 6.9% 7.5% 4.3%
--------------------------------------------------------------------------------
6 Years 7.7% 8.3% 3.8%
--------------------------------------------------------------------------------
7 Years 9.6% 10.2% 5.5%
--------------------------------------------------------------------------------
8 Years 10.9% 11.5% 5.8%
--------------------------------------------------------------------------------
9 Years 12.6% 13.2% 7.2%
--------------------------------------------------------------------------------
10 Years 14.6% 15.1% 10.5%
--------------------------------------------------------------------------------
11 Years 13.2% 13.8% 7.6%
--------------------------------------------------------------------------------
12 Years 11.0% 11.5% 7.0%
--------------------------------------------------------------------------------
13 Years 10.7% 11.2% 6.8%
--------------------------------------------------------------------------------
14 Years 11.9% 12.4% 8.0%
--------------------------------------------------------------------------------
15 Years 12.0% 12.5% 7.4%
--------------------------------------------------------------------------------
Since Inception
(7/1/97) 12.8% 13.3% 8.0%
--------------------------------------------------------------------------------
|
(1) The calculation of returns is computed on a monthly basis starting July 1, 1997 for the Composite; including accrued dividends and interest income. Actual results may vary depending on level of assets and fee schedule. Performance results net of fees reflect the actual rate of fees paid by the accounts included in the Composite. Westwood's fee schedules are as follows for the SMidCap strategy: 0.85% on the first $25 million and negotiable thereafter. All fees are stated in annual rates and are typically billed quarterly. Westwood claims compliance with GIPS(R) and has prepared and presented this report in compliance with the GIPS(R) standards. Westwood has been independently verified for the periods January 1, 1995 through December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS(R) standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS(R) standards. The SMidCap Strategy Composite has been examined for the periods July 1, 1997 through December 31, 2011. The verification and performance examination reports are available upon request.
(2) The Russell 2500 Index is an unmanaged index of the 2,500 smallest companies in the Russell 3000 Index, which contains the 3,000 largest stocks in the U.S. based on total market capitalization.
(3) The comparative benchmark returns include interest and dividend income but do not include taxes, potential transaction costs or management fees.
(4) Dispersion is measured using the asset-weighted standard deviation of accounts managed for the entire year. Standard deviation is a statistical measure of the degree to which an individual portfolio's return varies from the median return for the composite. Greater deviation means greater risk to the investor.
PERFORMANCE INFORMATION FOR THE ADVISER'S SMALLCAP VALUE STRATEGY COMPOSITE(1)
(JANUARY 1, 2004 THROUGH DECEMBER 31, 2012)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE ADVISER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD SMALLCAP VALUE FUND.
------------------------------------------------------------------------------------------------------------
TOTAL RETURN TOTAL RETURN RUSSELL NUMBER DISPERSION(4) TOTAL ASSETS PERCENTAGE
(NET OF FEES) (GROSS OF 2000 OF AT END OF OF FIRM
FEES) VALUE PORTFOLIOS PERIOD ASSETS
YEAR INDEX(2,3) ($ MILLIONS)
------------------------------------------------------------------------------------------------------------
2012 18.4% 19.0% 18.1% 9 0.4 $210.3 1.6%
------------------------------------------------------------------------------------------------------------
2011 -1.3% -0.6% -5.5% 9 0.6 $201.9 1.7%
------------------------------------------------------------------------------------------------------------
2010 23.7% 24.6% 24.5% 8 1.0 $204.6 1.9%
------------------------------------------------------------------------------------------------------------
2009 20.6% 21.4% 20.6% 11 0.3 $242.2 2.6%
------------------------------------------------------------------------------------------------------------
2008 -31.4% -31.0% -28.9% 9 0.4 $177.2 2.7%
------------------------------------------------------------------------------------------------------------
2007 3.2% 3.6% -9.8% 5 0.9 $134.5 1.9%
------------------------------------------------------------------------------------------------------------
2006 23.7% 24.1% 23.5% 4 0.2 $125.7 2.3%
------------------------------------------------------------------------------------------------------------
2005 10.1% 10.5% 4.7% 3 0.5 $38.0 0.8%
------------------------------------------------------------------------------------------------------------
2004 28.1% 28.4% 22.3% 3 0.3 $37.7 1.0%
------------------------------------------------------------------------------------------------------------
|
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (SINCE INCEPTION THROUGH 12/31/2012)
--------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
--------------------------------------------------------------------------------
RUSSELL 2000
TIME PERIOD NET OF FEES GROSS OF FEES VALUE INDEX(2,3)
--------------------------------------------------------------------------------
1 Year 18.4% 19.0% 18.1%
--------------------------------------------------------------------------------
2 Years 8.1% 8.7% 5.6%
--------------------------------------------------------------------------------
3 Years 13.1% 13.8% 11.6%
--------------------------------------------------------------------------------
4 Years 14.9% 15.6% 13.8%
--------------------------------------------------------------------------------
5 Years 3.7% 4.3% 3.6%
--------------------------------------------------------------------------------
6 Years 3.6% 4.2% 1.2%
--------------------------------------------------------------------------------
7 Years 6.3% 6.8% 4.1%
--------------------------------------------------------------------------------
8 Years 6.7% 7.3% 4.2%
--------------------------------------------------------------------------------
9 Years(5) 8.9% 9.4% 6.1%
--------------------------------------------------------------------------------
|
(1) The calculation of returns is computed on a monthly basis starting January 1, 2004 for the Composite; including accrued dividends and interest income. Actual results may vary depending on level of assets and fee schedule. Performance results net of fees reflect the actual rate of fees paid by the accounts included in the Composite. Westwood's fee schedules are as follows for the SmallCap Value strategy: 1.00% on the first $10 million and negotiable thereafter. All fees are stated in annual rates and are typically billed quarterly. Westwood claims compliance with GIPS(R) and has prepared and presented this report in compliance with the GIPS(R) standards. Westwood has been independently verified for the periods January 1, 1995 through December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS(R) standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS(R) standards. The SmallCap Value Strategy Composite has been examined for the periods January 1, 2004 through December 31, 2011. The verification and performance examination reports are available upon request.
(2) The Russell 2000 Value Index is an unmanaged market index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
(3) The comparative benchmark returns include interest and dividend income but do not include taxes, potential transaction costs or management fees.
(4) Dispersion is measured using the asset-weighted standard deviation of accounts managed for the entire year. Standard deviation is a statistical measure of the degree to which an individual portfolio's return varies from the median return for the composite. Greater deviation means greater risk to the investor.
(5) Inception date of the SmallCap Value Composite is January 1, 2004.
PERFORMANCE INFORMATION FOR THE ADVISER'S INCOME OPPORTUNITY STRATEGY
COMPOSITE (1)
(JANUARY 1, 2003 THROUGH DECEMBER 31, 2012)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE ADVISER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD INCOME OPPORTUNITY FUND.
-------------------------------------------------------------------------------------------------
YEAR TOTAL TOTAL CITIGROUP CITIGROUP S&P 500 NAREIT BLENDED
RETURN RETURN TREASURY 3-MONTH INDEX(4,7) U.S. BENCHMARK(6,7)
(NET OF (GROSS OF 10-YEAR TREASURY EQUITY
FEES) FEES) INDEX(2,7) BILL INDEX(5,7)
INDEX(3,7)
-------------------------------------------------------------------------------------------------
2012 8.7% 9.1% 4.2% 0.1% 16.0% 19.7% 10.0%
-------------------------------------------------------------------------------------------------
2011 7.4% 8.1% 17.0% 0.1% 2.1% 8.3% 7.3%
-------------------------------------------------------------------------------------------------
2010 14.5% 15.2% 8.1% 0.1% 15.1% 28.0% 13.1%
-------------------------------------------------------------------------------------------------
2009 13.3% 13.9% -9.9% 0.2% 26.5% 28.0% 12.0%
-------------------------------------------------------------------------------------------------
2008 -7.1% -6.7% 20.3% 1.8% -37.0% -37.7% -14.6%
-------------------------------------------------------------------------------------------------
2007 0.2% 0.8% 9.8% 4.7% 5.5% -15.7% 1.0%
-------------------------------------------------------------------------------------------------
2006 13.5% 14.1% 1.4% 4.8% 15.8% 35.1% 13.7%
-------------------------------------------------------------------------------------------------
2005 5.4% 5.7% 2.0% 3.0% 4.9% 12.2% 5.7%
-------------------------------------------------------------------------------------------------
2004 16.3% 16.8% 4.9% 1.2% 10.9% 31.6% 12.0%
-------------------------------------------------------------------------------------------------
2003 23.2% 23.5% 1.3% 1.1% 28.7% 37.1% 16.3%
-------------------------------------------------------------------------------------------------
|
---------------------------------------------------------------
YEAR NUMBER DISPERSION(8) TOTAL PERCENT-
OF ASSETS AT AGE OF
PORTFOLIOS END OF FIRM
PERIOD ASSETS
($ MILLIONS)
---------------------------------------------------------------
2012 9 0.4 $1,279.5 9.7%
---------------------------------------------------------------
2011 5 0.3 $759.8 6.3%
---------------------------------------------------------------
2010 3 0.8 $313.2 3.0%
---------------------------------------------------------------
2009 3 1.3 $203.5 2.2%
---------------------------------------------------------------
2008 3 4.3 $144.1 2.2%
---------------------------------------------------------------
2007 3 1.1 $190.6 2.7%
---------------------------------------------------------------
2006 5 0.2 $235.0 4.3%
---------------------------------------------------------------
2005 20 0.3 $119.6 2.6%
---------------------------------------------------------------
2004 2 0.3 $32.7 0.9%
---------------------------------------------------------------
2003 2 0.2 $18.9 0.5%
---------------------------------------------------------------
|
AVERAGE ANNUAL TOTAL RETURNS (SINCE INCEPTION THROUGH 12/31/2012)
---------------------------------------------------------------------------------------------------------------------
ADVISER'S
COMPOSITE RETURNS
---------------------------------------------------------------------------------------------------------------------
CITIGROUP CITIGROUP S&P NAREIT
TREASURY 3-MONTH 500 U.S.
TIME PERIOD NET OF FEES GROSS OF FEES 10-YEAR TREASURY INDEX(4,7) EQUITY BLENDED
INDEX(2,7) BILL INDEX(5,7) BENCHMARK(6,7)
INDEX(3,7)
---------------------------------------------------------------------------------------------------------------------
1 Year 8.7% 9.1% 4.2% 0.1% 16.0% 19.7% 10.0%
---------------------------------------------------------------------------------------------------------------------
2 Years 8.0% 8.6% 10.4% 0.1% 8.8% 13.9% 8.6%
---------------------------------------------------------------------------------------------------------------------
3 Years 10.1% 10.7% 9.7% 0.1% 10.9% 18.4% 10.1%
---------------------------------------------------------------------------------------------------------------------
4 Years 10.9% 11.5% 4.4% 0.1% 14.6% 20.7% 10.6%
---------------------------------------------------------------------------------------------------------------------
5 Years 7.1% 7.6% 7.4% 0.5% 1.7% 5.7% 5.0%
---------------------------------------------------------------------------------------------------------------------
6 Years 5.9% 6.4% 7.8% 1.2% 2.3% 1.8% 4.4%
---------------------------------------------------------------------------------------------------------------------
7 Years 6.9% 7.5% 6.8% 1.7% 4.1% 6.0% 5.6%
---------------------------------------------------------------------------------------------------------------------
8 Years 6.7% 7.3% 6.2% 1.8% 4.2% 6.8% 5.7%
---------------------------------------------------------------------------------------------------------------------
9 Years 7.8% 8.3% 6.1% 1.8% 4.9% 9.3% 6.3%
---------------------------------------------------------------------------------------------------------------------
10 Years(9) 9.2% 9.7% 5.6% 1.7% 7.1% 11.7% 7.3%
---------------------------------------------------------------------------------------------------------------------
|
(1) The calculation of returns is computed on a monthly basis starting January 1, 2003 for the Composite; including accrued dividends and interest income. Actual results may vary depending on level of assets and fee schedule. Performance results net of fees reflect the actual rate of fees paid by the accounts included in the Composite. Westwood's fee schedule for the Income Opportunity strategy: 0.80% on the first $25 million and negotiable thereafter. All fees are stated in annual rates and are typically billed quarterly. Westwood claims compliance with GIPS(R) and has prepared and presented this report in compliance with the GIPS(R) standards. Westwood has been independently verified for the periods January 1, 1995 through December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS(R) standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS(R) standards. The Income Opportunity Strategy Composite has been examined for the periods January 1, 2003 through December 31, 2011. The verification and performance examination reports are available upon request.
(2) The Citigroup Treasury 10-Year Index computes returns for the current Treasury Notes with a maturity of 10 years or less. Treasury Notes are fixed income securities whose interest and principal payments are backed by the full faith and credit of the U.S. government.
(3) The Citigroup 3-Month Treasury Bill Index computes returns for the current Treasury Bills with a maturity of 90 days or less.
(4) The S&P((R)) 500 Index is a widely recognized, market value weighted (higher market value stocks have more influence that lower market value stocks) index of 500 stocks designed to mimic the overall U.S. equity market's industry weightings.
(5) The NAREIT U.S. Equity Index is an unmanaged index of all tax qualified REITs listed on the NYSE, AMEX and NASDAQ which have 75% or more of their gross invested book assets invested directly or indirectly in the equity ownership of real estate.
(6) The blended benchmark is comprised of the following: 25% S&P 500 Index / 25% NAREIT U.S. Equity Index / 25% Citigroup 3-Month Treasury Bill Index /25% Citigroup 10-Yr. Treasury Note Index.
(7) The comparative benchmark returns include interest and dividend income but do not include taxes, potential transaction costs or management fees.
(8) Dispersion is measured using the asset-weighted standard deviation of accounts managed for the entire year. Standard deviation is a statistical measure of the degree to which an individual portfolio's return varies from the median return for the composite. Greater deviation means greater risk to the investor.
(9) Inception date of the Income Opportunity Composite is January 1, 2003.
COMPARABLE FUND PERFORMANCE
WESTWOOD SHORT DURATION HIGH YIELD FUND
Anne Yobage, CFA (the "Portfolio Manager") is a co-founding member of SKY Harbor Capital Management, LLC, and is primarily responsible for the day-to-day management of the Westwood Short Duration High Yield Fund's portfolio. The Portfolio Manager previously was primarily responsible for the day-to-day management of the portfolio of the U.S. Short Duration High Yield Fund (the "Comparable Fund") from its inception date April 2004, through May 2011 (the "Relevant Period"). The Comparable Fund, referred to as a "sub-fund," is a stand-alone fund constituting a separate investment portfolio of the AXA IM Fixed Income Investment Strategies. AXA IM Fixed Income Investment Strategies is incorporated in Luxembourg as an open-ended investment company and qualifies as a UCITS fund (Undertakings for Collective Investment in Transferable Securities). UCITS is a regulatory regime governing the marketing and distribution of securities within the European Union. During the Relevant Period, the Portfolio Manager exercised final decision-making authority over all material aspects concerning the investment objective, policies, strategies, and security selection decisions of the Comparable Fund, and the Portfolio Manager exercises the same level of authority and discretion in managing the Westwood Short Duration High Yield Fund. The investment objective, policies and strategies of the Comparable Fund are substantially similar in all material respects to those of the Westwood Short Duration High Yield Fund.
The following table sets forth performance data relating to the historical performance of the A USD share class of the Comparable Fund. The data provided, which is net of all actual fees and expenses (including any sales loads and account fees) of the Comparable Fund, illustrates the past performance of the Portfolio Manager in managing a substantially similar fund as the Westwood Short Duration High Yield Fund as measured against the Bank of America Merrill Lynch US High Yield Master II Index (the "Index"), which is a representative index of the broader U.S. publicly issued corporate high yield market, which has among other characteristics, a longer duration than both the Comparable Fund and the Westwood Short Duration High Yield Fund. The Comparable Fund is not subject to the same types of expenses to which the Westwood Short Duration High Yield Fund is subject, nor the specific tax restrictions and investment limitations imposed by the Investment Company Act or Subchapter M of the Internal Revenue Code. Consequently, the performance results for the Comparable Fund expressed below could have been adversely affected if the Comparable Fund had been regulated as an investment company under the Federal securities and tax laws. In addition, the performance information shown below was not calculated in accordance with SEC standardized performance methodology. If the performance information was calculated in accordance with SEC standardized performance methodology, the
performance results may have been different. The Comparable Fund is a separate fund and its historical performance is not indicative of the potential future performance of the Westwood Short Duration High Yield Fund. The expenses of the Westwood Short Duration High Yield Fund (gross and net of waivers and reimbursements) are estimated to be higher than the expenses of the Comparable Fund. If the Westwood Short Duration High Yield Fund's fees and expenses had been imposed on the Comparable Fund, the performance shown below would have been lower. During the Relevant Period, the Portfolio Manager also managed other accounts with investment objectives, policies and strategies substantially similar to those of the Westwood Short Duration High Yield Fund. Performance results for these other accounts have not been provided due to lack of supporting records. However, the composite performance of these other accounts is not materially different than the Comparable Fund performance.
COMPARABLE FUND PERFORMANCE
(APRIL 1, 2004 THROUGH MAY 31, 2011)
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE PORTFOLIO MANAGER IN MANAGING THE COMPARABLE FUND AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD SHORT DURATION HIGH YIELD FUND.
-------------------------------------------------------------------------------- CALENDAR YEAR TOTAL PRE-TAX RETURNS(1) 2005 2006 2007 2008 2009 2010 -------------------------------------------------------------------------------- Comparable Fund(2) 2.87% 7.26% 4.58% -9.01% 20.60% 9.20% -------------------------------------------------------------------------------- Index(3) 2.74% 11.77% 2.15% -26.39% 57.51% 15.19% -------------------------------------------------------------------------------- |
----------------------------------------------------------------------------------------- AS OF 5/31/2011 SINCE AVERAGE ANNUAL TOTAL PRE-TAX RETURNS(1) 1 YEAR 3 YEARS 5 YEARS INCEPTION(4) ----------------------------------------------------------------------------------------- COMPARABLE FUND(2) 10.02% 6.47% 6.08% 5.70% INDEX(3) 18.09% 11.75% 9.34% 8.56% |
(1) After tax returns would be lower than those shown.
(2) The U.S. Short Duration High Yield Fund, a substantially similar fund previously managed by the Westwood Short Duration High Yield Fund's portfolio manager, commenced operations on April 1, 2004.
(3) The BofA Merrill Lynch U.S. High Yield Master II Index ("Index") is a representative index of the broader U.S. publicly issued corporate high yield market, and is included solely for the purpose of comparing the Comparable Fund's historical performance against the performance of the broader high yield market, which has, among other characteristics, a longer duration than both the Comparable Fund and the Westwood Short Duration High Yield Fund. The Comparable Fund, however, was not and the Westwood Short Duration High Yield Fund is not managed towards the Index or any other benchmark.
(4) Returns are shown from April 1, 2004 through May 31, 2011.
WESTWOOD EMERGING MARKETS FUND
Patricia Perez-Coutts, CFA (the "Portfolio Manager") is primarily responsible for the day-to-day management of the Westwood Emerging Markets Fund's portfolio. The Portfolio Manager previously was primarily responsible for the day-to-day management of the portfolio of the AGF Emerging Markets Fund (the "Comparable Fund") from its inception date June 2003, through April 2012 (the "Relevant Period"). The Comparable Fund belongs to the AGF Group of Funds, which are Canadian open-end mutual funds established under the laws of Ontario and managed by AGF Investments, Inc. Throughout the Relevant Period, the Portfolio Manager was identified to Comparable Fund shareholders as being responsible for exercising final decision-making authority over all material aspects concerning the investment objective, policies, strategies, and security selection decisions of the Comparable Fund and the Portfolio Manager will exercise the same level of authority and discretion in managing the Westwood Emerging Markets Fund. The investment objective, policies and strategies of the Comparable Fund are substantially similar in all
material respects to those of the Westwood Emerging Markets Fund. During the Relevant Period, the Portfolio Manager also managed other accounts with investment objectives, policies and strategies substantially similar to those of the Westwood Emerging Markets Fund. Performance results for these other accounts have not been provided due to lack of supporting records. However, the composite performance of these other accounts is not materially different than the Comparable Fund performance.
The following tables set forth performance data relating to the historical performance of the MF Series class of the Comparable Fund. The data provided, which is net of all actual fees and expenses (including any sales loads and account fees) of the Comparable Fund, illustrates the past performance of the Portfolio Manager in managing a substantially similar fund as measured against the MSCI Emerging Markets Index (the "Comparable Index"). The Comparable Fund is not subject to the same types of expenses to which the Westwood Emerging Markets Fund is subject, nor the specific tax restrictions and investment limitations imposed by the Investment Company Act of 1940, as amended, or Subchapter M of the Internal Revenue Code. Consequently, the performance results for the Comparable Fund expressed below could have been adversely affected if the Comparable Fund had been regulated as an investment company under the Federal securities and tax laws. In addition, the performance information shown below was not calculated in accordance with SEC standardized performance methodology. If the performance information was calculated in accordance with SEC standardized performance methodology, the performance results may have been different. The Comparable Fund is a separate fund and its historical performance is not indicative of the potential future performance of the Westwood Emerging Markets Fund. The expenses of the Westwood Emerging Markets Fund (gross and net of waivers and reimbursements) are estimated to be higher than the expenses of the Comparable Fund. If the Westwood Emerging Markets Fund's fees and expenses had been imposed on the Comparable Fund, the performance shown below would have been lower.
The performance results are calculated using Canadian dollars.
COMPARABLE FUND PERFORMANCE
THE FOLLOWING DATA ILLUSTRATES THE PAST PERFORMANCE OF THE PORTFOLIO MANAGER IN MANAGING THE COMPARABLE FUND AND DOES NOT REPRESENT THE PERFORMANCE OF THE WESTWOOD EMERGING MARKETS FUND.
-------------------------------------------------------------------------------- CALENDAR YEAR TOTAL PRE-TAX RETURNS(1) 2004 2005 2006 2007 2008 2009 2010 2011 -------------------------------------------------------------------------------- Comparable Fund(2) 16.6% 35.3% 40.4% 12.4% -35.3% 60.3% 15.3% -14.6% -------------------------------------------------------------------------------- Comparable Index(3) 16.8% 31.2% 32.1% 18.6% -41.4% 52.0% 13.0% -16.2% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AS OF 4/30/12 AVERAGE ANNUAL TOTAL SINCE PRE-TAX RETURNS(1) 1 YEAR 3 YEARS 5 YEARS INCEPTION(4) -------------------------------------------------------------------------------- Comparable Fund(2) -4.38% 15.25% 4.05% 15.47% -------------------------------------------------------------------------------- Comparable Index(3) -8.73% 11.59% 1.47% 12.51% -------------------------------------------------------------------------------- |
(1) After-tax returns would be lower than those shown.
(2) The AGF Emerging Markets Fund, a substantially similar fund previously managed by the Portfolio Manager, commenced operations on June 16, 2003.
(3) The MSCI Emerging Markets Index ("Comparable Index") is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Comparable Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The Comparable Fund was benchmarked against the Comparable Index, and the Adviser will benchmark the Westwood Emerging Markets Fund to the Comparable Index.
(4) Returns are shown from July 1, 2003 through April 30, 2012.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase, sell (sometimes called "redeem") and exchange Institutional Shares of the Funds.
Institutional Shares are for individual and institutional investors.
For information regarding the federal income tax consequences of transactions in shares of the Funds, including information about cost basis reporting, see "Taxes."
HOW TO PURCHASE FUND SHARES
You will ordinarily submit your purchase orders through your securities broker or other financial intermediary through which you opened your shareholder account. To purchase shares directly from the Funds through their transfer agent, complete and send in the application. If you need an application or have questions, please call 1-877-FUND-WHG (1-877-386-3944) or log on to the Funds' website at www.westwoodfunds.com.
All investments must be made by check, Automated Clearing House (ACH), or wire. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions. The Funds do not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler's checks, money orders or cashier's checks.
The Funds reserve the right to reject any specific purchase order for any reason. The Funds are not intended for short-term trading by shareholders in response to short-term market fluctuations. For more information about the Funds' policy on short-term trading, see "Excessive Trading Policies and Procedures."
The Funds do not generally accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Funds subject to the satisfaction of enhanced due diligence. Please contact the Funds for more information.
BY MAIL
REGULAR MAIL ADDRESS
Westwood Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Westwood Funds
c/o DST Systems, Inc.
430 W. 7th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, call 1-877-FUND-WHG (1-877-386-3944) for details. To add to an existing account by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
UMB Bank, N.A.
ABA#: 101000695
Westwood Funds
DDA# 9871063178
Ref: Fund name/account name/account number
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (the "NYSE") is open for business (a "Business Day"). Shares cannot be purchased by Federal Reserve wire on days that either the NYSE or the Federal Reserve is closed. Each Fund's price per share will be the net asset value per share ("NAV") next determined after the Fund or authorized institution receives your purchase order in proper form. "Proper form" means that the Funds were provided a complete and signed account application, including the investor's social security number, tax identification number, and other identification required by law or regulation, as well as sufficient purchase proceeds.
Each Fund calculates its NAV once each Business Day as of the close of normal trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current Business Day's NAV, a Fund or authorized institution must receive your purchase order in proper form before 4:00 p.m., Eastern Time. If the NYSE closes early -- such as on days in advance of certain holidays -- the Funds reserve the right to calculate NAV as of the earlier closing time. The Funds will not accept orders that request a particular day or price for the transaction or any other special conditions.
Shares will not be priced on days that the NYSE is closed for trading, including nationally observed holidays. Since securities that are traded on foreign exchanges may trade on days when the NYSE is closed, the value of the Funds may change on days when you are unable to purchase or redeem shares.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Funds through their transfer agent, you may also buy or sell shares of the Funds through accounts with financial intermediaries such as brokers and other institutions that are authorized to place trades in Fund shares for their customers. When you purchase or sell Fund shares through a financial intermediary (rather than directly from the Fund), you may have to transmit your purchase and sale requests to the financial intermediary at an earlier time for your transaction to become effective that day. This allows the financial intermediary time to process your requests and transmit them to the Funds prior to the time the Funds calculate their NAV that day.
Your financial intermediary is responsible for transmitting all purchase and redemption requests, investment information, documentation and money to the Funds on time. If your financial intermediary fails to do so, it may be responsible for any resulting fees or losses. Unless your financial intermediary is an authorized institution (defined below), orders transmitted by the financial intermediary and received by the Funds after the time NAV is calculated for a particular day will receive the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and shareholder organizations, are authorized to act as agent on behalf of the Funds with respect to the receipt of purchase and redemption requests for Fund shares ("authorized institutions"). These requests are executed at the NAV next determined after the authorized institution receives the request. To determine whether your financial intermediary is an authorized institution such that it may act as agent on behalf of the Funds with respect to purchase and redemption requests for Fund shares, you should contact them directly.
If you deal directly with a financial intermediary, you will have to follow their procedures for transacting with the Funds. Your financial intermediary may charge a fee for your purchase and/or redemption transactions. For more information about how to purchase or sell Fund shares through a financial intermediary, you should contact your authorized institution directly.
HOW THE FUNDS CALCULATE NAV
NAV for one Fund share is the value of that share's portion of the net assets of the Fund. In calculating NAV, each Fund generally values its investment portfolio at market price. If market prices are not readily available or a Fund reasonably believes that they are unreliable, such as in the case of a security value that has been materially affected by events occurring after the relevant market closes, the Fund is required to price those securities at fair value as determined in good faith using methods approved by the Funds' Board. Pursuant to the policies adopted by, and under the ultimate supervision of the Funds' Board, these methods are implemented through the Funds' Fair Value Pricing Committee, members of which are appointed by the Board. A Fund's determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that the Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available.
There may be limited circumstances in which the Funds would price securities at fair value for stocks of U.S. companies that are traded on U.S. exchanges -- for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Funds calculated their NAV.
With respect to any non-U.S. securities held by the Funds, the Funds may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Funds may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Funds price their shares, the value the Funds assign to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Funds may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, or securities market movements in the United States, or other relevant information as related to the securities.
When valuing fixed income securities with remaining maturities of more than 60 days, the Funds use the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security, securities expected to trade in a similar manner or a pricing
matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Funds use the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing.
Securities, options, futures contracts and other assets (including swap agreements) for which market quotations are not readily available will be valued at their fair value as determined in good faith by or under the direction of the Board.
PURCHASES IN-KIND
Subject to the approval of the Funds, an investor may purchase shares of a Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Funds reserve the right to amend or terminate this practice at any time.
MINIMUM PURCHASES
You can open an account with the Westwood LargeCap Value Fund, the Westwood Income Opportunity Fund and the Westwood Emerging Markets Fund with a minimum initial investment of $100,000. You can open an account with the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund, the Westwood SMidCap Fund, the Westwood SmallCap Value Fund, the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund and the Westwood Global Dividend Fund with a minimum initial investment of $5,000. The Westwood Emerging Markets Plus Fund is currently not available for purchase. There is no minimum for subsequent investments. Each Fund may accept initial investments of smaller amounts in its sole discretion.
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR "ACH")
You may not open an account via ACH. However, once you have established an account, you can set up an automatic investment plan by mailing a completed application to the Funds. These purchases can be made monthly, quarterly, semi-annually and annually in amounts of at least $25 per Fund. To cancel or change a plan, write to the Funds at: Westwood Funds, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: Westwood Funds, c/o DST Systems, Inc., 430 West 7(th) Street, Kansas City, MO 64105). Please allow up to 15 days to create the plan and 3 days to cancel or change it.
FUND CODES
The reference information listed below will be helpful to you when you contact the Funds to purchase Institutional Shares of a Fund, check daily NAV or obtain additional information. Because shares of the Westwood Emerging Markets Plus Fund are currently not available to investors, the Fund does not have a ticker symbol, CUSIP or Fund Code.
FUND NAME TICKER SYMBOL CUSIP FUND CODE Westwood LargeCap Value Fund WHGLX 0075W0734 2689 Westwood Dividend Growth Fund WHGDX 0075W0718 2684 Westwood SMidCap Plus Fund WHGPX 0075W0544 2683 Westwood SMidCap Fund WHGMX 0075W0767 2691 Westwood SmallCap Value Fund WHGSX 0075W0726 2687 |
Westwood Income Opportunity Fund WHGIX 0075W0775 2690 Westwood Short Duration High WHGHX 00769G758 2682 Yield Fund Westwood Global Equity Fund WWGEX 0075W0494 3982 Westwood Global Dividend Fund WWGDX 0075W0486 3984 Westwood Emerging Markets Fund WWEMX 0075W0510 3986 |
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may redeem your shares on any Business Day by contacting the Funds directly by mail or telephone at 1-877-FUND-WHG (1-877-386-3944).
If you own your shares through an account with a broker or other institution, contact that broker or institution to redeem your shares. Your broker or institution may charge a fee for its services in addition to the fees charged by the Funds.
If you would like to have your sales proceeds, including proceeds generated as a result of closing your account, sent to a third party or an address other than your own, please notify the Funds in writing.
Certain redemption requests will require a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last 30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee and that we must be provided with the original guarantee. Signature guarantees are for the protection of our shareholders. Before they grant a redemption request, the Funds may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. The Funds participate in the Paperless Legal Program (the "Program"), which eliminates the need for accompanying paper documentation on legal securities transfers. Requests received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and may not require additional documentation. Please contact Shareholder Services at 1-877-386-3944 for more information.
The sale price will be the NAV per share next determined after the Funds receive your request.
BY MAIL
To redeem shares by mail, please send a letter to a Fund signed by all registered parties on the account specifying:
o The Fund name;
o The Share class;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) and must designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
Westwood Funds
P.O. Box 219009
Kansas City, MO 64121-9009
EXPRESS MAIL ADDRESS
Westwood Funds
c/o DST Systems, Inc.
430 W. 7th Street
Kansas City, MO 64105
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if desired, the wire and ACH redemption privileges) by completing the appropriate sections of the account application. Call 1-877-FUND-WHG (1-877-386-3944) to redeem your shares. Based on your instructions, a Fund will mail your proceeds to you, or send them to your bank via wire or ACH.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as $100 per month from your account to another financial institution through a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account application and mail it to the Funds.
RECEIVING YOUR MONEY
Normally, the Funds will send your sale proceeds within seven days after the Funds receive your request. Your proceeds can be wired to your bank account (may be subject to a $10 fee), sent to you by check or sent via Automated Clearing House (ACH) to your bank account once you have established banking instructions with the Funds. IF YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
The Funds generally pay sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise and for the protection of the Funds' remaining shareholders, the Funds might pay all or part of your redemption proceeds in securities with a market value equal to the redemption price (redemption in kind). It is highly unlikely that your shares would ever be redeemed in kind, but if they were, you would have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. In addition, you would continue to be subject to the risks of any market fluctuation in the value of the securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $5,000 because of redemptions, you may be required to sell your shares. The Funds will provide you at least 30 days' written notice to give you time to add to your account and avoid the involuntary redemption of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Funds may suspend your right to sell your shares during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More information about this is in the SAI.
HOW TO EXCHANGE FUND SHARES
At no charge, you may exchange Institutional Class Shares of one Westwood Fund for Institutional Class Shares of another Westwood Fund by writing to or calling the Funds. You may only exchange shares between accounts with identical registrations (i.e., the same names and addresses).
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Funds may suspend or terminate your exchange privilege if you engage in a pattern of exchanges that is excessive, as determined in the sole discretion of the Funds. For more information about the Funds' policy on excessive trading, see "Excessive Trading Policies and Procedures."
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely convenient, but not without risk. Although the Funds have certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Funds are not responsible for any losses or costs incurred by following telephone instructions they reasonably believe to be genuine. If you or your financial institution transact with the Funds over the telephone, you will generally bear the risk of any loss.
SHAREHOLDER SERVICING ARRANGEMENTS
The Funds may compensate financial intermediaries for providing a variety of services to shareholders. Financial intermediaries include affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, their service providers or their respective affiliates. This section and the following section briefly describe how financial intermediaries may be paid for providing these services.
The Funds generally pay financial intermediaries a fee that is based on the assets of each Fund that are attributable to investments by customers of the financial intermediary. The services for which financial intermediaries are compensated may include record-keeping, transaction processing for shareholders' accounts and other shareholder services. In addition to these payments, your financial intermediary may charge you account fees, transaction fees for buying or redeeming shares of the Funds, or other fees for servicing your account. Your financial intermediary should provide a schedule of its fees and services to you upon request.
The Westwood SMidCap Plus Fund, the Westwood SMidCap Fund and the Westwood SmallCap Value Fund have each adopted a shareholder servicing plan that provides that the Funds may pay financial
intermediaries for shareholder services in an annual amount not to exceed 0.20% based on the Fund's average daily net assets. The Funds do not pay these service fees on shares purchased directly. In addition to payments made directly to financial intermediaries by the Funds, the Adviser or its affiliates may, at their own expense, pay financial intermediaries for these and other services to the Funds' shareholders, as described in the section below.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may
make payments to certain affiliated or unaffiliated financial intermediaries to
compensate them for the costs associated with distribution, marketing,
administration and shareholder servicing support. These payments may be in
addition to any shareholder servicing payments that are reflected in the fees
and expenses listed in the fee table sections of this prospectus. These
payments are sometimes characterized as "revenue sharing" payments and are made
out of the Adviser's and/or its affiliates' own legitimate profits or other
resources, and are not paid by the Funds. A financial intermediary may provide
these services with respect to Fund shares sold or held through programs such
as retirement plans, qualified tuition programs, fund supermarkets, fee-based
advisory or wrap fee programs, bank trust programs, and insurance (e.g.,
individual or group annuity) programs. In addition, financial intermediaries
may receive payments for making shares of the Funds available to their
customers or registered representatives, including providing the Funds with
"shelf space," placing it on a preferred or recommended fund list, or promoting
the Funds in certain sales programs that are sponsored by financial
intermediaries. To the extent permitted by SEC and Financial Industry
Regulatory Authority ("FINRA") rules and other applicable laws and regulations,
the Adviser and/or its affiliates may pay or allow other promotional incentives
or payments to financial intermediaries. For more information please see
"Payments to Financial Intermediaries" and "Shareholder Services" in the Funds'
SAI.
The level of payments to individual financial intermediaries varies in any given year and may be negotiated on the basis of sales of Fund shares, the amount of Fund assets serviced by the financial intermediary or the quality of the financial intermediary's relationship with the Adviser and/or its affiliates. These payments may be more or less than the payments received by the financial intermediaries from other mutual funds and may influence a financial intermediary to favor the sales of certain funds or share classes over others. In certain instances, the payments could be significant and may cause a conflict of interest for your financial intermediary. Any such payments will not change the net asset value or price of the Funds' shares. Please contact your financial intermediary for information about any payments it may receive in connection with the sale of Fund shares or the provision of services to Fund shareholders, as well as information about any fees and/or commissions it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Funds are intended for long-term investment purposes only and discourage shareholders from engaging in "market timing" or other types of excessive short-term trading. This frequent trading into and out of the Funds may present risks to the Funds' long-term shareholders and could adversely affect shareholder returns. The risks posed by frequent trading include interfering with the efficient implementation of the Funds' investment strategies, triggering the recognition of taxable gains and losses on the sale of Fund investments, requiring the Funds to maintain higher cash balances to meet redemption requests, and experiencing increased transaction costs.
In addition, because the Funds may invest in foreign securities traded primarily on markets that close prior to the time a Fund determines its NAV, the risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than funds investing exclusively in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by a Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of their Fund's shares if the price of the Fund's foreign securities do not reflect their fair value. Although the Funds have procedures designed to determine the fair value of foreign securities for purposes of calculating their NAV when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage.
In addition, because the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund, the Westwood SMidCap Fund, the Westwood Income Opportunity Fund, the Westwood SmallCap Value Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund each invest in small- and mid-cap securities, which often trade in lower volumes and may be less liquid, these Funds may be more susceptible to the risks posed by frequent trading because frequent transactions in the Funds' shares may have a greater impact on the market prices of these types of securities.
The Funds' service providers will take steps reasonably designed to detect and deter frequent trading by shareholders pursuant to the Funds' policies and procedures described in this prospectus and approved by the Funds' Board. For purposes of applying these policies, the Funds' service providers may consider the trading history of accounts under common ownership or control. The Funds' policies and procedures include:
o Shareholders are restricted from making more than 4 "round trips" into or out of any Fund over any rolling 12 month period. If a shareholder exceeds this amount, the Funds and/or their service providers may, at their discretion, reject any additional purchase orders. The Funds define a "round trip" as a purchase into a Fund by a shareholder, followed by a subsequent redemption out of the Fund, of an amount the Adviser reasonably believes would be harmful or disruptive to the Fund.
o Each Fund reserves the right to reject any purchase request by any investor or group of investors for any reason without prior notice, including, in particular, if the Fund or the Adviser reasonably believes that the trading activity would be harmful or disruptive to the Fund.
The Funds and/or their service providers seek to apply these policies to the best of their abilities uniformly and in a manner they believe is consistent with the interests of the Funds' long-term shareholders. The Funds do not knowingly accommodate frequent purchases and redemptions by Fund shareholders. Although these policies are designed to deter frequent trading, none of these measures alone nor all of them taken together eliminate the possibility that frequent trading in the Funds will occur.
Financial intermediaries (such as investment advisers and broker-dealers) often establish omnibus accounts in the Funds for their customers through which transactions are placed. The Funds have entered into "information sharing agreements" with these financial intermediaries, which permit the Funds to obtain, upon request, information about the trading activity of the intermediary's customers that invest in the Funds. If the Funds or their service providers identify omnibus account level trading patterns that have
the potential to be detrimental to the Funds, the Funds or their service providers may, in their sole discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon a review of that information, if the Funds or their service providers determine that the trading activity of any customer may be detrimental to the Funds, they may, in their sole discretion, request the financial intermediary to restrict or limit further trading in the Funds by that customer. If the Funds are not satisfied that the intermediary has taken appropriate action, the Funds may terminate the intermediary's ability to transact in Fund shares. When information regarding transactions in the Funds' shares is requested by the Funds and such information is in the possession of a person that is itself a financial intermediary to a financial intermediary (an "indirect intermediary"), any financial intermediary with whom the Funds have an information sharing agreement is obligated to obtain transaction information from the indirect intermediary or, if directed by the Funds, to restrict or prohibit the indirect intermediary from purchasing shares of the Funds on behalf of other persons.
The Funds and their service providers will use reasonable efforts to work with financial intermediaries to identify excessive short-term trading in omnibus accounts that may be detrimental to the Funds. However, there can be no assurance that the monitoring of omnibus account level trading will enable the Funds to identify or prevent all such trading by a financial intermediary's customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means to you: When you open an account, the Funds will ask your name, address, date of birth, and other information that will allow the Funds to identify you. This information is subject to verification to ensure the identity of all persons opening a mutual fund account.
The Funds are required by law to reject your new account application if the required identifying information is not provided.
In certain instances, the Funds are required to collect documents to fulfill their legal obligation. Documents provided in connection with your application will be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be performed by either contacting you or, if applicable, your broker. If this information cannot be obtained within a reasonable timeframe established in the sole discretion of the Funds, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all identifying information required on the application), your investment will be accepted and your order will be processed at the next-determined NAV per share.
The Funds reserve the right to close or liquidate your account at the NAV next-determined and remit proceeds to you via check if they are unable to verify your identity. Attempts to verify your identity will be performed within a reasonable timeframe established in the sole discretion of the Funds. Further, the Funds reserve the right to hold your proceeds until your original check clears the bank, which may take up to 15 days from the date of purchase. In such an instance, you may be subject to a gain or loss on Fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Funds' overall obligation to deter money laundering under federal law. The Funds have adopted an anti-money laundering compliance program designed to prevent the Funds from being used for money laundering or the financing of illegal activities. In this regard, the Funds reserve the right to: (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of Fund management, they are deemed to be in the best interest of the Funds or in cases when the Funds are requested or compelled to do so by governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of the redemption if the Funds are required to withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Westwood LargeCap Value Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund, the Westwood SMidCap Fund, Westwood SmallCap Value Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund distribute their net investment income and make distributions of their net realized capital gains, if any, at least annually. The Westwood Income Opportunity Fund distributes its net investment income quarterly and makes distributions of its net realized capital gains, if any, at least annually. The Westwood Short Duration High Yield Fund distributes its net investment income monthly and makes distributions of its net realized capital gains, if any, at least annually. If you own Fund shares on a Fund's record date, you will be entitled to receive the distribution.
You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Funds in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Funds receive your written notice. To cancel your election, simply send the Funds written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL, STATE AND LOCAL INCOME TAXES. Below is a summary of some important tax issues that affect the Funds and their shareholders. This summary is based on current tax laws, which may change.
Certain Funds intend to invest in royalty trusts. Depending on the U.S. federal income tax classification of these royalty trusts in which a Fund invests, securities issued by certain royalty trusts (such as royalty trusts which are grantor trusts for U.S. federal income tax purposes) may not produce qualifying income for purposes of the requirements to be treated as a Regulated Investment Company under the Internal Revenue Code of 1986, as amended. Additionally, a Fund may be deemed to directly own the assets of each royalty trust, and would need to look to such assets when determining its compliance with the diversification requirements under the Internal Revenue Code. Certain Canadian royalty trusts may be treated as a corporation for U.S. federal income tax purposes and distributions from such may be qualifying income when received by a Fund. Each Fund will monitor its investments in royalty trusts with the objective of maintaining its continued qualification as a Regulated Investment Company under the Internal Revenue Code.
Each Fund will distribute substantially all of its net investment income and net realized capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation,
depending upon your tax situation. Distributions you receive from each Fund may be taxable whether or not you reinvest them. Dividend distributions, including distributions of short-term capital gains are generally taxable at ordinary income tax rates. Distributions of long-term capital gains and distributions of qualified dividend income are generally taxable at the rates applicable to long-term capital gains.
Each sale of Fund shares may be a taxable event. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale. The gain or loss on the sale of Fund shares generally will be treated as a short term capital gain or loss if you held the shares for 12 months or less or a long term capital gain or loss if you held the shares for longer.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012 and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, a Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, a Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, a Fund will use the average basis method as the default cost basis method. The cost basis method elected by a Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Because the Funds may invest in foreign securities, they may be subject to foreign withholding taxes with respect to dividends or interest that they receive from sources in foreign countries. The Funds may be able to make an election to pass along a tax credit for foreign income taxes it pays. The Funds will notify you if it makes this decision.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the Institutional Shares of the Funds. This information is intended to help you understand each Fund's financial performance for the period of its operations. Some of this information reflects financial information for a single Fund share. The total returns in the tables represent the rate that you would have earned (or lost) on an investment in a Fund, assuming you reinvested all of your dividends and distributions. With respect to the Westwood LargeCap Value Fund, Westwood SMidCap Plus Fund, Westwood SMidCap Fund, Westwood SmallCap Value Fund, Westwood Income Opportunity Fund and Westwood Short Duration High Yield Fund, the information provided below has been audited by Ernst & Young LLP, independent registered public accounting firm of the Funds. With respect to the Westwood Dividend Growth Fund, the information for the fiscal year ended October 31, 2012, for the fiscal period July 1, 2011 to October 31, 2011 and for the fiscal year ended June 30, 2011 has been audited by Ernst & Young LLP, independent registered public accounting firm of the Fund. On February 5, 2011, the Predecessor Fund reorganized into the Westwood Dividend Growth Fund. Information for fiscal years ended June 30, 2008 through June 30, 2010 has been audited by the Predecessor Fund's independent registered public accounting firm. The financial statements and the unqualified opinion of Ernst & Young LLP are included in the 2012 Annual Report of the Funds, which is available upon request by calling the Funds at 1-877-386-3944.
WESTWOOD LARGECAP VALUE FUND INSTITUTIONAL CLASS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2012 2011 2010 2009 2008
NET ASSET VALUE, BEGINNING OF
PERIOD $10.15 $9.70 $8.64 $8.74 $12.98
------ ------ ------ ------- --------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net Investment Income (Loss)(3) 0.16 0.13 0.10 0.11 0.15
Net Realized and Unrealized
Gains (Losses) on Investments 1.14 0.42 1.04 (0.12) (4.08)
------ ------ ------ ------- --------
Total from Operations 1.30 0.55 1.14 (0.01) (3.93)
------ ------ ------ ------- --------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment (0.15) (0.10) (0.08)
Income (0.09) (0.09)
Distributions from Net
Realized Gains -- -- -- -- (0.22)
------ ------ ------ ------- --------
Return of Capital -- -- -- -- --
------ ------ ------ ------- --------
Total Dividends and
Distributions (0.15) (0.10) (0.08) (0.09) (0.31)
------ ------ ------ ------- --------
NET ASSET VALUE, END OF PERIOD $11.30 $10.15 $9.70 $8.64 $8.74
====== ====== ====== ======= ========
TOTAL RETURN(2) 12.97% 5.62% 13.24% (0.04)%(1) (30.94)%(1)
====== ====== ====== ======= ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $154,231 $215,894 $214,416 $125,933 $53,506
Ratio of Expenses to Average Net
Assets 0.96%(4) 1.00%(4) 1.00%(4) 1.00% 1.00%
Ratio of Expenses to Average Net
Assets (Excluding Waivers and
Recovered Fees) 0.92% 0.91% 0.97% 1.14% 1.41%
Ratio of Net Investment Income
(Loss) to Average Net Assets 1.46% 1.26% 1.04% 1.43% 1.42%
Portfolio Turnover Rate 40% 42% 57% 89% 70%
|
Amounts designated as "--" are $0.
(1) Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period.
(2) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemptions of Fund shares.
(3) Calculation performed using average shares for the period.
(4) Ratio includes previously waived investment advisory fees recaptured. The impact of the recaptured fees may cause a higher net expense ratio.
WESTWOOD DIVIDEND GROWTH FUND INSTITUTIONAL CLASS(7)
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
YEAR ENDED FISCAL PERIOD YEAR ENDED YEAR YEAR YEAR
OCTOBER 31, JULY 1, 2011 TO JUNE 30, 2011 ENDED ENDED ENDED
2012 OCTOBER 31, JUNE 30, JUNE 30, JUNE 30,
2011(1) 2010 2009 2008
NET ASSET VALUE, BEGINNING OF PERIOD $11.02 $11.39 $9.33 $8.14 $10.30 $12.51
------ ------ ------ ----- ----- ------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net Investment Income (Loss) 0.21(3) 0.05(3) 0.13(3) 0.08 0.04 0.02
Net Realized and Unrealized Gains
(Losses) on Investments 0.91 (0.42) 2.00 1.16 (2.11) (1.07)
------ ------ ------ ----- ----- ------
Total from Operations 1.12 (0.37) 2.13 1.24 (2.07) (1.05)
------ ------ ------ ----- ----- ------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment
Income (0.18) -- (0.07) (0.05) (0.02) (0.05)
Distributions from Realized
Capital Gains (0.96) -- -- -- (0.07) (1.11)
------ ------ ------ ----- ----- ------
Total Dividends and
Distributions (1.14) -- (0.07) (0.05) (0.09) (1.16)
------ ------ ------ ----- ----- ------
NET ASSET VALUE, END OF PERIOD $11.00 $11.02 $11.39 $9.33 $8.14 $10.30
====== ====== ====== ===== ===== ======
TOTAL RETURN 11.41% (3.25)%(2) 22.92%(2) 15.14% (19.95)%(2) (8.87)%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $81,929 $71,594 $72,293 $52,132 $41,589 $36,948
Ratio of Expenses to Average Net
Assets 0.97%(6) 1.00%(4) 1.02% 1.10% 1.15% 1.15%
Ratio of Expenses to Average Net
Assets (Excluding Waivers and
Recovered Fees) 0.96% 1.04%(4) 1.03% 1.07% 1.19% 1.15%
Ratio of Net Investment Income
(Loss) to Average Net Assets 1.97% 1.24%(4) 1.19% 0.89% 0.65% 0.19%
Portfolio Turnover Rate 95% 24%(5) 66% 50% 100% 104%
|
Amounts designated as "--" are $0.
(1) For the period from July 1, 2011 through October 31, 2011.
(2) Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period.
(3) Calculations performed using average shares for the period.
(4) Annualized.
(5) Not annualized.
(6) Ratio includes previously waived investment advisory fees recaptured. The impact of the recaptured fees may cause a higher net expense ratio.
(7) Effective February 4, 2011, the Westwood Dividend Growth Fund acquired all the assets and liabilities of the McCarthy Multi-Cap Stock Fund ("Predecessor Fund"). The financial highlights for the period prior to that date reflect the performance of the Predecessor Fund.
WESTWOOD SMIDCAP PLUS FUND INSTITUTIONAL CLASS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE
YEAR ENDED PERIOD ENDED
OCTOBER 31, 2012 OCTOBER 31, 2011(4)
NET ASSET VALUE, BEGINNING OF PERIOD $8.98 $10.00
------ -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss)(5) 0.05 0.02
Net Realized and Unrealized Gains (Losses)
on Investments 0.84 (1.04)
------ -------
Total from Operations 0.89 (1.02)
------ -------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment Income (0.03) --
Distributions from Realized Gains (0.03) --
------ -------
Return of Capital -- --
------ -------
Total Dividends and Distributions (0.06) --
====== =======
NET ASSET VALUE, END OF PERIOD $9.81 $8.98
====== =======
TOTAL RETURN(1) 10.01% (10.20)%(6)
====== =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $21,131 $10,874
Ratio of Expenses to Average Net Assets 1.00% 1.00%(2)
Ratio of Expenses to Average Net Assets (Excluding 1.46% 2.35%(2)
Waivers and Recovered Fees)
Ratio of Net Investment Income (Loss) to Average Net Assets 0.58% 0.37%(2)
Portfolio Turnover Rate 34% 31%(3)
|
Amounts designated as "--" are $0.
(1) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemptions of Fund shares.
(2) Annualized.
(3) Not annualized.
(4) Commenced operations on March 28, 2011.
(5) Calculation performed using average shares for the period.
(6) Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period.
WESTWOOD SMIDCAP FUND INSTITUTIONAL CLASS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2012 2011 2010 2009 2008
NET ASSET VALUE, BEGINNING OF PERIOD
INCOME (LOSS) FROM INVESTMENT OPERATIONS: $14.64 $13.90 $11.28 $9.41 $13.84
------ ------ ------ ------ ------
Net Investment Income (Loss)(3) 0.14 0.05 0.06 0.08 0.11
Net Realized and Unrealized Gains
(Losses) on Investments 1.02 0.88 2.61 1.85 (4.03)
------ ------ ------ ------ ------
Total from Operations 1.16 0.93 2.67 1.93 (3.92)
------ ------ ------ ------ ------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment Income (0.06) (0.05) (0.05) (0.06) (0.17)
Distributions from Net Realized Gains (1.74) (0.14) -- -- (0.34)
------ ------ ------ ------ ------
Total Dividends and Distributions (1.80) (0.19) (0.05) (0.06) (0.51)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $14.00 $14.64 $13.90 $11.28 $9.41
====== ====== ====== ====== =====
TOTAL RETURN(1) 9.57% 6.64% 23.72% 20.65% (29.25)%
====== ====== ====== ====== =====
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $385,944 $403,979 $343,751 $168,700 $77,475
Ratio of Expenses to Average Net Assets 0.95% 0.96% 0.99% 1.24%(2) 1.25%(2)
Ratio of Expenses to Average Net Assets
(Excluding Waivers and Recovered Fees) 0.95% 0.96% 0.99% 1.24% 1.25%
Ratio of Net Investment Income (Loss) to
Average Net Assets 1.05% 0.34% 0.47% 0.81% 0.87%(2)
Portfolio Turnover Rate 37% 62% 48% 54% 81%
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Amounts designated as "--" are $0.
(1) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemptions of Fund shares.
(2) Ratio includes previously waived investment advisory fees recaptured. The impact of the recaptured fees may cause a higher net expense ratio.
(3) Calculation performed using average shares for the period.
WESTWOOD SMALLCAP VALUE FUND INSTITUTIONAL CLASS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2012 2011 2010 2009 2008
NET ASSET VALUE, BEGINNING OF
PERIOD $9.24 $8.56 $7.11 $7.00 $10.33
------ ----- ------ ----- ------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net Investment Income (Loss)(3)
0.04 --(4) (0.02) 0.01 0.07
Net Realized and Unrealized
Gains (Losses) on Investments 1.38 0.68 1.47 0.13 (3.35)
------ ----- ------ ----- ------
Total from Operations
1.42 0.68 1.45 0.14 (3.28)
------ ----- ------ ----- ------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment
Income (0.02) -- -- (0.03) (0.05)
------ ----- ------ ----- ------
Distributions from Net
Realized Gains (0.43) -- -- -- --
------ ----- ------ ----- ------
Return of Capital -- -- --(4) --(4) --
------ ----- ------ ----- ------
Total Dividends and
------ ----- ------ ----- ------
Distributions (0.45) -- -- (0.03) (0.05)
------ ----- ------ ----- ------
NET ASSET VALUE, END OF PERIOD $10.21 $9.24 $8.56 $7.11 $7.00
====== ===== ====== ===== ======
TOTAL RETURN(1,2) 16.21% 7.94% 20.42% 1.99% (31.86)%
====== ===== ====== ===== ======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $32,895 $32,644 $30,490 $20,361 $17,286
====== ===== ====== ===== ======
Ratio of Expenses to Average Net
Assets 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of Expenses to Average Net
Assets (Excluding Waivers and
Recovered Fees) 1.33% 1.28% 1.35% 1.63% 1.88%
Ratio of Net Investment Income
(Loss) to Average Net Assets 0.38% (0.01)% (0.28)% 0.08% 0.79%
Portfolio Turnover Rate 68% 103% 67% 82% 93%
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Amounts designated as "--" are either $0 or have been rounded to $0.
(1) Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period.
(2) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemptions of Fund shares.
(3) Calculation performed using average shares for the period.
(4) Amount was less than $0.01 per share.
WESTWOOD INCOME OPPORTUNITY FUND INSTITUTIONAL CLASS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2012 2011 2010 2009 2008
NET ASSET VALUE, BEGINNING OF
PERIOD
INCOME (LOSS) FROM INVESTMENT
OPERATIONS: $11.41 $11.08 $9.73 $9.32 $10.61
------ ------ ------ ----- -----
Net Investment Income (Loss)(3) 0.32 0.33 0.32 0.30 0.36
Net Realized and Unrealized
Gains (Losses) on Investments 0.86 0.26 1.39 0.38 (1.13)
------ ------ ------ ----- -----
Total from Operations 1.18 0.59 1.71 0.68 (0.77)
------ ------ ------ ----- -----
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment (0.26) (0.26) (0.36) (0.27) (0.32)
Income
Distributions from Realized
Capital Gains -- -- -- -- (0.20)
------ ------ ------ ----- -----
Total Dividends and
Distributions (0.26) (0.26) (0.36) (0.27) (0.52)
------ ------ ------ ----- -----
NET ASSET VALUE, END OF PERIOD $12.33 $11.41 $11.08 $9.73 $9.32
====== ====== ====== ===== ======
TOTAL RETURN(1) 10.46% 5.35% 17.89%(2) 7.50%(2) (7.50)%(2)
====== ====== ====== ===== =====
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $805,218 $448,112 $202,142 $124,856 $113,764
Ratio of Expenses to Average Net
Assets 0.90%(4) 0.90%(4) 0.90% 1.00% 1.00%
Ratio of Expenses to Average Net
Assets (Excluding Waivers and
Recovered Fees) 0.87% 0.89% 0.96% 1.11% 1.24%
Ratio of Net Investment Income
(Loss) to Average Net Assets 2.63% 2.93% 3.18% 3.22% 3.57%
Portfolio Turnover Rate 24% 26% 34% 91% 99%
|
Amounts designated as "--" are $0.
(1) Total return is for the period indicated and has not been annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemptions of Fund shares.
(2) Total return would have been lower had certain expenses not been waived or assumed by the Adviser during the period.
(3) Calculation performed using average shares for the period.
(4) Ratio includes previously waived investment advisory fees recaptured. The impact of the recaptured fees may cause a high expense ratio.
WESTWOOD SHORT DURATION HIGH YIELD FUND INSTITUTIONAL CLASS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE
PERIOD ENDED OCTOBER 31, 2012(1)
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss)(**) 0.46
Net Realized and Unrealized Gains (Losses)
on Investments 0.02
------
Total from Operations 0.48
------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from Net Investment Income (0.40)
Total Dividends and Distributions (0.40)
NET ASSET VALUE, END OF PERIOD $10.08
======
TOTAL RETURN 4.91%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000) $37,774
Ratio of Expenses to Average Net Assets 0.90%(*)
Ratio of Expenses to Average Net Assets
(Excluding Waivers and Recovered Fees) 1.44%
Ratio of Net Investment Income (Loss) to
Average Net Assets 5.40%(*)
Portfolio Turnover Rate 52%(***)
|
(1) For the period from December 28, 2011 through October 31, 2012.
* Annualized.
** Calculation performed using average shares for the period.
*** Not annualized.
WESTWOOD GLOBAL EQUITY FUND, WESTWOOD GLOBAL DIVIDEND FUND, WESTWOOD EMERGING MARKETS FUND AND WESTWOOD EMERGING MARKETS PLUS FUND -- INSTITUTIONAL CLASS SHARES
Because the Funds had not commenced operations during the fiscal year ended October 31, 2012, financial highlights are not available.
THE ADVISORS' INNER CIRCLE FUND
WESTWOOD FUNDS
INVESTMENT ADVISER
Westwood Management Corp.
200 Crescent Court, Suite 1200
Dallas, Texas 75201
SUB-ADVISER
SKY Harbor Capital Management, LLC (Westwood Short Duration High Yield Fund)
20 Horseneck Lane
Greenwich, Connecticut 06830
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
MORE INFORMATION ABOUT THE FUNDS IS AVAILABLE, WITHOUT CHARGE, THROUGH THE FOLLOWING:
STATEMENT OF ADDITIONAL INFORMATION: The SAI, dated March 1, 2013, includes detailed information about the Westwood Funds and The Advisors' Inner Circle Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Funds' holdings and contain information from the Adviser about investment strategies, and recent market conditions and trends and their impact on Fund performance. The reports also contain detailed financial information about the Funds.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: 1-877-FUND-WHG (1-877-386-3944)
BY MAIL: Westwood Funds
P.O. Box 219009
Kansas City, MO 64121-9009
BY INTERNET: www.westwoodfunds.com
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
|
Reports, as well as other information about The Advisors' Inner Circle Fund, from the EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 202-551-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: U.S. Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-1520.
You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov.
THE ADVISORS' INNER CIRCLE FUND'S INVESTMENT COMPANY ACT REGISTRATION NUMBER IS
811-06400.
WHG-PS-001-0800
STATEMENT OF ADDITIONAL INFORMATION
ACADIAN EMERGING MARKETS DEBT FUND (AEMDX)
ACADIAN EMERGING MARKETS PORTFOLIO (AEMGX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
ACADIAN ASSET MANAGEMENT LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Acadian Emerging Markets Debt Fund ("Emerging Markets Debt Fund") and the Acadian Emerging Markets Portfolio ("Emerging Markets Portfolio") ( each a "Fund" and together, the "Funds"). This SAI is incorporated by reference and should be read in conjunction with the prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The Funds' financial statements and financial highlights including notes thereto, and the report of PricewaterhouseCoopers LLP for the fiscal year ended October 31, 2012 are contained in the 2012 Annual Report to Shareholders and are incorporated by reference into and are deemed part of this SAI. A copy of the Funds' 2012 Annual Report to Shareholders accompanies the delivery of this SAI. Shareholders may obtain copies of the Funds' prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9009 or by calling the Funds at 1-866-AAM-6161.
TABLE OF CONTENTS
THE TRUST ............................................................... S-1 DESCRIPTION OF PERMITTED INVESTMENTS .................................... S-1 INVESTMENT POLICIES OF THE FUNDS ........................................ S-29 INVESTMENT ADVISORY AND OTHER SERVICES .................................. S-32 PORTFOLIO MANAGERS ...................................................... S-33 THE ADMINISTRATOR ....................................................... S-35 THE DISTRIBUTOR ......................................................... S-36 PAYMENTS TO FINANCIAL INTERMEDIARIES .................................... S-36 TRANSFER AGENT .......................................................... S-37 CUSTODIAN ............................................................... S-37 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................... S-37 LEGAL COUNSEL ........................................................... S-37 TRUSTEES AND OFFICERS OF THE TRUST ...................................... S-37 PURCHASING AND REDEEMING SHARES ......................................... S-47 DETERMINATION OF NET ASSET VALUE ........................................ S-48 TAXES ................................................................... S-49 BROKERAGE ALLOCATION AND OTHER PRACTICES ................................ S-55 PORTFOLIO HOLDINGS ...................................................... S-58 DESCRIPTION OF SHARES ................................................... S-59 SHAREHOLDER LIABILITY ................................................... S-59 LIMITATION OF TRUSTEES' LIABILITY ....................................... S-59 PROXY VOTING ............................................................ S-60 CODES OF ETHICS ......................................................... S-60 5% AND 25% SHAREHOLDERS ................................................. S-60 APPENDIX A -- DESCRIPTION OF RATINGS .................................... A-1 APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES ....................... B-1 March 1, 2013 ACA-SX-001-1200 |
THE TRUST
GENERAL. The Funds are a separate series of the Trust. The Trust is an
open-end investment management company established under Massachusetts law as a
Massachusetts voluntary association (commonly known as a business trust) under
a Declaration of Trust dated July 18, 1991, as amended and restated February
18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust
to offer separate series ("funds") of shares of beneficial interest ("shares").
The Trust reserves the right to create and issue shares of additional funds.
Each fund is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong solely to that
fund and would be subject to liabilities related thereto. Each Fund pays its:
(i) operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses, and (ii) pro rata
share of the Fund's other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the
assets of that fund. Expenses not attributable to a specific fund are allocated
across all of the funds on the basis of relative net assets. The other funds of
the Trust are described in one or more separate statements of additional
information.
HISTORY OF THE EMERGING MARKETS PORTFOLIO. The Acadian Emerging Markets Portfolio is the successor to the UAM Funds, Inc. Acadian Emerging Markets Portfolio (the "Predecessor Fund"). The Predecessor Fund was managed by Acadian Asset Management LLC ("Acadian" or the "Adviser") using the same investment objective, strategies, policies and restrictions as those used by the Emerging Markets Portfolio. The Predecessor Fund's date of inception was June 17, 1993. The Predecessor Fund dissolved and reorganized into the Acadian Emerging Markets Portfolio on June 24, 2002. Substantially all of the assets of the Predecessor Fund were transferred to its successor in connection with the Emerging Markets Portfolio's commencement of operations on June 24, 2002.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Funds will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Funds without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
The Funds' investment objectives and principal investment strategies are described in the prospectus. The Funds may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Funds' stated investment policies, including those stated below. The following information supplements, and should be read in conjunction with, the prospectus.
DEBT SECURITIES
Corporations and governments use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
U.S. GOVERNMENT SECURITIES - The Funds may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed
dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
CORPORATE BONDS - Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Adviser will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA") - GNMA is the principal governmental guarantor of mortgage-related securities. GNMA is a wholly-owned corporation of the U.S. government within the Department of Housing and Urban Development. Securities issued by GNMA are treasury securities, which means the full faith and credit of the U.S. government backs them. GNMA guarantees the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the market value or yield of mortgage-backed securities or the value of the Funds' shares. To buy GNMA securities, the Funds may have to pay a premium over the maturity value of the underlying mortgages, which the Funds may lose if prepayment occurs.
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") - FNMA is a government-sponsored corporation owned entirely by private stockholders. FNMA is regulated by the Secretary of Housing and Urban Development. FNMA purchases conventional mortgages from a list of approved sellers and service providers, including state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Securities issued by FNMA are agency securities, which means FNMA, but not the U.S. government, guarantees their timely payment of principal and interest.
FREDDIE MAC -- Freddie Mac is a stockholder-owned corporation established by the U.S. Congress to create a
continuous flow of funds to mortgage lenders. Freddie Mac supplies lenders with the money to make mortgages and packages the mortgages into marketable securities. The system is designed to create a stable mortgage credit system and reduce the rates paid by homebuyers. Freddie Mac, not the U.S. government, guarantees timely payment of principal and interest.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by GNMA, FNMA and Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES -- Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. The most significant differences of mortgage-backed securities are:
o payments of interest and principal are more frequent (usually monthly); and
o falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing a Fund to reinvest the money at a lower interest rate.
In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. If the prepayment rates increase, a Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Funds may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
SHORT-TERM INVESTMENTS - To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, the Funds may invest a portion of its assets in the short-term securities listed below, U.S. government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS - The Funds will only invest in a security issued by a commercial bank if the bank:
o Has total assets of at least $1 billion, or the equivalent in other currencies (based on the most recent publicly available information about the bank); and
o Is a U.S. bank and a member of the Federal Deposit Insurance Corporation; or
o Is a foreign branch of a U.S. bank and the Adviser believes the security is of an investment quality comparable with other debt securities that the Funds may purchase.
TIME DEPOSITS - Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation. The Funds may only purchase time deposits maturing from two business days through seven calendar days.
CERTIFICATES OF DEPOSIT - Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or savings and loan association for a definite period of time and earning a specified return.
BANKERS' ACCEPTANCE - A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods).
COMMERCIAL PAPER - Commercial paper is a short-term obligation with a maturity ranging from 1 to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. The Funds may invest in commercial paper rated A-1 or A-2 by Standard and Poor's Ratings Services ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service ("Moody's"), or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A - Ratings" for a description of commercial paper ratings.
YANKEE BONDS - Yankee bonds are dollar-denominated bonds issued inside the United States by foreign entities. Investments in these securities involve certain risks that are not typically associated with investing in domestic securities. See "Foreign Securities."
ZERO COUPON BONDS - These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with
the same maturity. Each Fund's investments in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its Fund securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once the
holder of the security has stripped or separated corpus and coupons, it may
sell each component separately. The principal or corpus is then sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (I.E., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of
the owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," a Fund may record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
TERMS TO UNDERSTAND:
MATURITY - Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security held by the mutual fund, with the maturity of each security weighted by the percentage of the assets of the mutual fund it represents.
DURATION - Duration is a calculation that seeks to measure the price sensitivity of a debt security, or of a mutual fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration. Effective duration takes into account call features and sinking fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES - The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding period and the coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument,
therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
o INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (I.E., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected, resulting in prepayments on the securities. A Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of a Fund. If left unattended, drifts in the average maturity of a Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of a Fund.
EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause a Fund's average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of a Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term treasury securities, such as three-month treasury bills, are considered "risk free." Corporate securities offer higher yields than treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." Since an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which affects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called "investment-grade" because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, the Adviser may determine that
it is of investment-grade. The Adviser may retain securities that are downgraded, if it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause a Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's assessment of the issuer's financial strength. The Funds currently use ratings compiled by Moody's, S&P, and Fitch, Inc. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk. The section "Appendix A - Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
The Adviser may use ratings produced by ratings agencies as guidelines to determine the rating of a security at the time a Fund buys it. A rating agency may change its credit ratings at any time. The Adviser monitors the rating of the security and will take such action, if any, it believes appropriate when it learns that a rating agency has reduced the security's rating. The Funds are not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded. The Funds may invest in securities of any rating.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, an underlying economic factor, such as an interest rate or a market benchmark, such as an index. Investors can use derivatives to gain exposure to various markets in a cost efficient manner, to reduce transaction costs, alter duration or to remain fully invested. They may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates. Investing in derivatives for these purposes is known as "hedging." When hedging is successful, a Fund will have offset any depreciation in the value of its Fund securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of a Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure. To the extent that a Fund engages in hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the Investment Company Act of 1940, as amended (the "1940 Act"). Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Funds, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), a Fund must either operate within certain guidelines and restrictions with
respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Funds, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Funds are not subject to registration or regulation as CPOs under the CEA. As a result, the Funds will operate within certain guidelines and restrictions with respect to their use of futures, options on such futures, commodity options and certain swaps.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading and regulated by the Commodity Futures Trading Commission (the "CFTC"). These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
The Funds may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or
"OTC options"). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counter-party will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When a Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). A Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that a Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. A Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, a Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When a Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when a Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. A Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an over-the-counter option by entering into an offsetting transaction with the counter-party to the option.
A Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, a Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, a Fund would hope to profit by closing out the put option at a lower price. If security prices fall, a Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. A Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, the
Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Funds are permitted only to write covered options. At the time of selling the call option, the Funds may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, the Funds may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (I.E., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
The Funds may purchase put and call options on futures contracts instead of selling or buying futures contracts. The Funds may buy a put option on a futures contract for the same reasons they would sell a futures contract. They also may purchase such put options in order to hedge a long position in the underlying futures contract. The
Funds may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
The Funds may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, a Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, a Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to a Fund.
o COMBINED POSITIONS
The Funds may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, a Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, a Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (I.E., the parties to the contract may fix the maturity date and the amount).
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC.
o Do not require an initial margin deposit.
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect the Funds against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. A Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
The Funds may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Funds could also hedge the position by selling another currency expected to perform similarly to the currency in
which a Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that a Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
A Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, a Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, a Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
To the extent that a Fund engages in foreign currency hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of a Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from a Fund. If a swap agreement calls for payments by a Fund, the Fund must be prepared to make such payments when due. In addition, if the counter-party's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. A Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counter-party is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, a Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a Fund's gains or losses. In order to reduce the risk associated with leveraging, a Fund may cover its current obligations under swap agreements according to guidelines established by the U.S. Securities and Exchange Commission ("SEC"). If a Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of a Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can
gain exposure to stocks making up the index of securities without actually
purchasing those stocks. Equity index swaps involve not only the risk
associated with investment in the securities represented in the index, but also
the risk that the performance of such securities, including dividends, will not
exceed the return on the interest rate that a Fund will be committed to pay.
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if a Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, the Fund may have to pay more money than it receives. Similarly, if a Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, the Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. A Fund may enter into a currency swap when it has one currency and desires a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
o CREDIT DEFAULT SWAPS
A credit default swap enables a Fund to buy or sell protection against a defined credit event of an issuer or a basket of securities. Generally, the seller of credit protection against an issuer or basket of securities receives a
periodic payment to compensate against potential default events. If a default event occurs, the seller must pay the buyer the full notional value of the reference obligation in exchange for the reference obligation or make a cash payment equal to the difference between the product of the full notional value and the difference of 100% less a reference price determined through an auction of the defaulted securities. If no default occurs, the counterparty will pay the stream of payments and have no further obligations to a Fund selling the credit protection.
In contrast, the buyer of a credit default swap would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value or receive a cash payment equal to the difference between the product of the full notional value and the difference of 100% less a reference price determined through an auction of the defaulted securities of such debt obligation from the counterparty in the event of a default or other credit event by the reference issuer, such as a U.S. or foreign corporation, with respect to its debt obligations. In return, the buyer of the credit protection would pay the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the counterparty would keep the stream of payments and would have no further obligations to a Fund purchasing the credit protection.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
CREDIT LINKED NOTES - A credit linked note ("CLN") is a type of structured note issued by a special purpose entity (the "Note Issuer") whose value is linked to an underlying reference asset (the "Reference Instrument"). Credit linked notes typically provide periodic payments of interest as well as payment of principal upon maturity, the value of which is tied to the underlying reference asset. The purchaser of the CLN (the "Note Purchaser") invests a par amount and receives a payment during the term of the CLN that equals a fixed or floating rate of interest equivalent to a high rated funded asset (such as a bank certificate of deposit) plus an additional premium that relates to taking on the credit risk of the Reference Instrument. Upon maturity of the CLN, the Note Purchaser will receive a payment equal to (i) the original par amount paid to the Note Issuer, if there is neither a designated event of default (an "Event of Default") with respect to the Reference Instrument nor a restructuring of the issuer of the Reference Instrument (a "Restructuring Event") or (ii) the value of the Reference Instrument, if an Event of Default or Restructuring Event has occurred. Depending upon the terms of the CLN, it is also possible that the Note Purchaser may be required to take physical delivery of the Reference Instrument in the event of an Event of Default or a Restructuring Event. Most CLNs use a corporate bond (or a portfolio of corporate bonds) as the Reference Instrument(s). However, almost any type of fixed income security (including foreign government securities) or derivative contract (such as a credit default swap) can be used as the Reference Instrument.
Investments in credit-linked notes are subject to the risk of loss of the principal investment and/or periodic interest payments expected to be received from an investment in a credit-linked note in the event that one or more of the underlying obligations of a note default or otherwise become non-performing. To the extent a Fund invests in a credit-linked note that represents an interest in a single issuer or limited number of issuers, a credit event with respect to that issuer or limited number of issuers presents a greater risk of loss to a Fund than if the credit-linked note represented an interest in underlying obligations of multiple issuers.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for a Fund than if it had not entered into any derivatives transactions. Derivatives may magnify a Fund's gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities a Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose a Fund to greater risks.
CORRELATION OF PRICES - A Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities a Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if a Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, a Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o Current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o A difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o Differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of a Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect a Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of a Fund's foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of a Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, a Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, a Fund may close out a futures contract only on the exchange the contract was initially traded. Although the Funds intend to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, the Fund may not be able to close out its position. In an illiquid market, the Funds may:
o Have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o Have to purchase or sell the instrument underlying the contract;
o Not be able to hedge its investments; and
o Not be able to realize profits or limit its losses.
Derivatives may become illiquid (I.E., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o An exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o Unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o The facilities of the exchange may not be adequate to handle current trading volume;
o Equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o Investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, a Fund may lose money by investing in derivatives. For example, if a Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if a Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if a Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into the Fund. If a Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to a Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, a Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. A Fund may lose its margin deposits if a broker with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (I.E., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, a Fund may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
EQUITY SECURITIES
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments
in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the net asset value of a Fund to fluctuate. A Fund purchases equity securities traded in the U.S. on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
COMMON STOCKS - Common stocks represent units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are described below, dividends on common stocks are not fixed but are declared at the discretion of the company's board of directors.
PREFERRED STOCKS - Preferred stocks are also units of ownership in a company. Preferred stocks normally have preference over common stock in the payment of dividends and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market values of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk.
CONVERTIBLE SECURITIES - Convertible securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of the issuer's common stock at a Fund's option during a specified time period (such as convertible preferred stocks, convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same corporation. In general, the market value of a convertible security is at least the higher of its "investment value" (I.E., its value as a fixed income security) or its "conversion value" (I.E., its value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times of steady interest rates than other types of debt securities. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which a Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics, and other factors. Because the Funds will create synthetic convertible positions only out of high grade fixed income securities, the credit rating associated with a Fund's synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing "time value" as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss, the market price
of the option component generally reflects these differences in maturities, and the Adviser takes such differences into account when evaluating such positions. When a synthetic convertible position "matures" because of the expiration of the associated option, a Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If a Fund does not so extend the maturity of a position, it may continue to hold the associated fixed income security.
RIGHTS AND WARRANTS - A right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life, usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
RISKS OF INVESTING IN EQUITY SECURITIES:
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
SMALL AND MEDIUM-SIZED COMPANIES - Investors in small and medium-sized companies typically take on greater risk and price volatility than they would by investing in larger, more established companies. This increased risk may be due to the greater business risks of their small or medium size, limited markets and financial resources, narrow product lines and frequent lack of management depth. The securities of small and medium-sized companies are often traded in the over-the-counter market and might not be traded in volumes
typical of securities traded on a national securities exchange. Thus, the securities of small and medium capitalization companies are likely to be less liquid, and subject to more abrupt or erratic market movements, than securities of larger, more established companies.
TECHNOLOGY COMPANIES - Stocks of technology companies have tended to be subject to greater volatility than securities of companies that are not dependent upon or associated with technological issues. Technology companies operate in various industries. Since these industries frequently share common characteristics, an event or issue affecting one industry may significantly influence other, related industries. For example, technology companies may be strongly affected by worldwide scientific or technological developments and their products and services may be subject to governmental regulation or adversely affected by governmental policies.
INITIAL PUBLIC OFFERINGS ("IPOS") - A Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on a Fund with a small asset base. The impact of IPOs on a Fund's performance likely will decrease as a Fund's asset size increases, which could reduce a Fund's total returns. IPOs may not be consistently available to a Fund for investing, particularly as a Fund's asset base grows. Because IPO shares frequently are volatile in price, a Fund may hold IPO shares for a very short period of time. This may increase the turnover of a Fund's portfolio and may lead to increased expenses for the Fund, such as commissions and transaction costs. By selling IPO shares, a Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The Funds' investment in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which presents risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product lines.
FOREIGN SECURITIES
TYPES OF FOREIGN SECURITIES:
Foreign securities are debt and equity securities that are traded in markets outside of the U.S. The markets in which these securities are located can be developed or emerging. The Funds can invest in foreign securities in a number of ways, including:
o The Funds can invest directly in foreign securities denominated in a foreign currency;
o The Funds can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o The Funds can invest in investment funds.
AMERICAN DEPOSITARY RECEIPTS ("ADRS") - ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national
markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS - An "emerging country" is generally a country that the World Bank and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 150 countries that the international financial community generally considers to be emerging or developing countries, approximately 50 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
SOVEREIGN DEBT OBLIGATIONS - Sovereign debt obligations are issued or guaranteed by foreign governments or their agencies. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and pay interest when due, and may require renegotiation or reschedule of debt payments. In addition, prospects for repayment of principal and payment of interest may depend on political as well as economic factors. Although some sovereign debt, such as Brady Bonds, is collateralized by U.S. Government securities, repayment of principal and payment of interest is not guaranteed by the U.S. Government.
INVESTMENT FUNDS - Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If a Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses of a Fund (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS - Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict or control foreign investments in its securities markets. These restrictions could limit a Fund's ability to invest in a particular country or make it very expensive for a Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION - There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign companies more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Adviser anticipates that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States. will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o Are generally more volatile than, and not as developed or efficient as, those in the United States;
o Have substantially less volume;
o Trade securities that tend to be less liquid and experience rapid and erratic price movements;
o Have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o Employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o May have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o Foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards.
o Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis.
o In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated.
o Economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights.
o Restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK - While a Fund denominates its net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES - Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for a Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income a Fund receives from its investments. A Fund does not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS - When a Fund invests in securities in emerging markets, it will be subject to risks not typically associated with domestic securities. Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it more difficult for a Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed.
Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
EXCHANGE-TRADED FUNDS ("ETFS")
A Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their operation, such as advisory and custody fees. When A Fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, a Fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
INVESTMENT COMPANIES
A Fund may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by a Fund. A Fund's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying a Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, a Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, a Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise complies with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
NON-DIVERSIFICATION
The Funds are non-diversified, as that term is defined in the 1940 Act, which means that a relatively high percentage of assets of the Funds may be invested in the obligations of a limited number of issuers. Although the Adviser does not intend to invest more than 5% of a Fund's assets in any single issuer (with the exception of securities which are issued or guaranteed by a national government), the value of the shares of a Fund may be more susceptible to any single economic, political or regulatory occurrence than the shares of a diversified investment company would be. The Funds intend to satisfy the diversification requirements necessary to qualify as a regulated investment company under the Internal Revenue Code, which generally requires that the Funds be diversified (I.E., will not invest more than 5% of its assets in the securities in any one issuer) with respect to 50% of their assets.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with financial institutions. A
repurchase agreement is an agreement under which a fund acquires a fixed income
security (generally a security issued by the U.S. government or an agency
thereof, a banker's acceptance, or a certificate of deposit) from a commercial
bank, broker, or dealer, and simultaneously agrees to resell such security to
the seller at an agreed upon price and date (normally, the next business day).
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement may be considered a loan that is
collateralized by the security purchased. The acquisition of a repurchase
agreement may be deemed to be an acquisition of the underlying securities as
long as the obligation of the seller to repurchase the securities is
collateralized fully. The Funds follows certain procedures designed to
minimize the risks inherent in such agreements. These procedures include
effecting repurchase transactions only with creditworthy financial institutions
whose condition will be continually monitored by the Adviser. The repurchase
agreements entered into by the Funds will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Funds, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, a Fund will seek to liquidate such collateral. However, the
exercising of a Fund's right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sale upon a default
of the obligation to repurchase were less than the repurchase price, a Fund
could suffer a loss. It is the current policy of the Funds, not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Funds, amounts
to more than 15% of a Fund's total assets. The investments of the Funds in
repurchase agreements, at times, may be substantial when, in the view of the
Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
A Fund may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Generally, the effect of such a transaction is that a Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while a Fund will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if
the interest cost to a Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and a Fund intends to use the reverse repurchase technique only when it will be advantageous to the Fund. A Fund will in each instance establish a segregated account with the Trust's custodian bank in which a Fund will maintain cash or cash equivalents or other portfolio securities equal in value to a Fund's obligations in respect of reverse repurchase agreements.
RESTRICTED AND ILLIQUID SECURITIES
While the Funds do not anticipate doing so, they may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. A Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of a Fund's net assets invested in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that can not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on a Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by a Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
SECURITIES LENDING
The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Funds (including the loan collateral). The Funds will not lend portfolio securities to their Adviser or their affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
A Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, a Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. Investing cash collateral subjects a Fund to market
risk. A Fund remains obligated to return all collateral to the borrower under the terms of its securities lending arrangements, even if the value of investments made with the collateral decline. Accordingly, if the value of a security in which the cash collateral has been invested declines, the loss would be borne by a Fund, and a Fund may be required to liquidate other investments in order to return collateral to the borrower at the end of the loan. The Funds will adhere to the following conditions whenever their portfolio securities are loaned: (i) a Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) a Fund must be able to terminate the loan on demand; (iv) a Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) a Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, a Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, a Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon a Fund's ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
SHORT SALES
DESCRIPTION OF SHORT SALES:
Selling a security short is when an investor sells a security it does not own. To sell a security short an investor must borrow the security from someone else to deliver to the buyer. The investor then replaces the security it borrowed by purchasing it at the market price at or before the time of replacement. Until it replaces the security, the investor repays the person that lent it the security for any interest or dividends that may have accrued during the period of the loan.
Investors typically sell securities short to:
o Take advantage of an anticipated decline in prices.
o Protect a profit in a security it already owns.
A Fund can lose money if the price of the security it sold short increases between the date of the short sale and the date on which the Fund replaces the borrowed security. Likewise, a Fund can profit if the price of the security declines between those dates. Because the market price of the security sold short could increase without limit, a Fund could also be subject to a theoretically unlimited loss.
To borrow the security, a Fund may be required to pay a premium, which would increase the cost of the security sold. A Fund will also incur transaction costs in effecting short sales. A Fund's gains and losses will be decreased or increased, as the case may be, by the amount of the premium, dividends, interest, or expenses the Fund may be required to pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent necessary to meet margin requirements, until the short position is closed out.
SHORT SALES AGAINST THE BOX - In addition, the Funds may engage in short sales "against the box." In a short sale against the box, a Fund agrees to sell at a future date a security that it either currently owns or has the right to acquire at no extra cost. The Funds will incur transaction costs to open, maintain and close short sales against the box. For tax purposes, a short sale against the box may be a taxable event to a Fund.
RESTRICTIONS ON SHORT SALES:
The Funds will not short sell a security if:
o After giving effect to such short sale, the total market value of all securities sold short would exceed 25% of the value of a Fund's net assets.
o The market value of the securities of any single issuer that have been sold short by a Fund would exceed two percent (2%) of the value of a Fund's net assets.
o Any security sold short would constitute more than two percent (2%) of any class of the issuer's securities.
Until a Fund closes its short position or replaces the borrowed security, a Fund may: (a) segregate cash or liquid securities at such a level that the amount segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short; or (b) otherwise cover Fund's short position.
WHEN ISSUED, DELAYED -- DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, a Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities a Fund has committed to purchase before the securities are delivered, although a Fund may earn income on securities it has in a segregated account to cover its position. A Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
A Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When a Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, a Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, a Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because a Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
A Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. A Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments.
BORROWING
A Fund may borrow money for investment purposes. Borrowing for investment purposes is one form of leverage. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk, but also increases investment opportunity. Because substantially all of a Fund's assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the net asset value per share ("NAV") of a Fund will increase more when the Fund's portfolio assets increase in value and decrease more when the Fund's portfolio assets decrease in value than would otherwise be the case. Moreover, interest costs on
borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the returns on the borrowed funds. Under adverse conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when investment considerations would not favor such sales. The Funds intend to use leverage during periods when the Adviser believes that the respective Funds' investment objective would be furthered.
The Funds may also borrow money to facilitate management of a Fund's portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the borrowing Fund promptly. As required by the 1940 Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of a Fund's assets should fail to meet this 300% coverage test, the Fund, within three days (not including Sundays and holidays), will reduce the amount of the Fund's borrowings to the extent necessary to meet this 300% coverage requirement. Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment considerations otherwise indicate that it would be disadvantageous to do so.
INVESTMENT POLICIES OF THE FUND
FUNDAMENTAL POLICIES
The following investment policies are fundamental, which means that the Funds cannot change them without approval by the vote of a majority of the outstanding shares of the Funds. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of a Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Unless otherwise noted, a Fund will determine compliance with the investment limitation percentages below (with the exception of a limitation relating to borrowing and illiquid securities) and other applicable investment requirements immediately after and as a result of its acquisition of such security or other asset. Accordingly, the Funds generally will not consider changes in values, net assets or other circumstances when determining whether the investment complies with its investment limitations. The Funds will not:
o Borrow money, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in the Funds' prospectus and SAI as they may be amended from time to time.
o Issue senior securities, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction.
o Underwrite securities of other issuers, except insofar as the Funds may technically be deemed to be an underwriter under the 1933 Act in connection with the purchase or sale of its portfolio securities.
o Concentrate its investments in the securities of one or more issuers conducting their principal business activities in the same industry (other than securities issued or guaranteed by the U.S. government or its agencies or instrumentalities).
o Purchase or sell real estate, except: (1) to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction; (2) that the Funds may invest in securities of issuers that deal or invest in real estate; and (3) that the Funds may purchase securities secured by real estate or interests therein.
o Purchase or sell commodities or contracts on commodities except that the Funds may engage in financial futures contracts and related options and currency contracts and related options and may otherwise do so
in accordance with applicable law and without registering as a commodity pool operator under the Commodity Exchange Act.
o Make loans to other persons, except that the Funds may lend their portfolio securities in accordance with applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in the Funds' prospectus and SAI as they may be amended from time to time. The acquisition of investment securities or other investment instruments shall not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
In addition to the investment objectives of the Funds, the following investment limitations are non-fundamental, and may be changed by the Board without shareholder approval.
The Emerging Markets Debt Fund may not:
o Hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
The Emerging Markets Portfolio may:
o Not borrow money, except that: (1) the Fund may borrow from banks (as defined in the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33 1/3 % of its total assets (including the amount borrowed); (2) the Fund may borrow up to an additional 5% of its total assets for temporary purposes; (3) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities; and (4) the Fund may purchase securities on margin and engage in short sales to the extent permitted by applicable law.
Notwithstanding the investment restrictions above, the Fund may not borrow amounts in excess of 33 1/3 % of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. The Fund will not purchase securities while borrowings are outstanding except to exercise prior commitments and to exercise subscription rights.
o Purchase and sell currencies or securities on a when-issued, delayed delivery or forward-commitment basis.
o Purchase and sell foreign currency, purchase options on foreign currency and foreign currency exchange contracts.
o Invest in the securities of foreign issuers.
o Purchase shares of other investment companies to the extent permitted by applicable law. The Fund may, notwithstanding any fundamental policy or other limitation, invest all of its investable assets in securities of a single open-end management investment company with substantially the same investment objectives, policies and limitations.
The 1940 Act currently permits the Fund to invest up to 10% of its total assets in the securities of other investment companies. However, the Fund may not invest more than 5% of its total assets in the securities of any one investment company or acquire more than 3% of the outstanding securities of any one investment company, unless permissible under the 1940 Act and the rules and promulgations thereunder.
o Invest in illiquid and restricted securities to the extent permitted by applicable law.
The Fund intends to follow the policies of the SEC as they are adopted from time to time with respect to illiquid securities, including (1) treating as illiquid securities that may not be disposed of in the ordinary course of business within 7 days at approximately the value at which the Fund has valued the investment on its books; and (2) limiting its holdings of such securities to 15% of net assets.
o Write covered call options and may buy and sell put and call options.
o Enter into repurchase agreements.
o Lend portfolio securities to registered broker-dealers or other institutional shareholders. These loans may not exceed 33 1/3 % of the Fund's total assets taken at market value. In addition, the Fund must receive at least 100% collateral.
o Sell securities short and engage in short sales "against the box."
o Enter into swap transactions.
Further, the Emerging Markets Debt Fund may not change its investment strategy to invest at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities of emerging markets issuers and related instruments without 60 days' prior written notice to shareholders. The Emerging Markets Portfolio may not change its investment strategy to invest at least 80% of its net assets in equity securities of issuers that: (1) have their principal securities trading market in an emerging country; (2) alone or on a consolidated basis derive 50% or more of annual revenue from goods produced, sales made or services performed in emerging countries; and (3) are organized under the laws of, and have principal office in, an emerging country without 60 days' prior written notice to shareholders.
Except with respect to the Funds' policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
CONCENTRATION. The SEC staff has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries, with certain exceptions. Each Fund may, at any time, invest more than 25% of its assets in securities issued by the Federal government or its agencies and instrumentalities, and/or state governments and their political sub-divisions, as the SEC Staff does not consider such entities to be the members of any industry.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets.
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as short sales, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Funds' current investment policy on lending is as follows: each Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its Statement of Additional Information.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly.
COMMODITIES AND REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in commodities or real estate, but does require that every investment company have a fundamental investment policy governing such investments. Each Fund has adopted a fundamental policy that would permit direct investment in commodities or real estate. The Funds' current investment policy is as follows: each Fund will not purchase or sell real estate, physical commodities, or commodities contracts, except that the Fund may purchase: (i) marketable securities issued by companies which own or invest in real estate (including REITs), commodities, or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. Acadian Asset Management LLC ("Acadian" or the "Adviser"), is an SEC-registered investment adviser and a Delaware limited liability company. Acadian is located at 260 Franklin Street, Boston, Massachusetts 02110, serves as the Fund's investment adviser. The Adviser manages and supervises the investment of the Funds' assets on a discretionary basis. The Adviser has provided investment management services to major pension funds, endowments, foundations, governments and other institutions based in the U.S. and abroad since 1986. Acadian is a subsidiary of Old Mutual Asset Managers (US) LLC. Old Mutual (US) LLC, Inc. is an indirect wholly owned subsidiary of Old Mutual plc., a financial services company based in the United Kingdom. As of December 31, 2012, the Adviser had approximately $51.9 billion in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement (the "Advisory Agreement") dated June 24, 2002. Under the Advisory Agreement, the Adviser serves as investment adviser and makes the investment decisions for the Funds and continuously reviews, supervises and administers the investment program of the Funds, subject to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Funds; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of the Funds, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, or bad faith or gross negligence in the performance of its duties hereunder or by reason of reckless disregard of its obligation and duties thereunder. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services, the Funds pay the Adviser a fee calculated at an annual rate of 0.65% and 1.00% of the average daily net assets of the Emerging Markets Debt Fund and the Emerging
Markets Portfolio, respectively. Due to the effect of fee waivers by the Adviser, the actual percentage of average daily net assets that each Fund pays in any given year may be different from the rate set forth in its contract with the Adviser. The Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep its net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.95% of the Emerging Markets Debt Fund's average daily net assets until March 1, 2014. Thereafter, the Adviser will consider the continuance of this agreement on an annual basis. With respect to the Emerging Markets Portfolio, the Adviser has voluntarily agreed to reduce fees and reimburse expenses to the extent necessary to keep its total annual Fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 2.50% of the Emerging Markets Portfolio's average daily net assets. The Adviser does not expect that any fee waivers will be necessary to keep fund expenses below the cap. The Adviser may change or cancel this expense limitation at any time.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following advisory fees:
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FEES WAIVED BY
CONTRACTUAL FEES PAID THE ADVISER(3) TOTAL FEES PAID (AFTER WAIVERS)
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FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
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Emerging
Markets N/A(1) $77,265(2) $135,138 N/A(1) $77,265(2,3) $135,138 N/A(1) $0(2) $0(4)
Debt Fund
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Emerging
Markets $6,311,756 $9,653,470 $9,248,835 $0 $0 $0 $6,311,756 $9,653,470 $9,248,835
Portfolio
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|
(1) Not in operation during the period.
(2) Represents the period between December 17, 2010 (commencement of Fund operations), and October 31, 2011.
(3) For the fiscal year ended October 31, 2011, the Adviser additionally reimbursed fees of $63,407 for the Emerging Markets Debt Fund to maintain the stated expense cap under its contractual expense limitation agreement with the Fund.
(4) For the fiscal year ended October 31, 2012, the Adviser additionally reimbursed fees of $70,541 for the Emerging Markets Debt Fund to maintain the stated expense cap under its contractual expense limitation agreement with the Fund.
PORTFOLIO MANAGERS
This section includes information about the Funds' portfolio managers, including information about other accounts managed, the dollar range of Fund shares owned and compensation.
COMPENSATION. Compensation structure varies among professionals, although the basic package involves a generous base salary, strong bonus potential, profit sharing potential, various fringe benefits, and, among the majority of senior investment professionals and certain other key employees, equity ownership in the firm as part of the Acadian Key Employee Limited Partnership (KELP).
Compensation is highly incentive-driven, with Acadian paying up to and sometimes in excess of 100% of base pay for performance bonuses. Bonuses are tied directly to the individual's contribution and performance during the year, with members of the investment team evaluated on such factors as their contributions to the investment process, account retention, portfolio performance, asset growth, and overall firm performance. Since portfolio management is a team approach, investment team members' compensation is not linked to the performance of specific accounts but rather to the individual's overall contribution to the success of the team and the firm's profitability.
FUND SHARES OWNED BY THE PORTFOLIO MANAGERS. The Funds are required to show the dollar amount range of the portfolio managers' "beneficial ownership" of shares of the Funds as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES OWNED(1) -------------------------------------------------------------------------------- L. Bryan Carter $50,001 - $100,000 (Emerging Markets Debt Fund) -------------------------------------------------------------------------------- Vasiliki Everett None -------------------------------------------------------------------------------- John Chisholm Over $1,000,000 (Emerging Markets Portfolio) -------------------------------------------------------------------------------- Brian Wolahan $50,001 - $100,000 (Emerging Markets Portfolio) -------------------------------------------------------------------------------- Ronald Frashure Over $1,000,000 (Emerging Markets Portfolio) -------------------------------------------------------------------------------- Asha Mehta None -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Funds, the portfolio managers may also be responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
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NUMBER NUMBER NUMBER
OF TOTAL ASSETS OF TOTAL ASSETS OF TOTAL ASSETS
NAME ACCOUNTS (MILLIONS) ACCOUNTS (MILLIONS) ACCOUNTS (MILLIONS)
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L. Bryan
Carter 0 $0 2 $81 0 $0
---------------------------------------------------------------------------------------------------------------------------
Vasiliki
Everett 0 $0 2 $81 0 $0
---------------------------------------------------------------------------------------------------------------------------
John
Chisholm(1) 10(2) $3,499(2) 59(3) $10,959(3) 135(4) $33,117(4)
---------------------------------------------------------------------------------------------------------------------------
Brian
Wolahan(1) 10(2) $3,499(2) 59(3) $10,959(3) 135(4) $33,117(4)
---------------------------------------------------------------------------------------------------------------------------
Ronald
Frashure(1) 10(2) $3,499(2) 59(3) $10,959(3) 135(4) $33,117(4)
---------------------------------------------------------------------------------------------------------------------------
Asha
Mehta(1) 10(2) $3,499(2) 59(3) $10,959(3) 135(4) $33,117(4)
---------------------------------------------------------------------------------------------------------------------------
|
(1) John Chisholm, Brian Wolahan, Ron Frashure and Asha Mehta function as part of a core equity team of 18 portfolio managers and are not segregated along product lines or by client type. These portfolio managers worked on all core equity products and the data shown for these managers reflects firm-level numbers of accounts and assets under management, segregated by investment vehicle type.
(2) Two accounts subject to a performance based fee, representing $1,274 million in assets.
(3) Four accounts subject to a performance based fee, representing $577 million in assets.
(4) Thirteen accounts subject to a performance based fee, representing $5,560 million in assets.
CONFLICTS OF INTERESTS. A conflict of interest may arise as a result of a portfolio manager being responsible for multiple accounts, including the subject Funds, which may have different investment guidelines and objectives. In addition to the subject Funds, these accounts may include other mutual funds managed on an advisory or sub-advisory basis, separate accounts and collective trust accounts. An investment opportunity may be suitable for the subject Funds as well as for any of the other managed accounts. However, the investment may not be available in sufficient quantity for all of the accounts to participate fully. In addition, there may be limited opportunity to sell an investment held by the subject Funds the Other Accounts. The Other Accounts may have similar investment objectives or strategies as the subject Funds, may track the same benchmarks or indexes as the subject Funds tracks, and may sell securities that are eligible to be held, sold or purchased by the subject Funds. A portfolio manager may be responsible for accounts that have different advisory fee schedules, which may create the incentive for the portfolio manager to favor one account over another in terms of access to investment opportunities. A portfolio manager may also manage accounts whose investment objectives and policies differ from those of the subject Funds, which may cause the portfolio manager to effect trading in one account that may have an adverse affect on the value of the holdings within another account, including the subject Funds.
To address and manage these potential conflicts of interest, Acadian has adopted compliance policies and procedures to allocate investment opportunities and to ensure that each of their clients is treated on a fair and equitable basis. Such policies and procedures include, but are not limited to, trade allocation and trade aggregation policies and oversight by investment management and the Compliance team.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991 as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Funds whereby the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.12% for the first $250 million in average daily net assets, 0.10% for the next $250 million in average daily net assets, 0.08% for the next $250 million in average daily net assets and 0.04% for all average daily net assets greater than $750 million. The minimum fee is $125,000 for one portfolio, $250,000 for two portfolios, $350,000 for three portfolios, an additional $75,000 for each additional portfolio over three and $20,000 for each additional class per
portfolio after the first class, apportioned to the Funds as a percentage of average daily net assets. Due to these minimums, the annual administration fee the Funds pay will exceed the above percentages at low asset levels.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the Administrator the following fees:
--------------------------------------------------------------------------------
ADMINISTRATION FEES PAID
--------------------------------------------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
Emerging Markets Debt Fund N/A(1) $10,190(2) $18,239
--------------------------------------------------------------------------------
Emerging Markets Portfolio $653,629 $830,815 $810,512
--------------------------------------------------------------------------------
|
(1) Not in operation during period.
(2) Represents the period between December 17, 2010 (commencement of Fund operations) and October 31, 2011.
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Funds; and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Funds, by a majority of the outstanding shares of the Funds, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Funds assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates, as incentives to help market and promote the Funds and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Funds, the Distributor or shareholders of the Funds through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Funds in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Funds; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Funds by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Funds' transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
CUSTODIAN
Union Bank, N.A., 350 California Street, 6th Floor, San Francisco, CA 94104 (the "Custodian") serves as the custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
For the fiscal year ending October 31, 2013, Deloitte & Touche LLP serves as the independent registered public accounting firm for each of the Funds. PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700 Philadelphia, PA 19103, previously served as independent registered public accounting firm for the Funds. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability
of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Chief Trust and New Covenant Funds,
Executive Officer of SEI Global Assets Fund plc, SEI Global
SEI Alpha Strategy Investments Fund plc, SEI
Portfolios, LP, June Investments--Global Funds Services,
2007 to present. Limited, SEI Investments Global,
President and Director Limited, SEI Investments (Europe)
of SEI Opportunity Ltd., SEI Investments--Unit Trust
Fund, L.P. to 2010. Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd. and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Administrator Trust, SEI Asset Allocation Trust, SEI
and the Distributor. Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
-------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Business Current Directorships: Trustee of The
(08/20/34) (since 2005) Consultant, Business Advisors' Inner Circle Fund II and
Projects Inc. since 1997. Bishop Street Funds; Director of
Oregon Transfer Co.
-------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Executive Current Directorships: Trustee of The
(08/17/44) (since 2008) Officer, Office of Advisors' Inner Circle Fund II and
Finance, Federal Home Bishop Street Funds. Director of
Loan Banks, from 1992 Federal Home Loan Bank of
to 2007. Pittsburgh and Manna, Inc. (non-
profit developer of affordable housing
for ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
-------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since January Advisors' Inner Circle Fund II and
2012; Director of Bishop Street Funds. Director of The
Endowments and Korea Fund, Inc.
Foundations, Morningstar
Investment Management,
Morningstar, Inc.,
February 2010 to May
2011; Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010; Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson (since 2005) since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
-------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc. from 2008 Bishop Street Funds.
to 2010. Self-Employed
Legal and Financial
Services Consultant since
2003. Counsel (in-house)
for State Street Bank
from 1995 to 2003.
-------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011; Executive
Vice President --
Investment Management
Services, John Hancock
Financial Services
(subsidiary of Manulife
Financial), June 2003 to
June 2010.
-------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and US Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
George J. Sullivan, Jr. Trustee Retired since January Current Directorships:
(11/13/42) (since 1999) 2012. Self-employed Trustee/Director of State Street
Lead Independent Consultant, Newfound Navigator Securities Lending Trust,
Trustee Consultants Inc., April The Advisors' Inner Circle Fund II,
1997 to December 2011. Bishop Street Funds, SEI Structured
Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board
because of their ability to review and understand information about the Funds
provided to them by management, to identify and request other information they
may deem relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on the
management and administration of the Funds, and to exercise their business
judgment in a manner that serves the best interests of the Funds' shareholders.
The Trust has concluded that each of the Trustees should serve as a Trustee
based on their own experience, qualifications, attributes and skills as
described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of
Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and considering any significant
disputes between the Trust's management and the independent registered
public accounting firm that arose in connection with the preparation of
those financial statements; (vii) considering, in consultation with the
independent registered public accounting firm and the Trust's senior
internal accounting executive, if any, the independent registered public
accounting firms' reports on the adequacy of the Trust's internal financial
controls; (viii) reviewing, in consultation with each fund's independent
registered public accounting firm, major changes regarding auditing and
accounting principles and practices to be followed when preparing each
fund's financial statements; and (ix) other audit related matters. Messrs.
Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms.
Krikorian currently serve as members of the Audit Committee. Mr. Sullivan
serves as the Chairman of
the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
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DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
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INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
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Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
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Krikorian None None
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Speca None None
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Storey None None
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Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
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AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
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INTERESTED TRUSTEES
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Doran $0 N/A N/A $0 for service on one (1) board
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Nesher $0 N/A N/A $0 for service on one (1) board
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INDEPENDENT TRUSTEES
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Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
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Darr $52,654 N/A N/A $52,654 for service on one (1) board
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Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Johnson $52,654 N/A N/A $52,654 for service on one (1) board
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Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
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SpecA(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Storey $52,654 N/A N/A $52,654 for service on one (1) board
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Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
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NAME AND POSITION WITH PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
DATE OF BIRTH TRUST AND LENGTH
OF TERM
--------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
--------------------------------------------------------------------------------
Michael Lawson Treasurer, Director, SEI Investments, Fund
(10/08/60) Controller and Accounting since July 2005. Manager,
Chief Financial SEI Investments, Fund Accounting at
Officer SEI Investments AVP from April 1995
(since 2005) to February 1998 and November 1998
to July 2005.
--------------------------------------------------------------------------------
Russell Emery Chief Compliance Chief Compliance Officer of SEI Structured
(12/18/62) Officer (since Credit Fund, LP and SEI Alpha Strategy
2006) Portfolios, LP since June 2007. Chief Compliance
Officer of The Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Institutional Managed
Trust, SEI Asset Allocation Trust, SEI
Institutional International Trust, SEI Institutional
Investments Trust, SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust,
Adviser Managed Trust and New Covenant Funds.
Chief Compliance Officer of SEI Opportunity
Fund, L.P. until 2010. Director of Investment
Product Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February 2003.
--------------------------------------------------------------------------------
Timothy D. Vice President and General Counsel and Secretary of SIMC
Barto Assistant Secretary and the Administrator since 2004. Vice
(03/28/68) (since 1999) President of SIMC and the
Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant
Secretary of SIMC, the Administrator
and the Distributor, and Vice President
of the Distributor, from 1999 to 2003.
--------------------------------------------------------------------------------
Dianne M. Vice President Counsel at SEI Investments since 2010.
Sulzbach and Secretary Associate at Morgan, Lewis & Bockius
(07/18/77) (since 2011) LLP from 2006 to 2010. Associate at
Morrison & Foerster LLP from 2003 to
2006. Associate at Stradley Ronon
Stevens & Young LLP from 2002 to
2003.
--------------------------------------------------------------------------------
John Munch Vice President and Attorney, SEI Investments Company,
(05/07/71) Assistant Secretary since 2001. General Counsel SEI Investments
(since 2012) Distribution Co., since 2004.
--------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments
(8/24/80) (since 2009) since 2003.
AML Officer
(since 2011)
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PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Funds are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Funds in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all of the funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Funds' securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Funds for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Funds adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Funds' pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Funds' pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
DERIVATIVES AND OTHER COMPLEX SECURITIES. Exchange traded options on securities and indices purchased by the Funds generally are valued at their last trade price or, if there is no last trade price, the last bid price. Exchange traded options on securities and indices written by the Funds generally are valued at their last trade price or, if
there is no last trade price, the last asked price. In the case of options traded in the over-the-counter ("OTC") market, if the OTC option is also an exchange traded option, the Funds will follow the rules regarding the valuation of exchange traded options. If the OTC option is not also an exchange traded option, the Funds will value the option at fair value in accordance with procedures adopted by the Board. Futures contracts and options on futures contracts are valued at the last trade price prior to the end of the Funds' pricing cycle.
OTC securities held by the Funds shall be valued at the NASDAQ Official Closing Price ("NOCP") on the valuation date or, if no NOCP is reported, the last reported bid price is used, and quotations shall be taken from the market/exchange where the security is primarily traded. Securities listed on the Nasdaq Global Select Market and Nasdaq Global Market shall be valued at the NOCP; which may differ from the last sales price reported. The portfolio securities of the Funds that are listed on national exchanges are taken at the last sales price of such securities on such exchange; if no sales price is reported, the last reported bid price is used. For valuation purposes, all assets and liabilities initially expressed in foreign currency values will be converted into U.S. Dollar values at the rate at which local currencies can be sold to buy U.S. Dollars as last quoted by any recognized dealer. If these quotations are not available, the rate of exchange will be determined in good faith by the Adviser based on guidelines adopted by the Board. Dividend income and other distributions are recorded on the ex-dividend date, except for certain dividends from foreign securities which are recorded as soon as the Trust is informed after the ex-dividend date.
The value of domestic equity index and credit default swap agreements entered into by the Funds are accounted for using the unrealized gain or loss on the agreements that is determined by marking the agreements to the last quoted value of the index that the swap pertains to at the close of the NYSE, usually 4:00 p.m., Eastern Time. The swap's market value is then adjusted to include dividends accrued, financing charges and/or interest associated with the swap agreement. If the last quoted value of the index is not readily available, the swap agreement will be valued in good faith in accordance with procedures adopted by the Board. The value of foreign equity index and currency index swap agreements entered into by the Funds are accounted for using the unrealized gain or loss on the agreements that is determined by marking the agreements to the price at which orders are being filled at the close of the NYSE, usually 4:00 p.m., Eastern Time. In the event that no order is filled at 4:00 p.m., Eastern Time, the Funds value the swap based on a quote provided by a dealer in accordance with the fund's pricing procedures. The swap's market value is then adjusted to include dividends accrued, financing charges and/or interest associated with the swap agreements.
Illiquid securities, securities for which reliable quotations or pricing services are not readily available, and all other assets will be valued either at the average of the last bid price of the securities obtained from two or more dealers or otherwise at their respective fair value as determined in good faith by, or under procedures established by the Board. The Board has adopted fair valuation procedures for the Funds and has delegated responsibility for fair value determinations to the Fair Valuation Committee. The members of the Fair Valuation Committee report, as necessary, to the Board regarding portfolio valuation determination. The Board, from time to time, will review these methods of valuation and will recommend changes which may be necessary to assure that the investments of the Funds are valued at fair value.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Funds and their shareholders that is intended to supplement the discussion contained in the Funds' prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and
the discussion here and in the Funds' prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended, (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). Each Fund intends to qualify and elect to be treated as a RIC. By following such a policy, each Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Funds as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the Code each Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of each Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership (the "Qualifying Income Test"); (ii) at the end of each fiscal quarter of each Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of each Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership; and (iii) at the end of each fiscal quarter of each Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If a Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If a Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, that Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such a case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss"
generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires a Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, a Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of such year, plus certain other amounts. The Funds intend to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Funds may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Funds to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. The Funds receive income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of a Fund, constitutes a Fund's net investment income from which dividends may be paid to you. Any distributions by a Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
As noted above, distributions by a Fund will be eligible for the reduced
maximum tax rate to individuals which is 20% (lower rates apply to individuals
in lower tax brackets) to the extent that a Fund receives qualified dividend
income on the securities it holds and a Fund designates the distributions as
qualified dividend income. Qualified dividend income is, in general, dividend
income from taxable domestic corporations and certain foreign corporations
(e.g., foreign corporations incorporated in a possession of the United States
or in certain countries with a comprehensive tax treaty with the United States,
or the stock of which is readily tradable on an established securities market
in the United States). A dividend will not be treated as qualified dividend
income to the extent that: (i) the shareholder has not held the shares on which
the dividend was paid for more than 60 days during the 121-day period that
begins on the date that is 60 days before the date on which the shares become
"ex-dividend" (which is the day on which declared distributions (dividends or
capital gains) are deducted from a Fund's assets before it calculates the net
asset value) with respect to such dividend; (ii) a Fund has not satisfied
similar holding period requirements with respect to the securities it holds
that paid the dividends distributed to the shareholder); (iii) the shareholder
is under an obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to substantially similar or related property; or
(iv) the shareholder elects to treat such dividend as investment income under
section 163(d)(4)(B) of the Code. Distributions by a Fund of its net short-term
capital gains will be taxable as ordinary income. Distributions reported to
Fund shareholders as capital gain dividends shall be taxable as long-term
capital gains at a maximum rate of 20% regardless of how long the shareholder
has owned the shares. Each Fund's shareholders will be notified annually by the
Fund as to the federal tax status of all distributions made by the Fund.
A Fund's dividends that are paid to its corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Funds' distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in a Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of a Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly),are subject to a 3.8% Medicare contribution tax on "net investment income", including interest, dividends, and capital gains (including any capital gains realized on the sale of shares of a Fund).
A Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders the cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to the requirement to report the gross proceeds from the sale of Fund shares, a Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares a Fund will permit Fund shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Funds will use the average basis method as their default cost basis method. The cost basis method elected by a Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
FOREIGN TAXES. If more than 50% of the value of a Fund's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to the election, the Fund will treat those taxes as dividends paid to its shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income
received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders' federal income tax. If the Fund makes the election, it will report annually to its shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and U.S. possessions.
Foreign tax credits, if any, received by a Fund as a result of an investment in another RIC (including an ETF which is taxable as a RIC) will not be passed through to you unless the Fund qualifies as a "qualified fund of funds" under the Code. If a Fund is a "qualified fund of funds" it will be eligible to file an election with the IRS that will enable the Fund to pass along these foreign tax credits to its shareholders. A Fund will be treated as a "qualified fund of funds" under the Code if at least 50% of the value of the Fund's total assets (at the close of each quarter of the Fund's taxable year) is represented by interests in other RICs.
TAX TREATMENT OF COMPLEX SECURITIES. The Funds may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Funds are treated as ordinary income or capital gain, accelerate the recognition of income to the Funds and/or defer the Funds' ability to recognize losses, and, in limited cases, subject the Funds to U.S. federal income tax on income from certain of their foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Funds.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
The Funds may acquire market discount bonds. A market discount bond is a security acquired in the secondary market at a price below its redemption value (or its adjusted issue price if it is also an original issue discount bond). If a Fund invests in a market discount bond, it will be required to treat any gain recognized on the disposition of such market discount bond as ordinary income (instead of capital gain) to the extent of the accrued market discount unless the Fund elects to include the market discount in income as it accrues as discussed above.
A Fund's investment in lower-rated or unrated debt securities may present issues for the Fund if the issuers of these securities default on their obligations because the federal income tax consequences to a holder of such securities are not certain.
In general, foreign currency gains or losses from forward contracts, from futures contracts that are not "regulated futures contracts," and from unlisted options will be treated as ordinary income or loss under the Code. At times, a significant portion of a Fund's returns (both positive and negative) may be attributable to investments in such currency forward contracts. Also, certain foreign exchange gains derived with respect to foreign fixed income securities are subject to special treatment. In general, any such gains or losses will increase or decrease the amount of a Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of a Fund's net capital gain. Additionally, if such losses exceed other investment company taxable income during a taxable year, a Fund would not be able to make any ordinary dividend distributions.
Gains from the sale or other disposition of foreign currencies and other income
(including but not limited to gains from options, futures or forward contracts)
derived from investing in stock, securities, or foreign currencies
generally are included as "good income" for purposes of the Qualifying Income Test described above that must be satisfied in order for a Fund to be treated as RIC. It should be noted, however, that for purposes of the Qualifying Income Test, the Secretary of the Treasury is authorized to issue regulations that would exclude from qualifying income foreign currency gains which are not directly related to the RIC's principal business of investing in stock or securities (or options and futures with respect to stock or securities). No regulations have been issued pursuant to this authorization. It is possible, however, that such regulations may be issued in the future. If such future regulations were applied to a Fund, it is possible under certain circumstances that its qualifying income would no longer satisfy the Qualifying Income Test and the Fund would fail to qualify as a RIC. It is also possible that a Fund's strategy of investing in foreign currency-related financial instruments might cause the Fund to fail to satisfy the requirements set forth under the RIC diversification tests, resulting in its failure to qualify as RICs. A failure of the diversification tests might result, for example, from a determination by the IRS that financial instruments in which a Fund invests are not securities. Moreover, even if the financial instruments are treated as securities, a determination by the IRS regarding the identity of the issuers of the securities or the fair market values of the securities that differs from the determinations made by the Funds could result in the failure by the Funds to diversify their investments in a manner necessary to satisfy the diversification tests. The tax treatment of a Fund and its shareholders in the event the Fund fails to qualify as a RIC are described above, but the failure of the Fund to maintain its status as a RIC may be avoided in some circumstances if the Fund complies with certain savings which are also described above.
If a Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies" or "PFICs", the Fund will be subject to one of the following special tax regimes: (i) the Fund would be liable for U.S. federal income tax, and an additional interest charge, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund were able and elected to treat a PFIC as a "qualified electing fund" or "QEF", the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the PFIC, whether or not such earnings or gains are distributed to the Fund; or (iii) the Fund may be entitled to mark-to-market annually shares of the PFIC, and in such event would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
The Fund may invest in ETFs that are taxable as RICs under the Code. Accordingly, the income a Fund receives from such ETFs will satisfy the Qualifying Income Test with respect to the Fund's qualification as a RIC. A Fund may also invest in one or more ETFs that are not taxable as RICs under the Code and that may generate non-qualifying income for purposes of satisfying the requirements to be taxable as a RIC under the Code. A Fund anticipates monitoring its investments in such ETFs such that the Fund's non-qualifying income stays within acceptable limits, however, it is possible that such if such income is greater than anticipated that it could cause the Fund to inadvertently fail to qualify as a RIC.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold, at a rate of 28%, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Funds may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Funds.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for
shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. A Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Funds generally serve to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in a Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by a Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. A Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Funds will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When a Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Funds, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Funds may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Funds to participate in higher volume transactions will generally be beneficial to the Funds.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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Emerging Markets Debt Fund N/A(1) $0(2) $0
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Emerging Markets Portfolio $1,021,328 $991,343 $739,727
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(1) Not in operation during period.
(2) Represents the period between December 17, 2010 (commencement of Fund operations) and October 31, 2011.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Funds to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Funds.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Funds'
Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Funds may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Funds did not pay any commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Funds, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Funds for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Funds, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2011 and 2012 and for the fiscal period from December 17, 2010 (commencement of operations for the Emerging Markets Debt Fund) to October 31, 2011, the Funds did not pay any aggregate brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that each Fund held during its most recent fiscal year. During the fiscal year ended October 31, 2012, the Funds did not hold any securities of "regular brokers and dealers."
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. The Funds may at times hold investments in short-term instruments, which are excluded for purposes of computing portfolio turnover. For the fiscal years ended October 31, 2011 and 2012, the Funds' portfolio turnovers were as follows:
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PORTFOLIO TURNOVER RATES
--------------------------------------------------------------------------------
FUND 2011 2012
--------------------------------------------------------------------------------
Acadian Emerging Markets Debt Fund 148%(1) 151%
--------------------------------------------------------------------------------
Acadian Emerging Markets Portfolio 49% 44%
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(1) Represents the period between December 17, 2010 (commencement of Fund operations) and October 31, 2011.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Funds' shareholders, on the one hand, and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds, the Adviser, or the principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Funds' Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, a Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Funds disclose a complete or summary schedule of investments (which includes the Funds' 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Funds' net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. The Funds' complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q and the Funds' complete schedule of investments following the second and fourth fiscal quarters, is available in the Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holding reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV. Should the Funds include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-866-AAM-6161. The Funds generally publish a complete list of their portfolio holdings on a monthly basis, as of the end of the previous month. For example, a Fund's investments as of the end of January would ordinarily be published at the end of February. The Funds also publish a list of their ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://aicfundholdings.com/acadian. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of a Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in connection with their services to the Funds. From time to time rating and ranking organizations, such as S&P, Lipper, Morningstar, Inc., Frank Russell, Investor Force, PSN, DeMarche and Wilshire Associates may request non-public portfolio holdings information in connection with rating the Funds. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of a Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Funds believe that these third parties have legitimate objectives in requesting such portfolio holdings information. The Funds' Chief Compliance Officer will regularly
review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
The Funds' policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Funds' shareholders and that, to the extent conflicts between the interests of the Funds' shareholders and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than 10 days after the date of the information.
The Funds require any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that such information will be used solely to analyze and rank the Funds, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Funds' policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipients of the Funds' portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Funds' shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined
in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Funds to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Funds' proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-866-AAM-6161; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, INCLUDING SECURITIES THAT MAY BE PURCHASED OR HELD BY THE FUNDS, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Funds. Persons who owned of record or beneficially more than 25% of a Fund's outstanding shares may be deemed to control the Funds within the meaning of the 1940 Act.
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ACADIAN EMERGING MARKETS DEBT FUND
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NAME AND ADDRESS NUMBER OF SHARES CLASS OF SHARES % OF FUND
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Millpencil (US) LP 1,160,724.3160 Institutional 43.19 %
Partnership
200 Clarendon St Floor 53
Attn: Finance
Boston, MA 02116-5045
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National Financial Services LLC 546,329.0150 Institutional 20.33 %
For the Exclusive Benefit of Our Customers
Attn Mutual Funds Dept 5th Floor
One World Financial Center
200 Liberty St
New York, NY 10281
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S-60
|
TD Ameritrade Inc. 277,038.1990 Institutional 10.31 % For the Exclusive Benefit of Our Clients PO Box 2226 Omaha, NE 68103-2226 ------------------------------------------------------------------------------------------------------------ Charles Schwab & Co. Inc. 212,820.7790 Institutional 7.92 % Special Custody A/C FBO Customers Attn Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------------------ Wilmington Trust Risc. As Agent FBO 174,725.5370 Institutional 6.50 % North Star Bluescope Steel LLC P.O. Box 52129 Phoenix, AZ 85072-2129 ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ACADIAN EMERGING MARKETS PORTFOLIO ------------------------------------------------------------------------------------------------------------ NAME AND ADDRESS NUMBER OF SHARES CLASS OF SHARES % OF FUND ------------------------------------------------------------------------------------------------------------ Charles Schwab & Co. Inc. 22,588,557.2610 Institutional 40.94 % Reinvest Account Attn Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------------------ National Financial Services LLC 18,450,093.7890 Institutional 33.44 % For the Exclusive Benefit of Our Customers Attn Mutual Funds Dept 5th Floor One World Financial Center 200 Liberty St New York, NY 10281 ------------------------------------------------------------------------------------------------------------ Wells Fargo Bank, NA FBO 5,714,612.9430 Institutional 10.36 % Omnibus Account Cash/Cash PO Box 1533 Minneapolis, MN 55480-1533 ------------------------------------------------------------------------------------------------------------ |
APPENDIX A -- DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater then in the "aaa" and "aa" classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each rating classification: the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DEBT RATINGS - TAXABLE DEBT & DEPOSITS GLOBALLY
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
SHORT-TERM RATINGS
SHORT-TERM PRIME RATING SYSTEM - TAXABLE DEBT & DEPOSITS GLOBALLY
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics:
o Leading market positions in well-established
industries.
o Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
o Well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
A-3
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PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
|
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S RATING SERVICES
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. Accordingly, in the case of junior debt, the rating may not conform exactly to the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, CCC, CC AND C
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial , or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to non-payment.
C A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preffered stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking or a similar action if payments on an obligation are jeopardised.
N.R. This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant speculative characteristics. Ratings of 'B-1', 'B-2', and 'B-3' may be assigned to indicate finer distinctions within the 'B' category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term obligation rated 'B-1' is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation rated 'B-2' is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated 'B-3' is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C A short-term obligation rated 'C' is currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor's capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government's own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.
FITCH INC. RATINGS
INTERNATIONAL LONG-TERM CREDIT RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings:
INVESTMENT GRADE
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. 'A' ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category
SPECULATIVE GRADE
BB: Speculative.
'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative.
o For issuers and performing obligations, 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
o For individual obligations, may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of 'R1' (outstanding).
CCC: For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. o For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of 'R2' (superior), or 'R3' (good) or 'R4' (average).
CC: For issuers and performing obligations, default of some kind appears probable.
o For individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of 'R4' (average) or 'R5' (below average).
Grade C: For issuers and performing obligations, default is imminent.
o For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor recoveries. Such obligations would possess a Recovery Rating of 'R6' (poor).
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated 'D' upon a default. Defaulted and distressed obligations typically are rated along the continuum of 'C' to 'B' ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation's documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the 'B' or 'CCC-C' categories.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for US public finance, in line with industry standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
RD Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
Notes to Long-term and Short-term ratings: The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' Long-term rating category, to categories below 'CCC', or to Short-term ratings other than 'F1'. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative
Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are 'stable' could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
Program ratings (such as those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, i.e. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.
Variable rate demand obligations and other securities which contain a short-term 'put' or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.
Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.
Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.
Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.
'PIF': Paid-in --Full; denotes a security that is paid-in-full, matured, called, or refinanced.
'NR' indicates that Fitch Ratings does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
ACADIAN ASSET MANAGEMENT LLC
PROXY VOTING POLICIES AND PROCEDURES
(AS OF NOVEMBER 2011)
Acadian will accept the fiduciary responsibility to vote proxies if directed by a client. Acadian has adopted a proxy voting policy reasonably designed to ensure that it votes proxies in the best interest of clients. Acadian utilizes the services of an unaffiliated proxy firm to help manage the proxy voting process and to research and vote proxies on behalf of Acadian's clients. Unless a client provides a client specific voting criteria to be followed when voting proxies on behalf of holdings in their portfolio, each vote is made according to predetermined guidelines agreed to between the proxy firm and Acadian. Acadian believes that utilizing this proxy service firm helps Acadian vote in the best interest of clients and insulates Acadian's voting decisions from any potential conflicts of interest.
When voting proxies on behalf of our clients, Acadian assumes a fiduciary responsibility to vote in our clients' best interests. In addition, with respect to benefit plans under the Employee Retirement Income Securities Act (ERISA), Acadian acknowledges its responsibility as a fiduciary to vote proxies prudently and solely in the best interest of plan participants and beneficiaries. So that it may fulfill these fiduciary responsibilities to clients, Acadian has adopted and implemented these written policies and procedures reasonably designed to ensure that it votes proxies in the best interest of clients.
PROXY VOTING GUIDELINES
Acadian acknowledges it has a duty of care to its clients that requires it to monitor corporate events and vote client proxies. To assist in this effort, Acadian has retained Institutional Shareholder Services ("ISS") to research and vote its proxies. ISS provides proxy-voting analysis and votes proxies in accordance with predetermined guidelines. Relying on ISS to vote proxies ensures that Acadian votes in the best interest of its clients and insulates Acadian's voting decisions from any potential conflicts of interest. Acadian will also accept specific written proxy voting instructions from a client and communicate those instructions to ISS to implement when voting proxies involving that client's portfolio.
There may be occasions when Acadian determines that not voting a proxy may be in the best interests of clients; for example, when the cost of voting the proxy exceeds the expected benefit to the client or in share blocking markets. Unless contrary instructions are received from a client, Acadian has instructed ISS to not vote proxies in so-called "share blocking" markets. Share-blocking markets are markets where proxy voters have their securities blocked from trading during the period of the annual meeting. The period of blocking typically lasts anywhere from a few days to two weeks. During the period, any portfolio holdings in these markets cannot be sold without a formal recall. The recall process can take time, and in some cases, cannot be accomplished at all. This makes a client's portfolio vulnerable to a scenario where a stock is dropping in attractiveness but cannot be sold because it has been blocked. Shareholders who do not vote are not subject to the blocking procedure.
Acadian also reserves the right to override ISS vote recommendations under certain circumstances. Acadian will only do so if they believe that voting contrary to the ISS recommendation is in the best interest of clients. All overrides will be approved by an Officer of Acadian and will be documented with the reasons for voting against the ISS recommendation.
CONFLICTS OF INTEREST
Occasions may arise during the voting process in which the best interest of clients conflicts with Acadian's interests. In these situations ISS will continue to follow the same predetermined guidelines as formally agreed upon between Acadian and ISS before such conflict of interest existed. Conflicts of interest generally include (i) business relationships where Acadian has a substantial business relationship with, or is actively soliciting business from, a company soliciting proxies, or (ii) personal or family relationships whereby an employee of Acadian has a family member or other personal relationship that is affiliated with a company soliciting proxies, such as a spouse who serves as a director of a public company. A conflict could also exist if a substantial business relationship exists with a proponent or opponent of a particular initiative.
If Acadian learns that a conflict of interest exists, the Proxy Coordinator will prepare a report to the Compliance Committee that identifies (i) the details of the conflict of interest, (ii) whether or not the conflict is material, and (iii) procedures to ensure that Acadian makes proxy voting decisions based on the best interests of clients. If Acadian determines that a material conflict exists, it will defer to ISS to vote the proxy in accordance with the predetermined voting policy.
VOTING POLICIES
Acadian has adopted the proxy voting policies developed by ISS, summaries of which can be found at HTTP://WWW.ISSGOVERNANCE.COM/POLICY and which are deemed to be incorporated herein. The policies have been developed based on ISS' independent, objective analysis of leading corporate governance practices and their support of long-term shareholder value. Acadian may change its proxy voting policy from time to time without providing notice of changes to clients.
VOTING PROCESS
Acadian has appointed the head of Operations to act as Proxy Coordinator. The Proxy Coordinator acts as coordinator with ISS including ensuring proxies Acadian is responsible to vote are forwarded to ISS, overseeing that ISS is voting assigned client accounts and maintaining appropriate authorization and voting records.
After ISS is notified by the custodian of a proxy that requires voting and/or after ISS cross references their database with a routine download of Acadian holdings and determines a proxy requires voting, ISS will review the proxy and make a voting proposal based on the recommendations provided by their research group. Any electronic proxy votes will be communicated to the proxy solicitor by ISS Global Proxy Distribution Service and Broadridge's Proxy Edge Distribution Service, while non-electronic ballots, or paper ballots, will be faxed, telephoned or sent via Internet. ISS assumes responsibility for the proxies to be transmitted for voting in a timely fashion and maintains a record of the vote, which is provided to Acadian on a monthly basis. Proxy voting records are available to all clients upon request.
PROXY VOTING RECORD
Acadian's Proxy Coordinator will maintain a record containing the following information regarding the voting of proxies: (i) the name of the issuer, (ii) the exchange ticker symbol, (iii) the CUSIP number, (iv) the shareholder meeting date, (v) a brief description of the matter brought to vote; (vi) whether the proposal was submitted by management or a shareholder, (vii) how Acadian/ ISS voted the proxy (for, against, abstained) and (viii) whether the proxy was voted for or against management.
OBTAINING A VOTING PROXY REPORT
Clients may request a copy of this policy, any ISS policies and procedures referenced and adopted herein, and/or a report on how their individual securities were voted by contacting Amy Conklin in Acadian's Client Communications Group at 1-800-946-0166 or aconklin@acadian-asset.com.
ALL DOCUMENTS MUST BE RETAINED IN ACCORDANCE WITH ACADIAN'S RECORD RETENTION POLICY.
STATEMENT OF ADDITIONAL INFORMATION
AIG MONEY MARKET FUND
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
AIG ASSET MANAGEMENT (U.S.), LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the AIG Money Market Fund (the "Fund"). This SAI is incorporated by reference into the prospectus dated March 1, 2013 and should be read in conjunction with the prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund for fiscal year end October 31, 2012, including notes thereto and the report of PricewaterhouseCoopers LLP thereon are herein incorporated by reference. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by calling the Fund at 1-800-249-7445.
TABLE OF CONTENTS
THE TRUST ............................................................... S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES ......... S-1 DESCRIPTION OF PERMITTED INVESTMENTS .................................... S-2 INVESTMENT LIMITATIONS .................................................. S-7 THE ADVISER ............................................................. S-9 THE ADMINISTRATOR ....................................................... S-10 THE DISTRIBUTOR ......................................................... S-10 PAYMENTS TO FINANCIAL INTERMEDIARIES .................................... S-11 THE TRANSFER AGENT ...................................................... S-11 THE CUSTODIAN ........................................................... S-11 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................... S-12 LEGAL COUNSEL ........................................................... S-12 TRUSTEES AND OFFICERS OF THE TRUST ...................................... S-12 PURCHASING AND REDEEMING SHARES ......................................... S-21 DETERMINATION OF NET ASSET VALUE ........................................ S-21 TAXES ................................................................... S-22 FUND TRANSACTIONS ....................................................... S-24 PORTFOLIO HOLDINGS ...................................................... S-26 DESCRIPTION OF SHARES ................................................... S-27 SHAREHOLDER LIABILITY ................................................... S-28 LIMITATION OF TRUSTEES' LIABILITY ....................................... S-28 CODES OF ETHICS ......................................................... S-28 5% AND 25% SHAREHOLDERS ................................................. S-28 APPENDIX A -- DESCRIPTION OF RATINGS .................................... A-1 |
March 1, 2013 AIG-SX-003-2000
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. The Fund pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objectives and principal investment strategies are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
INVESTMENT OBJECTIVE. The investment objective of the Fund is to preserve principal value and maintain a high degree of liquidity while providing current income. This investment objective is fundamental and cannot be changed without the consent of shareholders. It is also a fundamental policy of the Fund to use its best efforts to maintain a constant net asset value of $1.00 per share. There is no assurance that the Fund will achieve its investment objective. Although the Fund seeks to maintain a constant net asset value of $1.00 per share, it is possible to lose money by investing in the Fund. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT STRATEGIES. In seeking its investment objective, the Fund will invest exclusively in (i) bills, notes and bonds issued by the United States Treasury ("U.S. Treasury Obligations") and separately traded interest and principal component parts of such obligations ("Stripped Government Securities"); (ii) obligations issued or guaranteed as to principal and interest by the agencies or instrumentalities of the U.S. government; (iii) U.S. dollar denominated short-term obligations of issuers rated at the time of investment in the highest rating category for short-term debt obligations (within which there may be sub-categories or gradations indicating relative standing) by two or more nationally recognized statistical rating organizations ("NRSROs"), or only one NRSRO if only one NRSRO has rated the security, or, if not rated, as determined by the Fund's investment adviser, AIG Asset Management (U.S.), LLC (the "Adviser") to be of comparable quality, consisting of obligations of U.S. and foreign corporations, domestic banks, foreign banks, and U.S. and foreign savings and loan institutions; (iv) repurchase agreements with respect to the foregoing; (v) obligations of supranational entities satisfying the credit standards described above or, if not rated, determined by the Adviser to be of comparable quality; and (vi) obligations of foreign governments, agencies and
instrumentalities satisfying the credit standards described above or, if not
rated, determined by the Adviser to be of comparable quality. With respect to
(iv) above, the Fund's investments in repurchase agreements may, at times, be
significant and may comprise as much as 100% of the Fund's assets, if in the
determination of the Adviser, such investment is appropriate in seeking to
achieve the Fund's investment objective.
The Fund reserves the right to invest more than 25% of its total assets in obligations issued by domestic branches of U.S. banks or U.S. branches of foreign banks subject to similar regulations as U.S. banks. To the extent that the Fund invests more than 25% of its net assets in bank obligations, it will be exposed to the risks associated with that industry as a whole. The Fund may purchase asset-backed securities rated in the highest NRSRO rating category at the time of investment. The Fund may invest in securities that pay interest on a variable or floating rate basis. In addition, the Fund may acquire securities on a when-issued basis and may buy securities that are subject to puts or standby commitments. The Fund will not hold more than 5% of its net assets in illiquid securities. The Fund reserves the right to enter into reverse repurchase agreements and engage in securities lending.
The Fund will use NRSROs such as Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") when determining security credit ratings.
RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS. Investments by a money market fund are subject to limitations imposed under regulations adopted by the U.S. Securities and Exchange Commission (the "SEC"). These regulations impose certain quality, maturity, diversification and liquidity restraints on investments by a money market fund. Under these regulations, money market funds may only acquire obligations that present minimal credit risk and that are "eligible securities," which means they are (i) rated, at the time of investment, by at least two NRSROs (or one if only one organization is rating such obligation) in the highest rating category or, if unrated, determined to be of comparable quality (a "first tier security") or (ii) rated according to the foregoing criteria in the second highest rating category or, if unrated, determined to be of comparable quality ("second tier security"). A security is not considered to be unrated if its issuer has outstanding obligations of comparable priority and security that have a short-term rating. A money market fund may invest up to 25% of its assets in "first tier" securities of a single issuer for a period of up to three business days. The securities that money market funds may acquire may be supported by credit enhancements, such as demand features or guarantees. The SEC regulations limit the percentage of securities that a money market fund may hold for which a single issuer provides credit enhancements. The Fund invests only in first tier securities.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the Fund's permitted investments and investment practices and the associated risk factors. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
ASSET-BACKED SECURITIES -- Asset-backed securities are securities backed by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Other asset-backed securities may be created in the future. These securities may be traded over-the-counter and typically have a short-intermediate maturity structure depending on the paydown characteristics of the underlying financial assets which are passed through to the security holder. These securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pool of assets. Asset-backed securities may also be debt obligations, which are known as collateralized obligations and are generally issued as the debt of a special purpose entity, such as a trust, organized solely for the purpose of owning these assets and issuing debt obligations.
Asset-backed securities are not issued or guaranteed by the U.S. government, its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and, for a certain period, by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of asset-backed securities raises risk considerations peculiar to the financing of the instruments underlying such securities. For example, there is a risk that another party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. There also is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities.
Asset-backed securities entail prepayment risk, which may vary depending on the type of asset, but is generally less than the prepayment risk associated with mortgage-backed securities. In addition, credit card receivables are unsecured obligations of the card-holder. There may be a limited secondary market for such securities.
BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used by corporations to finance the shipment and storage of goods. Maturities are generally six months or less.
CERTIFICATES OF DEPOSIT -- Certificates of deposit are interest bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity.
COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured short-term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from a few to 270 days.
EURODOLLAR AND YANKEE BANK OBLIGATIONS -- Eurodollar bank obligations are U.S. dollar denominated certificates of deposit or time deposits issued outside the United States by foreign branches of U.S. banks or by foreign banks. Yankee bank obligations are U.S. dollar denominated obligations issued in the United States by foreign banks.
ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board of Trustees (the "Board"). Despite such good faith efforts to determine fair value prices, the Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon its sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to a fund. Under the supervision of Trust's Board, the Adviser determines the liquidity of the Fund's investments. In determining the liquidity of the Fund's investments, the Adviser may consider various factors, including (1) the frequency and volume of trades and quotations; (2) the number of dealers and prospective purchasers in the marketplace; (3) dealer undertakings to make a market; and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not hold more than 5% of its net assets in illiquid securities.
OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities established through the joint participation of several governments, and include the Asian Development Bank, the Inter-American Development Bank, the International Bank for Reconstruction and Development ("World Bank"), the African Development Bank, the European Economic Community, the European Investment Bank and the Nordic Investment Bank.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a person
(E.G, the Fund) obtains a security and simultaneously commits to return the
security to the seller (a primary securities dealer as recognized by the
Federal Reserve Bank of New York or a national member bank as defined in
Section 3(d)(1) of the Federal Deposit Insurance Act, as amended) at an agreed
upon price (including principal and interest) on an agreed upon date within a
number of days (usually not more than seven) from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the underlying
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is, in effect, secured by the value of
the underlying security.
Repurchase agreements are considered to be loans by the Fund for purposes of its investment limitations. The repurchase agreements entered into by the Fund will provide that the underlying security at all times shall have a value at least equal to 102% of the resale price stated in the agreement and consist only of securities permissible under Section 101(47)(A)(i) of the
Bankruptcy Code (the Adviser monitors compliance with this requirement). Under all repurchase agreements entered into by the Fund, the appropriate custodian or its agent must take possession of the underlying collateral. However, if the seller defaults, the Fund could realize a loss on the sale of the underlying security to the extent that the proceeds of the sale including accrued interest are less than the resale price provided in the agreement including interest. In addition, even though the Bankruptcy Code provides protection for most repurchase agreements, if the seller should be involved in bankruptcy or insolvency proceedings, the Fund may incur delay and costs in selling the underlying security or may suffer a loss of principal and interest if the Fund is treated as an unsecured creditor and required to return the underlying security to the seller's estate. The acquisition of a repurchase agreement may be deemed to be an acquisition of the underlying securities as long as the obligation of the seller to repurchase the securities is collateralized fully and the creditworthiness of the counterparty has been evaluated.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be sold to the public without registration under the Securities Act of 1933, as amended (the "1933 Act") or an exemption from registration. Permitted investments for the Fund includes restricted securities. Restricted securities, including securities eligible for re-sale under the 1933 Act's Rule 144A, that are determined to be liquid are not subject to this limitation. This determination is to be made by the Adviser pursuant to guidelines adopted by the Board. Under these guidelines, the Adviser will consider the frequency of trades and quotes for the security, the number of dealers in, and potential purchasers for, the securities, dealer undertakings to make a market in the security, and the nature of the security and of the marketplace trades. In purchasing such restricted securities, the Adviser intends to purchase securities that are exempt from registration under Rule 144A under the 1933 Act.
REVERSE REPURCHASE AGREEMENTS -- Reverse repurchase agreements are agreements by which the Fund sells securities to financial institutions and simultaneously agrees to repurchase those securities at a mutually agreed-upon date and price. At the time the Fund enters into a reverse repurchase agreement, the Fund will place liquid assets having a value equal to the repurchase price in a segregated custodial account and monitor this account to ensure equivalent value is maintained. Reverse repurchase agreements involve the risk that the market value of securities sold by the Fund may decline below the price at which the Fund is obligated to repurchase the securities. Reverse repurchase agreements are considered to be borrowings by the Fund under the 1940 Act.
SECURITIES OF OTHER INVESTMENT COMPANIES - The Fund may purchase securities of other investment companies that invest exclusively in money market instruments and operate in compliance with Rule 2a-7 under the 1940 Act. Investing in other investment companies involves substantially the same risks as investing directly in the underlying instruments, but may involve additional expenses at the investment company-level, such as portfolio management fees and operating expenses. Federal securities laws limit the extent to which the Fund can invest in securities of other investment companies. The Fund may invest up to 10% of its total assets in the securities of other investment companies, but may not invest more than 5% of its total assets in the securities of any one investment company or acquire more than 3% of the outstanding securities of any one investment company, unless permissible under the 1940 Act and the rules and promulgations thereunder.
SECURITIES LENDING -- The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to its Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. The Board has adopted procedures reasonably designed to
ensure that the foregoing criteria will be met. Loan agreements involve certain
risks in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
SECURITIES OF FOREIGN GOVERNMENTS -- The Fund may invest in U.S. dollar denominated obligations of foreign governments. These instruments may subject the Fund to investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include future adverse political and economic developments, the possible imposition of withholding taxes on interest or other income, possible seizure, nationalization, or expropriation of foreign deposits, the possible establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations. Such investments may also entail higher custodial fees and sales commissions than domestic investments. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks.
SECURITIES OF FOREIGN ISSUERS -- There are certain risks connected with investing in foreign securities. These include risks of adverse political and economic developments (including possible governmental seizure or nationalization of assets), the possible imposition of exchange controls or other governmental restrictions, less uniformity in accounting and reporting requirements, the possibility that there will be less information on such securities and their issuers available to the public, the difficulty of obtaining or enforcing court judgments abroad, restrictions on foreign investments in other jurisdictions, difficulties in effecting repatriation of capital invested abroad, and difficulties in transaction settlements and the effect of delay on shareholder equity. Foreign securities may be subject to foreign taxes, and may be less marketable than comparable U.S. securities.
STANDBY COMMITMENTS AND PUTS -- The Fund may purchase securities at a price which would result in a yield to maturity lower than that generally offered by the seller at the time of purchase when they can simultaneously acquire the right to sell the securities back to the seller, the issuer or a third party (the "writer") at an agreed-upon price at any time during a stated period or on a certain date. Such a right is generally denoted as a "standby commitment" or a "put." The purpose of engaging in transactions involving puts is to maintain flexibility and liquidity to permit the Fund to meet redemptions and remain as fully invested as possible. The Fund reserves the right to engage in put transactions. The right to put the securities depends on the writer's ability to pay for the securities at the time the put is exercised. The Fund would limit its put transactions to institutions which the Adviser believes present minimal credit risks, and the Adviser would use its best efforts to initially determine and continue to monitor the financial strength of the sellers of the options by evaluating their financial statements and such other information as is available in the marketplace. It may, however, be difficult to monitor the financial strength of the writers because adequate current financial information may not be available. In the event that any writer is unable to honor a put for financial reasons, the Fund would be a general creditor (I.E., on a parity with all other unsecured creditors) of the writer. Furthermore, particular provisions of the contract between the Fund and the writer may excuse the writer from repurchasing the securities; for example, a change in the published rating of the underlying securities or any similar event that has an adverse
effect on the issuer's credit or a provision in the contract that the put will not be exercised except in certain special cases, for example, to maintain portfolio liquidity. The Fund could, however, at any time sell the underlying portfolio security in the open market or wait until the portfolio security matures, at which time it should realize the full par value of the security.
The securities purchased subject to a put may be sold to third persons at any time, even though the put is outstanding, but the put itself, unless it is an integral part of the security as originally issued, may not be marketable or otherwise assignable. Therefore, the put would have value only to the Fund. Sale of the securities to third parties or lapse of time with the put unexercised may terminate the right to put the securities. Prior to the expiration of any put option, the Fund could seek to negotiate terms for the extension of such an option. If such a renewal cannot be negotiated on terms satisfactory to the Fund, the Fund could, of course, sell the portfolio security. The maturity of the underlying security will generally be different from that of the put. There will be no limit to the percentage of portfolio securities that the Fund may purchase subject to a standby commitment or put, but the amount paid directly or indirectly for all standby commitments or puts which are not integral parts of the security as originally issued held in the Fund will not exceed 1/2 of 1% of the value of the total assets of the Fund calculated immediately after any such put is acquired.
STRIPPED GOVERNMENT SECURITIES -- The Fund may purchase Separately Traded Registered Interest and Principal Securities ("STRIPS") that are created when the coupon payments and the principal payment are stripped from an outstanding United States Treasury bond by the Federal Reserve Bank of New York and sold separately. The Fund may not actively trade STRIPS.
TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or a remaining term to maturity in excess of seven (7) days are considered to be illiquid securities.
U.S. GOVERNMENT AGENCY OBLIGATIONS -- U.S. government agency obligations are obligations issued or guaranteed by agencies or instrumentalities of the U.S. government. Agencies of the U.S. government which issue obligations consist of, among others, the Export Import Bank of the United States, the Farmers Home Administration, the Federal Farm Credit Bank, the Federal Housing Administration, the Government National Mortgage Association ("Ginnie Mae"), the Maritime Administration, the Small Business Administration and The Tennessee Valley Authority. Obligations of instrumentalities of the U.S. government include securities issued by, among others, Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal Intermediate Credit Banks, Federal Land Banks, the Federal National Mortgage Association ("Fannie Mae") and the United States Postal Service as well as government trust certificates. Some of these securities are supported by the full faith and credit of the United States Treasury, others are supported by the right of the issuer to borrow from the Treasury and still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U.S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing the value of the obligation prior to maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a
quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $ 250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as STRIPS.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. The Fund will maintain with its custodian a separate account with liquid assets in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Fund may dispose of a when-issued security or forward commitment prior to settlement if it deems appropriate.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
In addition to the Fund's investment objective, the following investment
limitations are fundamental policies of the Fund that cannot be changed without
the consent of the holders of a majority of the Fund's outstanding shares. The
phrase "majority of the outstanding shares" means the vote of (i) 67% or more
of the Fund's shares present at a meeting, if more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (ii) more than 50%
of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of the Fund would be invested in securities of such issuer; provided, however, that the Fund may invest up to 25% of its total assets without regard to this restriction as permitted by applicable law.
2. Purchase any securities which would cause 25% or more of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in the obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, repurchase agreements involving such securities and obligations issued by domestic branches of U.S. banks or U.S. branches of foreign banks subject to the same regulations as U.S. banks. For purposes of this limitation, (i) utility companies will be classified according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry; (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; (iii) supranational entities will be considered a separate industry; and (iv) asset-backed securities will be classified according to the underlying assets securing such securities.
3. Make loans, except that the Fund may (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in this SAI.
4. Borrow money, except that the Fund may (i) enter into reverse repurchase agreements and (ii) borrow money for temporary or emergency purposes and then only in an amount not exceeding 33 1/3% of the value of its total assets. Any borrowing will be done from a bank and asset coverage of at least 300% is required. In the event that such asset coverage shall at any time fall below 300%, the Fund shall, within three days or such longer period as the SEC may prescribe by rules and regulations, reduce the amount of its borrowings to such an extent that the asset coverage of such borrowings shall be at least 300%. This borrowing provision is included for temporary liquidity or emergency purposes. All borrowings will be repaid before making investments and any interest paid on such borrowings will reduce income.
5. Acquire more than 5% of the voting securities of any one issuer.
6. Invest in companies for the purpose of exercising control.
7. Pledge, mortgage or hypothecate assets except to secure temporary borrowings in aggregate amounts not to exceed 10% of total assets taken at current value at the time of the incurrence of such loan.
8. Purchase or sell real estate, real estate limited partnership interests, futures contracts, commodities or commodities contracts and interests in a pool of securities that are secured by interests in real estate. However, subject to the permitted investments of the Fund, it may invest in municipal securities or other marketable obligations secured by real estate or interests therein.
9. Make short sales of securities, maintain a short position or purchase securities on margin, except that the Fund may obtain short-term credits as necessary for the clearance of security transactions.
10. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling the Fund security.
11. Purchase securities of other investment companies except as permitted by the 1940 Act and the rules and regulations thereunder.
12. Issue senior securities (as defined in the 1940 Act) except in connection with permitted borrowings as described above or as permitted by rule, regulation or order of the SEC.
13. Purchase or retain securities of an issuer if, to the knowledge of the Fund, an officer, trustee, partner or director of the Trust or any investment adviser of the Fund owns beneficially more than 0.5% of the shares or securities of such issuer and all such officers, trustees, partners and directors owning more than 0.5% of such shares or securities together own more than 5% of such shares or securities.
14. Invest in interests in oil, gas or other mineral exploration or development programs and oil, gas or mineral leases.
15. Write puts, calls, options or combinations thereof or invest in warrants.
The foregoing percentages will apply at the time of the purchase of a security.
THE ADVISER
GENERAL. AIG Asset Management (U.S.), LLC (the "Adviser") is a professional investment management firm registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. AIG Global Investment Corp. (the "Former Adviser") served as the adviser to the Fund prior to September 13, 2009. The Adviser, like the Former Adviser, is an indirect wholly-owned subsidiary of American International Group, Inc. ("AIG"). AIG is a holding company, which, through its subsidiaries, is primarily engaged in a broad range of insurance, insurance-related and financial services activities in the United States and abroad. Its officers and employees include individuals with investment management experience, including experience with short-term investments. AIG Asset Management comprises a global team of investment professionals that provides investment advisory and asset management services to AIG and its businesses, including SunAmerica Financial Group and Chartis. Headquartered in New York with several locations around the world, the Adviser directly manages $XX billion of AIG firm-wide assets and indirectly manages $XX billion through the use of AIG affiliated entities and unaffiliated investment advisors as of December 31, 2012.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Former Adviser entered into an investment advisory agreement (the "Advisory Agreement") dated November 21, 1994 with respect to the Fund. On August 12, 2009, the Board approved the assumption of the Advisory Agreement by the Adviser, which occurred on September 13, 2009 in connection with the sale of the Former Adviser's third party asset management business. The investment personnel that managed the Fund and the services provided under the Advisory Agreement remained the same after the assumption of the Advisory Agreement. Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder or its reckless disregard of its obligation and duties under this Advisory Agreement.
After the initial two year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. (As used in this Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act).
For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.25% of the average daily net assets of the Fund. Effective August 3, 2012, the Adviser has voluntarily agreed to waive 0.22% of its management fee. For the period from December 8, 2011 through August 2, 2012, the Adviser had voluntarily agreed to reduce 0.25% of its investment advisory fees. For the period from November 1, 2011 through December 7, 2011, the Adviser had voluntarily agreed to reduce 0.215% of its investment advisory fees. In addition, the Adviser has voluntarily agreed to further reduce fees in order to ensure that total annual operating expenses do not exceed 0.40% of the Fund's average daily net assets. The Adviser may discontinue all or part of these voluntary fee reductions or expense limitation reimbursements at any time. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Adviser the following advisory fees:
----------------------------------------------------------------------------------------------------------------------- CONTRACTUAL ADVISORY FEES PAID FEES WAIVED BY THE ADVISER TOTAL FEES PAID (AFTER WAIVERS) ----------------------------------------------------------------------------------------------------------------------- 2010 2011 2012 2010 2011 2012 2010 2011 2012 ----------------------------------------------------------------------------------------------------------------------- $17,762,854 $17,119,746 $4,825,861 $15,276,060 $14,722,987 $4,579,727 $2,486,794 $2,396,759 $246,134 ----------------------------------------------------------------------------------------------------------------------- |
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatoryreporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.05% Up to $1 billion
0.03% Over $1 billion
--------------------------------------------------------------------------------
|
There is a minimum annual fee of $110,000 per portfolio plus $15,000 for each additional class. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Administrator the following fees:
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CONTRACTUAL FEES PAID FEES WAIVED BY THE TOTAL FEES PAID TO THE
ADMINISTRATOR ADMINISTRATOR (AFTER WAIVERS)
---------------------------------------------------------------------------------------------------------------------
FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
---------------------------------------------------------------------------------------------------------------------
AIG Money
Market Fund $2,331,521 $2,254,350 $779,198 $78,832 $73,274 $81,062 $2,252,689 $2,181,076 $698,136
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The Trust and the Administrator entered into an agreement dated May 20, 2005 whereby the Administrator agrees to pay the Fund's transfer agency expenses up to a maximum of $110,000 annually to the extent aggregate annual average daily net assets of Class A Shares remain greater than $500 million. A waiver of the administration fee on a dollar-for-dollar basis will offset transfer agency expenses billed to the Fund.
THE DISTRIBUTOR
GENERAL. SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments and an affiliate of the Administrator, and the Trust are parties to a distribution agreement dated November 14, 1991, as amended and restated November 15, 2005 (the "Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
U.S. Bank National Association, 800 Nicollett Mall, Minneapolis, Minnesota 55402-4302 (the "Custodian"), acts as custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700 Philadelphia, PA 19103, serves as the independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-today management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
---------------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Chief Trust and New Covenant Funds.
Executive Officer of Director of SEI Global Master Fund
SEI Alpha Strategy plc, SEI Global Assets Fund plc, SEI
Portfolios, LP, June Global Investments Fund plc, SEI
2007 to present. Investments--Global Funds Services,
President and Director Limited, SEI Investments Global,
of SEI Opportunity Limited, SEI Investments (Europe)
Fund, L.P. to 2010. Ltd., SEI Investments--Unit Trust
Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
---------------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II, Bishop
Partner at Morgan, Lewis Street Funds, SEI Daily Income Trust,
& Bockius LLP (law SEI Institutional International Trust,
firm) from 1976 to 2003. SEI Institutional Investments Trust, SEI
Counsel to the Trust, SEI Institutional Managed Trust, SEI Liquid
Investments, SIMC, the Asset Trust, SEI Asset Allocation Trust
Administrator and the and SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
---------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
---------------------------------------------------------------------------------------------------------------------
Charles E. Trustee Self-Employed Business Current Directorships: Trustee of The
Carlbom (since 2005) Consultant, Business Advisors' Inner Circle Fund II and
(08/20/34) Projects Inc., since 1997. Bishop Street Funds. Director of
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S-14
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------------
Oregon Transfer Co.
---------------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and
Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
---------------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of The
Jr. (since 2011) Consultant since January Advisors' Inner Circle Fund II and
(05/28/52) 2012. Director of Bishop Street Funds. Director of The
Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010. Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
---------------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson (since 2005) since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
---------------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
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S-15
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------------
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
---------------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment Management
Services, John Hancock
Financial Services
(subsidiary of Manulife
Financial), June 2003 to
June 2010.
---------------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships: Trustee/Director
(04/12/31) (since 1994) Practitioner since 1994. of The Advisors' Inner Circle Fund II,
Bishop Street Funds and U.S.
Charitable Gift Trust. Trustee of SEI
Daily Income Trust, SEI Institutional
International Trust, SEI Institutional
Investments Trust, SEI Institutional
Managed Trust, SEI Liquid Asset Trust,
SEI Asset Allocation Trust, SEI Tax
Exempt Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
---------------------------------------------------------------------------------------------------------------------
George J. Sullivan, Trustee Retired since January Current Directorships: Trustee/
Jr. (since 1999) 2012. Self-employed Director of State Street Navigator
(11/13/42) Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II, Bishop
1997 to December 2011. Street Funds, SEI Structured Credit
Fund, LP, SEI Daily Income Trust, SEI
Institutional International Trust, SEI
Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid
Asset Trust, SEI Asset Allocation
Trust, SEI Tax Exempt Trust, SEI
Alpha Strategy Portfolios, LP, Adviser
Managed Trust and New Covenant
Funds. Member of the independent
review committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the1940Actbyvirtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and considering any significant
disputes between the Trust's management and the independent registered
public accounting firm that arose in connection with the preparation of
those financial statements; (vii) considering, in consultation with the
independent registered public accounting firm and the Trust's senior
internal accounting executive, if any, the independent registered public
accounting firms' reports on the adequacy of the Trust's internal financial
controls; (viii) reviewing, in consultation with each fund's independent
registered public accounting firm, major changes regarding auditing and
accounting principles and practices to be followed when preparing each
fund's financial statements; and (ix) other audit related matters. Messrs.
Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms.
Krikorian currently serve as members of the Audit Committee. Mr. Sullivan
serves as the Chairman of the Audit Committee. The Audit Committee meets
periodically, as necessary, and met four (4) times during the most recently
completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i)
considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
--------------------------------------------------------------------------------
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
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Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
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Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
-----------------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
-----------------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
-----------------------------------------------------------------------------------------------------------------
Michael Lawson Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
(10/08/60) Financial Officer since July 2005. Manager, SEI Investments,
(since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
-----------------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief Compliance
Officer of The Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Institutional Managed
Trust, SEI Asset Allocation Trust, SEI
Institutional International Trust, SEI Institutional
Investments Trust, SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust,
Adviser Managed Trust and New Covenant Funds.
Chief Compliance Officer of SEI Opportunity
Fund, L.P. until 2010. Director of Investment
Product Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February 2003.
-----------------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of SIMC
(03/28/68) (since 1999) and the Administrator since 1999. Vice President
and Assistant Secretary of SEI Investments since
2001. Assistant Secretary of SIMC, the
Administrator and the Distributor, and Vice
President of the Distributor, from 1999 to 2003.
-----------------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010. Associate
Sulzbach (since 2011) at Morgan, Lewis & Bockius LLP from 2006 to
(07/18/77) 2010. Associate at Morrison & Foerster LLP from
2003 to 2006. Associate at Stradley Ronon
Stevens & Young LLP from 2002 to 2003.
-----------------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since 2001.
(05/07/71) Secretary General Counsel, SEI Investments Distribution
(since 2012) Co., since 2004.
-----------------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
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PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith using methods approved by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security at the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elects to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, under the Code the Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership (the "Qualifying Income Test"); (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
The Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term
capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
The treatment of capital loss carryovers for RICs is similar to the rules that apply to capital loss carryovers of individuals which provide that such losses are carried over by the Fund indefinitely. If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires the Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, the Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of such year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Fund may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. The Fund receives income generally in the form of interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income whether you take them in cash or in additional shares. It is not anticipated that any distributions by the Fund will be eligible for the reduced tax rates applicable to qualified dividend income.
It is anticipated that the Fund will maintain a constant price per share and that shareholders will not generally realize gain or loss with respect to such shares. Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, the Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because the Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the adviser would not have chosen to sell such securities and
which may result in taxable gain or loss.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
FOREIGN TAXES. It is not anticipated that the Fund will pay any foreign or U.S. possessions income taxes.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold, at applicable withholding rates, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of the Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in Ginnie Mae or Fannie Mae securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Trust's Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund did not pay any aggregate brokerage commissions on portfolio transactions.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Fund's Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities for clients, provide the Adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Fund did not pay any commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934
Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act, affiliated broker-dealers are permitted to receive and retain compensation for effecting portfolio transactions for the Fund on an exchange if a written contract is in effect between the affiliate and the Fund expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund did not pay any aggregate brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. During the fiscal year ended October 31, 2012, the Fund held the following securities of its "regular brokers and dealers:"
-------------------------------------------------------------------------------------------- NAME OF BROKER/DEALER TYPE OF SECURITY HELD DOLLAR AMOUNT AT FISCAL YEAR END -------------------------------------------------------------------------------------------- Deutsche Bank Debt $400,000 -------------------------------------------------------------------------------------------- Barclays Bank PLC Debt $280,000 -------------------------------------------------------------------------------------------- RBC Capital Debt $325,000 -------------------------------------------------------------------------------------------- |
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund, its Adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person reports quarterly to the Board regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Fund will disclose a complete or summary schedule of investments (which includes each of the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. The Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q, and is available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR. The Fund provides a full list of holdings as of the last business day of the previous month in monthly holdings reports filed with the SEC on Form N-MFP and at http://aicfundholdings.com/Intermediate%20Page/MoneyMarket_FundList.html. This information will be provided monthly by no later than the fifth business day of each month. The information will be available on the web site for a period of not less than six months.
Fund filings on Form N-Q, Form N-CSR and Form N-MFP are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. Should the Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-800-249-7445.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in connection with their services to the Fund. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors (including affiliates of the Adviser), financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of the Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Fund believes that these third parties have legitimate objectives in requesting such portfolio holdings information. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosures pursuant to such arrangements.
The Fund's policies and procedures provide that the Authorized Person may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Authorized Person must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Fund's shareholders and that to the extent conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund exist, such conflicts are addressed. Portfolio holdings information may be disclosed daily to ratings agencies, consultants and other qualified financial professionals or individuals. In addition, upon request the Fund will provide its shareholders daily disclosure of the Fund's portfolio holdings. To request this information, please contact the Authorized Person as 1-212-770-7000.
With the exception of disclosures to rating and ranking organizations as described above, and affiliated entities of the Adviser as described below, the Fund requires any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Fund, or to perform due diligence and asset allocation, depending on the recipient of the information.
As noted in the section entitled "The Adviser," the Adviser is an indirect wholly-owned subsidiary of AIG, a holding company, which, through its subsidiaries, is primarily engaged in a broad range of insurance, insurance-related and financial services activities in the United States and abroad. Certain officers and investment personnel of the Adviser may also serve as officers and investment personnel of AIG and/or its subsidiaries, and in such capacity the affiliates for which they serve may be deemed to have access to non-public information regarding the Fund's portfolio holdings. Pursuant to the Adviser's policies and procedures, these officers and investment personnel of the Adviser are subject to a duty of confidentiality with regard to such non-public information. In addition, the Adviser participates in various investment committees, the membership of which includes personnel of AIG and/or its subsidiaries, which may have access to non-public information regarding the Fund's portfolio holdings for the purpose of supervising the investment activities of the Adviser. Further, the Adviser may disclose non-public information regarding the Fund's portfolio holdings to affiliates in connection with regulatory examinations of such affiliates. The Authorized Person believes that non-disclosure agreements with affiliated entities under these circumstances are unnecessary based on the relationship between the parties and the context in which the disclosures are made.
The Fund's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the fund for shares of additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares, when issued are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
CODES OF ETHICS
The Board on behalf of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Administrator and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, INCLUDING SECURITIES THAT MAY BE PURCHASED OR HELD BY THE FUND, but are required to report their personal securities transactions for monitoring purposes. In addition, certain Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Fund. The Trust believes that most of the shares referred to above were held by the persons above in accounts for their fiduciary, agency or custodial customers. Persons who owned of record or beneficially more than 25% of the Funds outstanding shares may be deemed to control the Fund within the meaning of the 1940 Act. Shareholders controlling the Fund may have a significant impact on any shareholder vote of the Fund.
-------------------------------------------------------------------------------- AIG MONEY MARKET FUND -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- AMERICAN HOME ASSURANCE 781,924,774.8500 21.33 C/O AIG INC 70 PINE STREET 19TH FLOOR NEW YORK, NY 10270-0001 -------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------- LEXINGTON INSURANCE COMPANY 733,890,021.0000 20.02 C/O AIG INC 70 PINE STREET 19TH FLOOR NEW YORK, NY 10270-0001 -------------------------------------------------------------------------------- NATIONAL UNION FIRE INSURANCE CO 690,804,295.0400 18.84 C/O AIG INC 70 PINE STREET 19TH FLOOR NEW YORK, NY 10270-0001 -------------------------------------------------------------------------------- AIG AVIATION -- PTA (PREMIUM) 213,558,507.5000 5.82% C/O AIG INC 70 PINE STREET 19TH FLOOR NEW YORK, NY 10270-0001 -------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
STATEMENT OF ADDITIONAL INFORMATION
ALPHAONE MICRO CAP EQUITY FUND
INVESTOR CLASS SHARES (AOMAX)
I CLASS SHARES (AOMCX)
ALPHAONE U.S. EQUITY LONG SHORT FUND
INVESTOR CLASS SHARES (AORAX)
I CLASS SHARES (AORCX)
R CLASS SHARES (AORRX)
EACH A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
ALPHAONE INVESTMENT SERVICES, LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the AlphaOne Micro Cap Equity Fund and AlphaOne U.S. Equity Long Short Fund (each a "Fund" and together, the "Funds"). This SAI is incorporated by reference into and should be read in conjunction with the Funds' prospectus dated March 1, 2013 (the "Prospectus"). Capitalized terms not defined herein are defined in the Prospectus. The financial statements with respect to the Fund, including notes thereto and the report of Ernst & Young LLP thereon, are contained in the 2012 Annual Report to Shareholders and are herein incorporated by reference into and deemed to be a part of this SAI. Shareholders may obtain a Prospectus or Annual Report free of charge by calling 1-855-4-ALPHAONE.
TABLE OF CONTENTS
THE TRUST ................................................................ S-1 DESCRIPTION OF PERMITTED INVESTMENTS ..................................... S-1 INVESTMENT LIMITATIONS ................................................... S-24 THE ADVISER .............................................................. S-26 THE PORTFOLIO MANAGERS ................................................... S-27 THE ADMINISTRATOR ........................................................ S-28 THE DISTRIBUTOR .......................................................... S-29 SHARHOLDER SERVICES ...................................................... S-29 PAYMENTS TO FINANCIAL INTERMEDIARIES ..................................... S-30 THE TRANSFER AGENT ....................................................... S-30 THE CUSTODIAN ............................................................ S-30 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................ S-30 LEGAL COUNSEL ............................................................ S-31 TRUSTEES AND OFFICERS OF THE TRUST ....................................... S-31 PURCHASING AND REDEEMING SHARES .......................................... S-40 DETERMINATION OF NET ASSET VALUE ......................................... S-41 TAXES .................................................................... S-42 FUND TRANSACTIONS ........................................................ S-47 PORTFOLIO HOLDINGS ....................................................... S-49 DESCRIPTION OF SHARES .................................................... S-50 SHAREHOLDER LIABILITY .................................................... S-50 LIMITATION OF TRUSTEES' LIABILITY ........................................ S-50 PROXY VOTING ............................................................. S-51 CODE OF ETHICS ........................................................... S-51 5% AND 25% SHAREHOLDERS .................................................. S-51 APPENDIX A -- RATINGS .................................................... A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ....................... B-1 March 1, 2013 ACP-SX-001-0300 |
THE TRUST
GENERAL. Each Fund is a separate series of the Trust. The Trust is an open-end
investment management company established under Massachusetts law as a
Massachusetts voluntary association (commonly known as a business trust) under
a Declaration of Trust dated July 18, 1991, as amended and restated February
18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust
to offer separate series ("funds") of shares of beneficial interest ("shares").
The Trust reserves the right to create and issue shares of additional funds.
Each fund is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong solely to that
fund and would be subject to liabilities related thereto. Each Fund pays its
(i) operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses, and (ii) pro rata
share of the Fund's other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the
assets of that fund. Expenses not attributable to a specific fund are allocated
across all of the funds on the basis of relative net assets. The other funds of
the Trust are described in one or more separate Statements of Additional
Information.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer shares of the Funds in Investor Class Shares, I Class Shares and R Class Shares. The different classes provide for variations in certain distribution and shareholder servicing expenses and in the minimum initial investment requirements. Minimum investment requirements and investor eligibility are described in the Prospectuses. The Trust reserves the right to create and issue additional classes of shares. For more information on shareholder servicing and distribution expenses, see "The Distributor."
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. Each Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Funds without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
Each Fund's investment objective and principal investment strategies are described in the Prospectus. Each Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The following information supplements, and should be read in conjunction with, the Prospectus. The following are descriptions of permitted investments and investment practices of the Funds and the associated risk factors. Each Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
FIXED INCOME SECURITIES
Fixed income securities, otherwise known as debt securities, consistent primarily of debt obligations issued by governments, corporations, municipalities and other borrowers, but may also include structured securities that provide for participation interests in debt obligations. Issuers use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
U.S. GOVERNMENT SECURITIES -- The Funds may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae, and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
CORPORATE BONDS -- Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. Each Fund's investment managers will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
RISKS OF MORTGAGE-BACKED SECURITIES -- Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways, the most significant differences of mortgage-backed securities are:
o payments of interest and principal are more frequent (usually monthly); and
o falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing a Fund to reinvest the money at a lower interest rate.
In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. If the prepayment rates increase, a Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
ASSET-BACKED SECURITIES -- These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or
sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Funds may also invest in residual interests in asset-backed securities, which is the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
MORTGAGE PASS-THROUGH SECURITIES -- The Funds may invest in mortgage pass-through securities. In the basic mortgage pass-through structure, mortgages with similar issuer, term and coupon characteristics are collected and aggregated into a "pool" consisting of multiple mortgage loans. The pool is assigned a CUSIP number and undivided interests in the pool are traded and sold as pass-through securities. The holder of the security is entitled to a pro rata share of principal and interest payments (including unscheduled prepayments) from the pool of mortgage loans.
An investment in a specific pool of pass-through securities requires an analysis of the specific prepayment risk of mortgages within the covered pool (since mortgagors typically have the option to prepay their loans). The level of prepayments on a pool of mortgage securities is difficult to predict and can impact the subsequent cash flows and value of the mortgage pool. In addition, when trading specific mortgage pools, precise execution, delivery and settlement arrangements must be negotiated for each transaction. These factors combine to make trading in mortgage pools somewhat cumbersome.
Most transactions in mortgage pass-through securities occur through the use of "to-be-announced" or "TBA transactions." "TBA" refers to a commonly used mechanism for the forward settlement of U.S. agency mortgage pass-through securities, and not to a separate type of mortgage-backed security. TBA transactions generally are conducted in accordance with widely-accepted guidelines which establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA transaction, the buyer and seller decide on general trade parameters, such as agency, settlement date, par amount, and price. The actual pools delivered generally are determined two days prior to settlement date. A Fund may use TBA transactions in several ways. For example, a Fund may enter into TBA agreements and "roll over" such agreements prior to the settlement date stipulated in such agreements. This type of TBA transaction is sometimes known as a "TBA roll." In a "TBA roll" a Fund generally will sell the obligation to purchase the pools stipulated in the TBA agreement prior to the stipulated settlement date and will enter into a new TBA agreement for future delivery of pools of mortgage pass-through securities. In addition, a Fund may enter into TBA agreements and settle such transactions on the stipulated settlement date by accepting actual receipt or delivery of the pools of mortgage pass-through securities stipulated in the TBA agreement.
Default by or bankruptcy of a counterparty to a TBA transaction would expose a Fund to possible loss because of adverse market action, expenses or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA transaction. To minimize this risk, a Fund will enter into TBA transactions only with established counterparties (such as major broker-dealers) and the Adviser will monitor the creditworthiness of such counterparties. The Fund's use of "TBA rolls" may cause the Fund to experience higher portfolio turnover, higher transaction costs and to pay higher capital gain distributions to shareholders (which may be taxable) than the other Funds described herein.
The Funds intends to invest cash pending settlement of any TBA transactions in money market instruments, repurchase agreements, commercial paper (including asset-backed commercial paper) or other high-quality, liquid short-term instruments, which may include money market funds affiliated with the Adviser.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") -- CMOs are one type of mortgage-backed security, which were first introduced in the early 1980's. CMOs generally retain many of the yield and credit quality characteristics as mortgage pass-through securities, while reducing some of the disadvantages of pass-throughs. CMOs may be backed by several types of varying mortgage collateral. The most prevalent types of collateral are: U.S. agency (e.g., GNMA, FNMA, or FHLMC) guaranteed mortgage pass-through securities, non-agency guaranteed mortgage loans, and commercial mortgage loans.
Some CMOs are also characterized as a Real Estate Mortgage Investment Conduit ("REMIC"). A REMIC is a CMO that qualifies for special tax treatment under the U.S. Internal Revenue Code of 1986, as amended (the "Code") and invests in certain mortgages primarily secured by interests in real property and other permitted investments.
A key difference between traditional mortgage pass-through securities and CMOs is the mechanics of the principal payment process. Unlike pass-through securities, which simply pay a pro rata distribution of any principal and interest payments from the underlying mortgage collateral, CMOs are structured into multiple classes, each bearing a different stated maturity and each potentially having different credit rating levels. Each class of CMO, often referred to as a "tranche", may be issued with a specific fixed interest rate or may pay a variable interest rate, which may change monthly. Each tranche must be fully retired by its final distribution date. Generally, all classes of CMOs pay or accrue interest monthly similar to pass-through securities.
The credit risk of all CMOs are not identical and must be assessed on a security by security basis. Generally, the credit risk of CMOs are heavily dependent upon the type of collateral backing the security. For example, a CMO collateralized by U.S. agency guaranteed pass-through securities will have a different credit risk profile compared to a CMO collateralized by commercial mortgage loans. Investing in the lowest tranche of CMO or REMIC certificates often involves risk similar to those associated with investing in non-investment grade rated corporate bonds. Additionally, CMOs may at times be less liquid than a regular mortgage pass-through security.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA") -- GNMA is the principal governmental guarantor of mortgage-related securities. GNMA is a wholly owned corporation of the U.S. government within the Department of Housing and Urban Development. Securities issued by GNMA are treasury securities, which means the full faith and credit of the U.S. government backs them. GNMA guarantees the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the market value or yield of mortgage-backed securities or the value of a Fund's shares. To buy GNMA securities, a Fund may have to pay a premium over the maturity value of the underlying mortgages, which the Fund may lose if prepayment occurs.
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") -- FNMA is a government- sponsored corporation owned entirely by private stockholders. FNMA is regulated by the Secretary of Housing and Urban Development. FNMA purchases conventional mortgages from a list of approved sellers and service providers, including state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Securities issued by FNMA are agency securities, which means FNMA, but not the U.S. government, guarantees their timely payment of principal and interest.
FREDDIE MAC -- Freddie Mac is stockholder-owned corporation established by the U.S. Congress to create a continuous flow of funds to mortgage lenders. Freddie Mac supplies lenders with the money to make mortgages and packages the mortgages into marketable securities. The system is designed to create a stable mortgage credit system and reduce the rates paid by homebuyers. Freddie Mac, not the U.S. government, guarantees timely payment of principal and interest.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS -- Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by GNMA, FNMA & Freddie Mac because they are not guaranteed by a government agency.
SHORT-TERM INVESTMENTS -- To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, a Fund may invest a portion of its assets in the short-term securities listed below, U.S. government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS
Each Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in
securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Funds. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
COMMERCIAL PAPER -- Commercial paper is a short-term obligation with a maturity ranging from one to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. A Fund may invest in commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A -- Ratings" for a description of commercial paper ratings.
YANKEE BONDS -- Yankee bonds are dollar-denominated bonds issued inside the United States by foreign entities. Investments in these securities involve certain risks that are not typically associated with investing in domestic securities. See "Foreign Securities."
ZERO COUPON BONDS -- These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with the same maturity. A Fund's investments in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its Fund securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once the
holder of the security has stripped or separated corpus and coupons, it may
sell each component separately. The principal or corpus is then sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of
the owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," a Fund can record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
TERMS TO UNDERSTAND:
MATURITY -- Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
A Fund that invests in debt securities has no real maturity. Instead, it calculates its weighted average maturity. This number is an average of the stated maturity of each debt security held by a Fund, with the maturity of each security weighted by the percentage of the assets of the Fund it represents.
DURATION -- Duration is a calculation that seeks to measure the price sensitivity of a debt security, or a Fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration. Effective duration takes into account call features and sinking Fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES -- The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding period and coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument, therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
o INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (i.e., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected, resulting in prepayments on the securities. A Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of a Fund. If left unattended, drifts in the average maturity of a Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of the Fund.
o EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause a Fund's average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of a Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term treasury securities, such as three-month treasury bills, are considered "risk free." Corporate securities offer higher yields than treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." Since an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which affects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called investment-grade because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, each Fund's investment managers may determine that it is of investment-grade. Each Fund's investment managers may retain securities that are downgraded, if it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influences their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause a Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's assessment of the issuer's financial strength. The Funds currently use ratings compiled by Moody's, S&P and Fitch Inc. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk.
The section "Appendix A -- Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
Each Fund's investment managers may use ratings produced by ratings agencies as guidelines to determine the rating of a security at the time a Fund buys it. A rating agency may change its credit ratings at any time. Each Fund's investment managers monitor the rating of the security and will take such action, if any, it believes appropriate when it learns that a rating agency has reduced the security's rating. A Fund is not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded below the above-stated ratings.
EQUITY SECURITIES
TYPES OF EQUITY SECURITIES:
COMMON STOCKS - Common stocks represent units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are described below, dividends on common stocks are not fixed but are declared at the discretion of the company's board of directors.
PREFERRED STOCKS - Preferred stocks are also units of ownership in a company. Preferred stocks normally have preference over common stock in the payment of dividends and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market values of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk.
CONVERTIBLE SECURITIES - Convertible securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of the issuer's common stock at a Fund's option during a specified time period (such as convertible preferred stocks, convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same corporation. In general, the market value of a convertible security is at least the higher of its "investment value" (i.e., its value as a fixed income security) or its "conversion value" (i.e., its value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times of steady interest rates than other types of debt securities. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which a Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics, and other factors. Because a Fund will create synthetic convertible positions only out of high grade fixed income securities, the credit rating associated with a Fund's synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing "time value" as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss, the market price of the option component generally reflects these differences in maturities, and the Adviser takes such differences into account when evaluating such positions. When a synthetic convertible position "matures" because of the expiration of the associated option, a Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If a Fund does not so extend the maturity of a position, it may continue to hold the associated fixed income security.
RIGHTS AND WARRANTS - A right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life of usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
RISKS OF INVESTING IN EQUITY SECURITIES:
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in general financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
SMALL- AND MEDIUM-SIZED COMPANIES - Investors in small- and medium-sized companies typically take on greater risk and price volatility than they would by investing in larger, more established companies. This increased risk may be due to the greater business risks of their small or medium size, limited markets and financial resources, narrow product lines and frequent lack of management depth. The securities of small- and medium-sized companies are often traded in the over-the-counter market and might not be traded in volumes typical of securities traded on a national securities exchange. Thus, the securities of small and medium capitalization companies are likely to be less liquid, and subject to more abrupt or erratic market movements, than securities of larger, more established companies.
FOREIGN SECURITIES
Foreign securities are debt and equity securities that are traded in markets outside of the United States. The markets in which these securities are located can be developed or emerging. Consistent with their respective investment strategies, the Funds can invest in foreign securities in a number of ways:
o They can invest directly in foreign securities denominated in a foreign currency;
o They can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o They can invest in investment funds.
TYPES OF FOREIGN SECURITIES:
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer 's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS -- An "emerging country" is generally a country that the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS -- Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If a Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses (including operating expenses and the fees of the Adviser), but also will bear indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS -- Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict or control foreign investments in its securities markets. These restrictions could limit a Fund's ability to invest in a particular country or make it very expensive for the Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION -- There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign countries more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK -- Each Fund's investment managers anticipate that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards;
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis;
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States;
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated;
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights; and
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK -- While the Funds denominate their net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES -- Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for a Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Fund receives from its investments. The Funds do not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS -- Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
CORPORATE LOANS. Corporate loans are negotiated and underwritten by a bank or syndicate of banks and other institutional investors. A Fund may acquire an interest in corporate loans through the primary market by acting as one of a group of
lenders of a corporate loan. The primary risk in an investment in corporate loans is that the borrower may be unable to meet its interest and/or principal payment obligations. The occurrence of such a default with regard to a corporate loan in which a Fund had invested would have an adverse affect on the Fund's net asset value. In addition, a sudden and significant increase in market interest rates may cause a decline in the value of these investments and in the Fund's net asset value. Other factors, such as rating downgrades, credit deterioration, or large downward movement in stock prices, a disparity in supply and demand of certain securities or market conditions that reduce liquidity could reduce the value of loans, impairing the Fund's net asset value. Corporate loans in which a Fund may invest may be collateralized or uncollateralized and senior or subordinate. Investments in uncollateralized and/or subordinate loans entail a greater risk of nonpayment than do investments in corporate loans which hold a more senior position in the borrower's capital structure or that are secured with collateral.
In the case of collateralized senior loans, however, there is no assurance that sale of the collateral would raise enough cash to satisfy the borrower's payment obligation or that the collateral can or will be liquidated. As a result, a Fund might not receive payments to which it is entitled and thereby may experience a decline in the value of its investment and its net asset value. In the event of bankruptcy, liquidation may not occur and the court may not give lenders the full benefit of their senior positions. If the terms of a senior loan do not require the borrower to pledge additional collateral, a Fund will be exposed to the risk that the value of the collateral will not at all times equal or exceed the amount of the borrower's obligations under the senior loans. To the extent that a senior loan is collateralized by stock in the borrower or its subsidiaries, such stock may lose all of its value in the event of bankruptcy of the borrower.
A Fund may also acquire an interest in corporate loans by purchasing participations ("Participations") in and assignments ("Assignments") of portions of corporate loans from third parties. By purchasing a Participation, a Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Participations typically will result in a Fund's having a contractual relationship only with the lender and not the borrower. A Fund will have the right to receive payments or principal, interest and any fees to which it is entitled only from the lender selling the Participation and only upon receipt by the lender of the payments from the borrower. In connection with purchasing Participations, a Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the Fund may not directly benefit from any collateral supporting the loan in which it has purchased the Participation. As a result, a Fund will assume the credit risk of both the borrower and the lender that is selling the Participation.
When a Fund purchases Assignments from lenders, the Fund will acquire direct rights against the borrower on the loan. However, since Assignments are arranged through private negotiations between potential assignees and assignors, the rights and obligations acquired by the Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by the lender from which the Fund is purchasing the Assignments.
A Fund may acquire corporate loans of borrowers that are experiencing, or are more likely to experience, financial difficulty, including loans of borrowers that have filed for bankruptcy protection. Although loans in which a Fund will invest generally will be secured by specific collateral, there can be no assurance that liquidation of such collateral would satisfy the borrower's obligation in the event of nonpayment of scheduled interest or principal, or that such collateral could be readily liquidated. In the event of bankruptcy of a borrower, a Fund could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a senior loan.
In addition, a Fund may have difficulty disposing of its investments in corporate loans. The liquidity of such securities is limited and each Fund anticipates that such securities could be sold only to a limited number of institutional investors. The lack of a liquid secondary market could have an adverse impact on the value of such securities and on a Fund's ability to dispose of particular loans or Assignments or Participations when necessary to meet the Fund's liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the borrower. The lack of a liquid secondary market for corporate loans may also make it more difficult for a Fund to assign a value to those securities for purposes of valuing the Fund's investments and calculating its net asset value.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Funds will reduce the risk that it will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission ("CFTC"). The Funds may use futures contracts and related options for: bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. To the extent futures and/or options on futures are employed by the Funds, such use will be in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Fund, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Funds are not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When the Funds purchase or sell a futures contract, or sell an option thereon, the Funds are required to "cover" their position in order to limit leveraging and related risks. To cover their position, the Funds may segregate (and marked-to-market on a daily basis), cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which the Funds may undertake and on the potential increase in the speculative character of the Funds' outstanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the Funds arising from such investment activities.
The Funds may also cover their long position in a futures contract by purchasing a put option on the same futures contract with a strike price (i.e., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Funds will segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Funds may also cover their long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. The Funds may cover their short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
The Funds may cover their sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Funds will segregate cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. The Funds may also cover their sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. The Funds may cover their sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Funds will segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Funds may also cover their sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with the Funds' use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual
securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Funds and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and options on futures. In addition, some strategies reduce the Funds' exposure to price fluctuations, while others tend to increase its market exposure.
OPTIONS. An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC options"). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counterparty will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When a Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). A Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. A Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, the Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When a Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when a Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. A Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an over-the-counter option by entering into an offsetting transaction with the counterparty to the option.
A Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, the Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, the Fund would hope to profit by closing out the put option at a lower price. If security prices fall, the Fund may lose an amount of money equal to the difference between the
value of the security and the premium it received. Writing covered put options may deprive the Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. A Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, the Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
A Fund is permitted only to write covered options. At the time of selling the call option, the Fund may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, a Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
A Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. The Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. The Fund may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
A Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, a Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to the Fund.
o COMBINED POSITIONS
A Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, the Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, the Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount).
o Are traded in the inter-bank markets conducted directly between currencytraders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC.
o Do not require an initial margin deposit.
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES -- A "settlement hedge" or "transaction hedge" is designed to protect a Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
A Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which the Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
A Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause the Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, a Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, the Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
To the extent that a Fund engages in foreign currency hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
SWAP AGREEMENTS -- Permitted swap agreements may include, but are not limited to, total return swaps, index swaps, interest rate swaps, and credit default swaps. The Funds may utilize swap agreements in an attempt to gain exposure to the securities in a market without actually purchasing those securities, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested in a "basket" of securities representing a particular index.
Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap," interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or "floor," and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Another form of swap agreement is a credit default swap. A credit default swap enables the Funds to buy or sell protection against a defined credit event of an issuer or a basket of securities. Generally, the seller of credit protection against an issuer or basket of securities receives a periodic payment to compensate against potential default events. If a default event occurs, the seller must pay the buyer the full notional value of the reference obligation in exchange for the reference obligation or make a cash payment equal to the difference between the product of the full notional value and the difference of 100% less a reference price determined through an auction of the defaulted securities. If no default occurs, the counterparty will pay the stream of payments and have no further obligations to the Funds selling the credit protection.
In contrast, the buyer of a credit default swap would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value or receive a cash payment equal to the difference between the product of the full notional value and the difference of 100% less a reference price determined through an auction of the defaulted securities of such debt obligation from the counterparty in the event of a default or other credit event by the reference issuer, such as a U.S. or foreign corporation, with respect to its debt obligations. In return, the buyer of the credit protection would pay the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the counterparty would keep the stream of payments and would have no further obligations to the Funds purchasing the credit protection.
Most swap agreements (but generally not credit default swaps) entered into by the Funds calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Funds' current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). Other swap agreements, such as credit default swaps, may require initial premium (discount) payments as well as periodic payments (receipts) related to the fixed interest leg of the swap or to the default of a reference obligation.
The Funds' current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Funds) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by segregating assets determined to be liquid. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of the Funds' investment restriction concerning senior securities. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for the Funds' illiquid investment limitations.
The Funds may enter into swap agreements to invest in a market without owning or taking physical custody of the underlying securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank, investment banking firm or broker/dealer. The counterparty will generally agree to pay the Funds the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends that would have been received on those stocks. The Funds will agree to pay to the counterparty a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Funds on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Funds on the notional amount.
Swap agreements typically are settled on a net basis (but generally not credit default swaps), which means that the two payment streams are netted out, with the Funds receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of a swap agreement or periodically during its term. Other swap agreements, such as credit default swaps, may require initial premium (discount) payments as well as periodic payments (receipts) related to the fixed interest leg of the swap or to the default of a reference obligation. The Funds will earmark and reserve assets necessary to meet any accrued payment obligations when it is the buyer of a credit default swap. In cases where the Funds are the seller of a credit default swap, if the credit default swap provides for physical settlement, the Funds will be required to earmark and reserve the mark-to-market of the credit default swap, which represents the Funds' exposure under the agreement.
Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount of payments that the Funds are contractually obligated to make. If a swap counterparty defaults, the Funds' risk of loss consists of the net amount of payments that the Funds are contractually entitled to receive, if any. The net amount of the excess, if any, of the Funds' obligations over its entitlements with respect to each equity swap will be accrued on a daily basis and an amount of cash or liquid assets, having an aggregate NAV at least equal to such accrued excess will be maintained in a segregated account by the Funds' custodian. Inasmuch as these transactions are entered into for hedging purposes or are offset by segregated cash of liquid assets, as permitted by applicable law, the Funds and their Adviser believe that these transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Funds' borrowing restrictions.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments, which are traded in the over-the-counter market. The Adviser, under the supervision of the Board, is responsible for determining and monitoring the liquidity of Funds transactions in swap agreements.
The use of swap agreements, including credit default swaps, is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The Funds will not enter into
swap agreements with respect to more than 25% of its total assets. Moreover, the Funds will not enter into swap agreements with one counterparty with respect to more than 10% of the Funds' total assets. The Funds will not enter into any swap agreement unless the Adviser believes that the other party to the transaction is creditworthy. The Funds bear 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. If a counterparty defaults on its payment obligations to the Funds, this default will cause the value of your investment in the Funds to decrease. Similarly, if a counterparty's creditworthiness declines, the value of the swap would likely decline. Moreover, there is no guarantee that the Funds could eliminate its exposure under an outstanding swap agreement by entering into an offsetting swap agreement with the same or another party. In addition, the Funds may enter into financial instruments with a limited number of counterparties, which may increase the Funds' exposure to counterparty credit risk.
ILLIQUID SECURITIES
The Funds may purchase or hold illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933 (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Funds will not invest more than 15% of the Funds' net assets in illiquid securities. If the percentage of the Funds' net assets invested in illiquid securities exceeds 15% due to market activity, the Funds will take appropriate measures to reduce their holdings of illiquid securities. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Funds have valued the securities.
Under current SEC staff guidelines, illiquid securities also are considered to include, among other securities, purchased OTC options, certain cover for OTC options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the federal securities laws. The Funds may not be able to sell illiquid securities when the Adviser considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the securities were more liquid. In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to value due to the unavailability of reliable market quotations for such securities, and investment in illiquid securities may have an adverse impact on NAV.
Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor" from 1933 Act registration requirements for qualifying sales to institutional investors. When Rule 144A restricted securities present an attractive investment opportunity and meet other selection criteria, the Funds may make such investments whether or not such securities are "illiquid" depending on the market that exists for the particular security. The Board of Trustees of the Trust (the "Board") has delegated the responsibility for determining the liquidity of Rule 144A restricted securities that the Funds may invest in to the Adviser.
MONEY MARKET SECURITIES
Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Ratings Service ("S&P") or Moody's Investor Service ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Ratings" to this SAI.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with financial institutions. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer,
and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The acquisition of a repurchase agreement may be deemed to be an acquisition of the underlying securities as long as the obligation of the seller to repurchase the securities is collateralized fully. The Funds follows certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with creditworthy financial institutions whose condition will be continually monitored by the Adviser. The repurchase agreements entered into by the Funds will provide that the underlying collateral at all times shall have a value at least equal to 102% of the resale price stated in the agreement and consist only of securities permissible under Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance with this requirement). Under all repurchase agreements entered into by the Funds, the custodian or its agent must take possession of the underlying collateral. In the event of a default or bankruptcy by a selling financial institution, the Funds will seek to liquidate such collateral. However, the exercising of the Funds' right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Funds could suffer a loss. It is the current policy of the Funds not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Funds, amounts to more than 15% of the Funds' total assets. There is no limit on the amount of a Fund's assets that may be invested in repurchase agreements with maturities that are within seven days of investment. The investments of the Funds in repurchase agreements, at times, may be substantial when, in the view of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Generally, the effect of such a transaction is that the Funds can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Funds will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to the Funds of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Funds intend to use the reverse repurchase technique only when it will be advantageous to the Funds. The Funds will in each instance establish a segregated account with the Trust's custodian bank in which the Funds will maintain cash or cash equivalents or other portfolio securities equal in value to the Funds' obligations in respect of reverse repurchase agreements.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Funds. The Funds' purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying the Funds' expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, the Funds may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, WisdomTree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Funds may invest in the ETFs in excess of the 3% limit described above, provided that the Funds otherwise comply with the conditions of the SEC order, as it may be amended, and any other
applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
SECURITIES LENDING
The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Funds' Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of each Fund (including the loan collateral). The Funds will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Funds.
The Funds may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Funds' securities lending agent, but will bear all of any losses from the investment of collateral.
By lending their securities, the Funds may increase their income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. Investing cash collateral subjects a Fund to market risk. A Fund remains obligated to return all collateral to the borrower under the terms of its securities lending arrangements, even if the value of investments made with the collateral decline. Accordingly, if the value of a security in which the cash collateral has been invested declines, the loss would be borne by the Fund, and the Fund may be required to liquidate other investments in order to return collateral to the borrower at the end of the loan. The Funds will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Funds must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) the Funds must be able to terminate the loan on demand; (iv) the Funds must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Funds may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Funds' administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Funds must terminate the loan and regain the right to vote the securities. In such instances, the Adviser will vote the securities in accordance with its proxy voting policies and procedures. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon the Funds' ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
SHORT SALES. As consistent with the Fund's investment objective, the Fund may engage in short sales that are either "uncovered" or "against the box." A short sale is "against the box" if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
Uncovered short sales are transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund may: (a) segregate cash or liquid securities at such a level that the amount segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short; or (b) otherwise cover the Fund's short position.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
In addition to each Fund's investment objective, the following are fundamental policies of the Funds. Fundamental policies cannot be changed without the consent of the holders of a majority of the Funds' outstanding shares. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Funds' shares present at a meeting, if more than 50% of the outstanding shares of the Funds are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
Each Fund may not:
1. Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Concentrate investments in a particular industry as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
6. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
The following investment limitations of each Fund are non-fundamental and may be changed by the Trust's Board of Trustees without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
Each Fund may not:
1. Hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
Further,
2. The AlphaOne Micro Cap Equity Fund may not change its investment strategies to invest at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of micro capitalization companies at the time of initial purchase without 60 days' prior written notice to shareholders.
3. The AlphaOne U.S. Equity Long Short Fund may not change its investment strategies to invest at least 80% of its net assets, plus any borrowings for investment purposes, in U.S. equity securities at the time of initial purchase without 60 days' prior written notice to shareholders.
Except with respect to the Funds' policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's outstanding voting securities would be held by the fund.
CONCENTRATION. The SEC staff has defined concentration as investing 25% or more of an investment company's net assets in an industry with certain exceptions. Each Fund may, at any time, invest more than 25% of its assets in securities issued by the Federal government or its agencies and instrumentalities, and/or state governments and their political sub-divisions, as the SEC Staff does not consider such entities to be the members of any industry.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets.
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as short sales, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Funds' current investment policy on lending is as follows: each Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its Statement of Additional Information.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly.
COMMODITIES AND REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in commodities or real estate, but does require that every investment company have a fundamental investment policy governing such investments. Each Fund has adopted a fundamental policy that would permit direct investment in commodities or real estate. The Funds' current investment policy is as follows: each Fund will not purchase or sell real estate, physical commodities, or commodities contracts, except that the Fund may purchase: (i) marketable securities issued by companies which own or invest in real estate (including REITs), commodities, or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
THE ADVISER
GENERAL. The Adviser, AlphaOne Investment Services, LLC is a professional investment management firm registered with the SEC under the Investment Advisers Act of 1940. The Adviser was established in 2008 as a Delaware limited liability company. The Adviser is a wholly owned subsidiary of AlphaOne Capital Partners, which in turn, is a wholly owned subsidiary of AlphaOne Holding, LLC, a private company owned by Paul J. Hondros. As of December 31, 2012, the Adviser had approximately $458 million in assets under management. The Adviser's principal business address is One Tower Bridge, 100 Front Street, Suite 1250, West Conshohocken, PA 19428.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated March 24, 2011 (the "Advisory Agreement") with respect to the Funds. Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Funds and continuously reviews, supervises and administers the investment program of the Funds, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall indemnify and hold the Funds harmless from losses arising out of, among other things, the Adviser's breach of the Advisory Agreement or improper investments made by the Adviser.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Funds; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of the Funds, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. (As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act).
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.00% of the average daily net assets of the AlphaOne Micro Cap Equity Fund and 1.25% of the average daily net assets of the AlphaOne U.S. Equity Long Short Fund. The Adviser may, from its own resources, compensate broker dealers whose clients purchase shares of the Funds. The Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep each Fund's net operating expenses (excluding 12b-1 Fees, Shareholder Servicing Fees, interest, dividend and interest expense on securities sold short, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding the following levels until March 1, 2014.
-------------------------------------------------------------------------------- FUND EXPENSE LIMIT -------------------------------------------------------------------------------- AlphaOne Micro Cap Equity Fund 1.50% -------------------------------------------------------------------------------- AlphaOne U.S. Equity Long Short Fund 2.00% -------------------------------------------------------------------------------- |
In addition, with respect to the AlphaOne Micro Cap Equity Fund, the Adviser has voluntarily agreed to further reduce its fees and/or reimburse expenses in order to keep the Fund net operating expenses (excluding excluded expenses) from exceeding 1.42% of the Fund's average daily net assets. The Adviser intends to continue this voluntary expense limitation until further notice, but may discontinue all or part of it at any time. If at any point it becomes unnecessary for the Adviser to reduce fees or make expense reimbursements, the Adviser may retain the difference between each Fund's total annual Fund operating expenses (not including excluded expenses) and its respective expense cap to recover all or a portion of its fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. With respect to the AlphaOne Micro Cap Equity Fund, if total annual Fund operating expenses are greater than the voluntary cap but less than the contractual cap, the Adviser will not be permitted to recover the difference between the total annual Fund operating expenses and the contractual cap.
For the fiscal years ended October 31, 2011 and 2012, the Funds paid the following advisory fees:
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CONTRACTUAL ADVISORY TOTAL FEES PAID
FEES PAID FEES WAIVED BY THE ADVISER TO THE ADVISOR
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FUND 2012 2011(1) 2012 2011(1) 2012 2011(1)
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AlphaOne Micro Cap $465,625 $5,480 $193,403 $5,480 $272,222 $0
Equity Fund
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AlphaOne U.S. $131,093 $8,402 $131,093 $8,402 $0 $0
Equity Long Short
Fund
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(1) Represents the period between March 31, 2011 (commencement of fund operations), and October 31, 2011.
THE PORTFOLIO MANAGERS
This section includes information about the Funds' portfolio managers, including information about other accounts managed, the dollar range of Fund shares owned and how the portfolio managers are compensated.
COMPENSATION. The Adviser compensates the portfolio managers for their management of the Funds. The portfolio managers' compensation consists of a combination of salary and bonus. Each portfolio manager's bonus is calculated based on a profit sharing program which calibrates net profits derived from each portfolio manager's individual strategy with the strength and quality of the stock picking of each portfolio manager.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Funds are required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Funds as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act").
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NAME DOLLAR RANGE OF FUND SHARES OWNED(1)
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Karl Richter None (AlphaOne Micro Cap Equity Fund)
None (AlphaOne U.S. Equity Long Short Fund)
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Steven Dray $50,001 - $100,000 (AlphaOne Micro Cap Equity Fund)
None (AlphaOne U.S. Equity Long Short Fund)
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Chris Crooks None (AlphaOne Micro Cap Equity Fund)
None (AlphaOne U.S. Equity Long Short Fund)
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Dan Goldfarb $10,001 - $50,000 (AlphaOne Micro Cap Equity Fund)
None (AlphaOne U.S. Equity Long Short Fund)
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Michael Gleason None (AlphaOne Micro Cap Equity Fund)
None (AlphaOne U.S. Equity Long Short Fund)
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(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Funds, the portfolio manager may also be responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED
INVESTMENT COMPANIES OTHER POOLED
(EXCLUDING THE FUNDS) INVESTMENT VEHICLES OTHER ACCOUNTS
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NUMBER OF NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS (MILLIONS) ACCOUNTS (MILLIONS)
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Karl Richter 0 $0 1 $25 4 $74
0 $0 1* $25 4* $74
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Steven Dray 0 $0 0 $0 9 $149
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Chris Crooks 0 $0 0 $0 7 $111
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Dan Goldfarb 0 $0 0 $0 9 $149
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Michael Gleason 0 $0 0 $0 0 $0
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* These accounts, which are a subset of the accounts in the preceding row, are subject to performance based advisory fees.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of a Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as a Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio managers could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of a Fund's trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of a Fund's. In addition, it is also possible that a potential conflict of interest may arise because a portfolio manager manages an account with a performance-based management fee in addition to the Funds and other accounts without a performance-based fee. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Funds whereby the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement for the Funds, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.11% of the first $750 million of average daily net assets and 0.09% of average daily net assets over $750 million. Notwithstanding the foregoing, the Administrator is entitled to a minimum fee of $255,000 for the two initial AlphaOne Funds. Due to these minimums, the annual administration fee the Funds pay will exceed the above percentages at low asset levels.
For the fiscal years ended October 31, 2011 and 2012, the Funds paid the Administrator the following fees:
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FEES WAIVED BY THE
CONTRACTUAL FEES PAID ADMINISTRATOR TOTAL FEES PAID
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FUND 2012 2011(1) 2012 2011(1) 2012 2011(1)
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AlphaOne Micro Cap Equity $115,053 $68,728 $0 $0 $115,053 $68,728
Fund
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AlphaOne U.S. Equity Long $140,064 $79,420 $0 $0 $140,064 $79,420
Short Fund
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(1) Represents the period between March 31, 2011 (commencement of Fund operations) and October 31, 2011.
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly -owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Funds and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of the Funds, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
DISTRIBUTION PLAN. The Distribution Plan (the "Plan") provides that Investor Class Shares of each Fund and R Class Shares of the AlphaOne U.S. Equity Long Short Fund pay the Distributor an annual fee of up to a maximum of 0.25% of the average daily net assets of the Investor Class Shares and R Class Shares. Under the Plan, the Distributor may make payments pursuant to written agreements to financial institutions and intermediaries such as banks, savings and loan associations and insurance companies including, without limit, investment counselors, broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for services and reimbursement of expenses incurred in connection with distribution assistance. The Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution expenses incurred by the Distributor or the amount of payments made to other financial institutions and intermediaries. The Trust intends to operate the Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
The Trust has adopted the Plan in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or any agreements related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the affected Fund(s). All material amendments of the Plan will require approval by a majority of the Trustees of the Trust and of the Qualified Trustees.
PAYMENTS UNDER THE DISTRIBUTION PLAN. For the fiscal years ended October 31, 2011 and 2012, the Fund paid the Distributor the following fees:
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12B-1 FEES PAID
------------------------
FUND SHARE CLASS 2012 2011(1)
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AlphaOne Micro Cap Equity Fund Investor Class $430 $136
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AlphaOne U.S. Equity Long Short Fund Investor Class $21,481 $267
R Class $274 $149
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(1) Represents the period between March 31, 2011 (commencement of Fund operations) and October 31, 2011.
SHAREHOLDER SERVICES
SHAREHOLDER SERVICING PLAN. The AlphaOne U.S. Equity Long Short Fund has adopted a shareholder servicing plan (the "Service Plan") under which a shareholder servicing fee of up to 0.25% of average daily net assets of the R Class Shares of the Fund will be paid to other service providers. Under the Service Plan, other service providers may perform, or may compensate other service providers for performing certain shareholder and administrative services as discussed below.
DESCRIPTION OF SHAREHOLDER SERVICES. Shareholder services may include: (i) maintaining accounts relating to clients that invest in shares; (ii) arranging for bank wires; (iii) responding to client inquiries relating to the services performed by the services provider; (iv) responding to inquiries from clients concerning their investment in shares; (v) assisting clients in changing dividend options, account designations and addresses; (vi) providing information periodically to clients showing their position in shares; (vii) forwarding shareholder communications from the Fund such as proxies, shareholder reports, annual reports, and dividend distribution and tax notices to clients; and (viii) processing dividend payments from the Fund on behalf of clients.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, their service providers or their respective affiliates, as incentives to help market and promote the Funds and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Funds, the Distributor or shareholders of the Funds through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Funds in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Funds; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Funds by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Funds' transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
Union Bank, N.A., 350 California Street, 6(th) Floor, San Francisco, CA 94104 (the "Custodian"), serves as custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Funds. The financial statements and notes thereto incorporated by
reference have been audited by Ernst & Young LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-today management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm
reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Chief Trust and New Covenant Funds.
Executive Officer of Director of SEI Global Master Fund
SEI Alpha Strategy plc, SEI Global Assets Fund plc, SEI
Portfolios, LP, June Global Investments Fund plc, SEI
2007 to present. Investments--Global Funds Services,
President and Director Limited, SEI Investments Global,
of SEI Opportunity Limited, SEI Investments (Europe)
Fund, L.P. to 2010. Ltd., SEI Investments--Unit Trust
Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd. and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Administrator Trust, SEI Asset Allocation Trust, SEI
and the Distributor. Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Business Current Directorships: Trustee of The
(08/20/34) (since 2005) Consultant, Business Advisors' Inner Circle Fund II and
Projects Inc. since 1997. Bishop Street Funds. Director of
Oregon Transfer Co.
-------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Executive Current Directorships: Trustee of The
(08/17/44) (since 2008) Officer, Office of Advisors' Inner Circle Fund II and
Finance, Federal Home Bishop Street Funds. Director of
Loan Banks, from 1992 Federal Home Loan Bank of
to 2007. Pittsburgh and Manna, Inc. (non-
profit developer of affordable housing
for ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
-------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since January Advisors' Inner Circle Fund II and
2012. Director of Bishop Street Funds. Director of The
Endowments and Korea Fund, Inc.
Foundations, Morningstar
Investment Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010. Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson (since 2005) since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
-------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house)
for State Street Bank
from 1995 to 2003.
-------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011; Executive
Vice President --
Investment Management
Services, John Hancock
Financial Services
(subsidiary of Manulife
Financial), June 2003 to
June 2010.
-------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
George J. Sullivan, Jr. Trustee Retired since January Current Directorships:
(11/13/42) (since 1999) 2012. Self-employed Trustee/Director of State Street
Lead Independent Consultant, Newfound Navigator Securities Lending Trust,
Trustee Consultants Inc., April The Advisors' Inner Circle Fund II,
1997 to December 2011. Bishop Street Funds, SEI Structured
Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Funds as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Funds provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Funds, and to exercise their business judgment in a manner that serves the best interests of the Funds' shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's independent registered public accounting firm and whether to terminate this relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence; (iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities; (iv) serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
------------------------------------------------------------------------------------
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF SHARES
NAME FUND SHARES (FUNDS)(1) (ALL FUNDS IN THE FUND COMPLEX)(1,2)
------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------
Doran None None
------------------------------------------------------------------------------------
Nesher None None
------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------
Carlbom None None
------------------------------------------------------------------------------------
Darr None None
------------------------------------------------------------------------------------
Grause None None
------------------------------------------------------------------------------------
Johnson None Over $100,000
------------------------------------------------------------------------------------
Krikorian None None
------------------------------------------------------------------------------------
Speca None None
------------------------------------------------------------------------------------
Storey None None
------------------------------------------------------------------------------------
Sullivan None None
------------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
------------------------------------------------------------------------------------------------------
PENSION OR
RETIREMENT ESTIMATED
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS
COMPENSATION AS PART OF FUND UPON TOTAL COMPENSATION FROM THE
NAME FROM THE TRUST EXPENSES RETIREMENT TRUST AND FUND COMPLEX(1)
------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND
OF BIRTH LENGTH OF TERM PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
------------------------------------------------------------------------------------------------------
Michael Lawson Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
(10/08/60) Financial Officer since July 2005. Manager, SEI Investments,
(since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed Trust and
New Covenant Funds. Chief Compliance Officer
of SEI Opportunity Fund, L.P. until 2010.
Director of Investment Product Management and
Development, SEI Investments, since February
2003; Senior Investment Analyst -- Equity Team,
SEI Investments, from March 2000 to February
2003.
------------------------------------------------------------------------------------------------------
|
------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND
OF BIRTH LENGTH OF TERM PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(03/28/68) (since 1999) SIMC and the Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
(07/18/77) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
------------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Funds are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Funds in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or
1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Funds' securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Funds for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The following information supplements and should be read in conjunction with the section in the Prospectus entitled "How the Fund Calculates NAV." The NAV of a Fund serves as the basis for the purchase and redemption price of the Fund's shares. The NAV of each Fund is calculated by dividing the market value of the Fund's securities plus the value of its other assets, less all liabilities, by the number of outstanding shares of the Fund. The Funds adhere to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value in accordance with procedures adopted by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Funds' pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
DERIVATIVES AND OTHER COMPLEX SECURITIES. Exchange traded options on securities and indices purchased by the Funds generally are valued at their last trade price or, if there is no last trade price, the last bid price. Exchange traded options on securities and indices written by the Funds generally are valued at their last trade price or, if there is no last trade price, the last asked price. In the case of options traded in the over-the-counter ("OTC") market, if the OTC option is also an exchange traded option, the Funds will follow the rules regarding the valuation of exchange traded options. If the OTC option is not also an exchange traded option, the Funds will value the option at fair value in accordance with procedures adopted by the Board. Futures contracts and options on futures contracts are valued at the last trade price prior to the end of the Funds' pricing cycle.
OTC securities held by the Funds shall be valued at the NASDAQ Official Closing Price ("NOCP") on the valuation date or, if no NOCP is reported, the last reported bid price is used, and quotations shall be taken from the market/exchange where the
security is primarily traded. Securities listed on the Nasdaq Global Select Market and Nasdaq Global Market shall be valued at the NOCP; which may differ from the last sales price reported. The portfolio securities of the Funds that are listed on national exchanges are taken at the last sales price of such securities on such exchange; if no sales price is reported, the last reported bid price is used. For valuation purposes, all assets and liabilities initially expressed in foreign currency values will be converted into U.S. Dollar values at the rate at which local currencies can be sold to buy U.S. Dollars as last quoted by any recognized dealer. If these quotations are not available, the rate of exchange will be determined in good faith by the Adviser based on guidelines adopted by the Board. Dividend income and other distributions are recorded on the ex-dividend date, except for certain dividends from foreign securities which are recorded as soon as the Trust is informed after the ex-dividend date.
The value of domestic equity index and credit default swap agreements entered into by the Funds is accounted for using the unrealized gain or loss on the agreements that is determined by marking the agreements to the last quoted value of the index that the swap pertains to at the close of the NYSE, usually 4:00 p.m., Eastern Time. The swap's market value is then adjusted to include dividends accrued, financing charges and/or interest associated with the swap agreement. If the last quoted value of the index is not readily available, the swap agreement will be valued in good faith in accordance with procedures adopted by the Board. The value of foreign equity index and currency index swap agreements entered into by the Funds are accounted for using the unrealized gain or loss on the agreements that is determined by marking the agreements to the price at which orders are being filled at the close of the NYSE, usually 4:00 p.m., Eastern Time. In the event that no order is filled at 4:00 p.m., Eastern Time, the Funds value the swap based on a quote provided by a dealer in accordance with the fund's pricing procedures. The swap's market value is then adjusted to include dividends accrued, financing charges and/or interest associated with the swap agreements.
Illiquid securities, securities for which reliable quotations or pricing services are not readily available, and all other assets will be valued either at the average of the last bid price of the securities obtained from two or more dealers or otherwise at their respective fair value as determined in good faith by, or under procedures established by the Board. The Board has adopted fair valuation procedures for the Funds and has delegated responsibility for fair value determinations to the Fair Valuation Committee. The members of the Fair Valuation Committee report, as necessary, to the Board regarding portfolio valuation determination. The Board, from time to time, will review these methods of valuation and will recommend changes which may be necessary to assure that the investments of the Funds are valued at fair value.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain federal income tax considerations generally affecting the Funds and their shareholders that are not described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussion here and in the Prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
This general discussion of certain federal income tax consequences is based on the Internal Revenue Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). Each Fund intends to qualify and elect to be treated as a RIC. By following such a policy, each Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Funds as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the Code each Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in qualified publicly traded partnerships ("Qualifying Income Test"); (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers that the Funds control and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships ("Asset Diversification Test").
If a Fund fails to satisfy the Qualifying Income or Asset Diversification Tests in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the Asset Diversification Test where a Fund corrects the failure within a specified period. If these relief provisions are not available to a Fund for any year in which it fails to qualify as a RIC, all of its taxable income will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and its distributions (including capital gains distributions) generally will be taxable as ordinary income dividends to its shareholders, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates on qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before re-qualifying as a RIC.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires the Funds to distribute at least 90% of their annual investment company income and does not require any minimum distribution of net capital gain, the Funds will be subject to a nondeductible 4% federal excise tax to the extent either Fund fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of such year, plus certain other amounts. The Funds intend to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. Each Fund may in certain circumstances be required to liquidate its investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the Adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
DISTRIBUTIONS TO SHAREHOLDERS. Each Fund may derive capital gains and losses in connection with sales or other dispositions of its portfolio of securities. Distributions of net short-term capital gains will be taxable to you as ordinary income. Distributions of net long-term capital gains will be taxable to you as long-term capital gain regardless of how long you have held your shares. Distributions of dividends will be taxed as ordinary income except that distributions of qualified dividend income will be taxed at the lower capital gains rates available for individual shareholders.
Certain distributions from the Funds may qualify as qualified dividend income.
Qualified dividend income distributed to an individual is taxable at the lower,
long-term capital gains rate which is set at a maximum rate of 20%. Qualified
dividend income is, in general, dividend income from taxable domestic
corporations and certain foreign corporations (e.g., foreign corporations
incorporated in a possession of the United States or in certain countries with
a comprehensive tax treaty with the United States, or the stock of which is
readily tradable on an established securities market in the United States). A
dividend will not be treated as qualified dividend income to the extent that:
(i) the shareholder has not held the shares on which the dividend was paid for
more than 60 days during the 121-day period that begins on the date that is 60
days before the date on which the shares become "ex-dividend" (which is the day
on which declared distributions (dividends or capital gains) are deducted from
a Fund's assets before it calculates the net asset value) with respect to such
dividend; (ii) a Fund has not satisfied similar holding period requirements
with respect to the securities it holds that paid the dividends distributed to
the shareholder); (iii) the shareholder is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to
substantially similar or related property; or (iv) the shareholder elects to
treat such dividend as investment income under section 163(d)(4)(B) of the
Code. Distributions reported to Fund shareholders as capital gain dividends
shall be taxable as long-term capital gains at a maximum rate of 20%,
regardless of how long the shareholder has owned the shares.
A Fund will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, a Fund may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Fund.
In the case of corporate shareholders, Fund distributions (other than capital gains distributions) generally qualify for the dividend-received deduction to the extent such distributions are so designated and do not exceed the gross amount of qualifying dividends received by the Funds for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If a Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Funds and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of a Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30
days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on "net investment income," including interest, dividends, and capital gains (including any capital gains realized on the sale of shares of a Fund).
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, each Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
If a call option written by a Fund expires, the amount of the premium received by the Fund for the option will be short-term capital gain to the Fund. If such an option is closed by the Fund, any gain or loss realized by the Fund as a result of the closing purchase transaction will be short-term capital gain or loss. If the holder of a call option exercises the holder's right under the option, any gain or loss realized by the Fund upon the sale of the underlying security or underlying futures contract pursuant to such exercise will be short-term or long-term capital gain or loss to the Fund depending on the Fund's holding period for the underlying security or underlying futures contract.
With respect to call options purchased by a Fund, the Fund will realize short-term or long-term capital gain or loss if such option is sold and will realize short-term or long-term capital loss if the option is allowed to expire depending on the Fund's holding period for the call option. If such a call option is exercised, the amount paid by the Fund for the option will be added to the basis of the stock or futures contract so acquired.
Each Fund has available to it a number of elections under the Internal Revenue Code concerning the treatment of option transactions for tax purposes. Each Fund will utilize the tax treatment that, in the Fund's judgment, will be most favorable to a majority of investors in that Fund. Taxation of these transactions will vary according to the elections made by the Fund. These tax considerations may have an impact on investment decisions made by the Fund.
Each Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by a Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses. In turn, those rules may affect the amount, timing or character of the income distributed to you by the Fund.
REDEMPTIONS AND EXCHANGES. Redemptions and exchanges of Fund shares may be taxable transactions for federal and state income tax purposes. If you hold your shares as a capital asset, the gain or loss that you realize will be capital gain or loss and will be long-term or short-term, generally depending on how long you hold your shares. Any loss incurred on the redemption or exchange of shares held for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gains distributed to you by the Funds on such shares. All or a portion of any loss that you realize upon the redemption of your Fund shares will be disallowed to the extent that you buy other shares in the Funds (through reinvestment of dividends or otherwise) within 30 days before or after your share redemption. Any loss disallowed under these rules will be added to your tax basis in the new shares you buy.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders the cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to the requirement to report the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares the Fund will permit Fund shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as their default cost basis method. The cost basis method elected by a Fund shareholder (or the cost basis method applied by default) for each sale of Fund
shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
FOREIGN TAXES. Dividends and interests received by a Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold a rate of 28% and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Funds may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Funds.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by a Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. A Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA
securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Funds will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Funds execute transactions in the over-the-counter market, they will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Funds, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Funds may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Funds to participate in higher volume transactions will generally be beneficial to the Funds.
During the fiscal years ended October 31, 2011 and 2012, each Fund paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF
BROKERAGE COMMISSIONS PAID
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FUND 2012 2011(1)
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AlphaOne Micro Cap Equity Fund $127,619 $2,208
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AlphaOne U.S. Equity Long Short Fund $364,724 $22,313
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(1) Represents the period between March 31, 2011 (commencement of Fund operations) and October 31, 2011.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Funds to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Funds.
To the extent that research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Funds' Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Funds may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
During the fiscal year ended October 31, 2012, the Funds paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR
AMOUNT OF BROKERAGE TOTAL DOLLAR AMOUNT OF
COMMISSIONS FOR TRANSACTIONS INVOLVING BROKERAGE
RESEARCH SERVICES COMMISSIONS FOR RESEARCH SERVICES
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AlphaOne Micro Cap Equity $26,455 $28,965,889
Fund
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AlphaOne U.S. Equity Long $37,327 $111,069,870
Short Fund
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BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Funds, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Funds for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Funds, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal period from March 31, 2011 (commencement of Fund operations) to October 31, 2011 and the fiscal year ended October 31, 2012, the Funds did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of their "regular brokers and dealers" (as such term is defined in the 1940 Act) that they held during the most recent fiscal year. During the fiscal year ended October 31, 2012, the Funds did not hold any securities of "regular brokers and dealers:"
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under U.S. Securities and Exchange Commission (the "SEC") rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Funds may invest since such contracts generally have remaining maturities of less than one-year. The Funds may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover. For the fiscal year ended October 31, 2012 and from March 31, 2011 (commencement of operations) to October 31, 2011, the Funds' portfolio turnover was as follows:
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PORTFOLIO TURNOVER RATE
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FUND 2011 2012
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AlphaOne Micro Cap Equity Fund 37% 52%
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AlphaOne U.S. Equity Long Short Fund 597% 1,183%(1)
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(1) The portfolio turnover rate of the AlphaOne U.S. Equity Long Short Fund increased from 597% for the fiscal period ended October 31, 2011 to 1,183% for the fiscal year ended October 31, 2012 because the fiscal year ended October 31, 2012 was the first full fiscal year in which the Fund was in operation and the Fund engaged in an increased number of purchases and sales of portfolio securities due to a substantial increase in assets during this time.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of the Funds' shareholders, and include procedures to address conflicts between the interests of the Funds' shareholders, on the one hand, and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds, the Adviser, or the principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Funds' Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Funds are required to disclose their complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). Each Fund will disclose a complete or summary schedule of investments (which includes the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule") in its Semi-Annual and Annual Reports which are distributed to the Fund's shareholders. Each Fund's complete schedule of investments following the first and third fiscal quarters will be available in quarterly holdings reports filed with the SEC on Form N-Q, and the Fund's complete schedule of investments following the second and fourth fiscal quarters will be available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q and Form N-CSR are not distributed to the Funds' shareholders but will be available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. Should a Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-855-4-ALPHAONE. The Funds provide information about their complete portfolio holdings within 30 days after the end of each calendar quarter on the internet at www.alphaonecapital.com.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in connection with their services to the Funds. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Funds. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings
information in order to assess the risks of a Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Funds believe that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Funds' policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Funds' shareholders and that to the extent conflicts between the interests of the Funds' shareholders and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than three days after the date of the information. The Funds' Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Funds require any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Funds, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Funds' policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipient of the Funds' portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Funds' shares, when issued, are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Funds to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Funds' proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-855-4-ALPHAONE; and (ii) on the SEC's website at http://www.sec.gov.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, INCLUDING SECURITIES THAT MAY BE PURCHASED OR HELD BY THE FUND, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Funds. Persons who owned of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to control the Funds within the meaning of the 1940 Act.
----------------------------------------------------------------------------------------------- ALPHAONE MICRO CAP EQUITY FUND ----------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES CLASS OF SHARES % OF FUND ----------------------------------------------------------------------------------------------- AlphaOne Capital Partners LLC 10,797.3300 Investor 29.70% 100 Front St Suite 1250 W Conshohocken, PA 19428-2872 ----------------------------------------------------------------------------------------------- Daniel J Goldfarb 5,760.9180 Investor 15.85% Subject to DST TOD Rules 9 Brownstone LN Sudbury, MA 01776-2272 ----------------------------------------------------------------------------------------------- Steven A Dray & Elizabeth H B Dray 5,499.7170 Investor 15.13% JTWROS Subject to DST TOD Rules 130 Jason St Arlington, MA 02476-8034 ----------------------------------------------------------------------------------------------- NFS LLC FEBO 4,399.7730 Investor 12.10% FMT CO CUST IRA Rollover FBO Ross Rocklin 86 Alexandria Way Basking Ridge, NJ 07920-2761 ----------------------------------------------------------------------------------------------- |
----------------------------------------------------------------------------------------------- NFS LLC FEBO 2,176.5570 Investor 5.99% FMTC Custodian -- Roth IRA FBO Paul James Hondros AlphaOne Capital Partners 100 Front Street-Suite 1250 West Conshohocken, PA 19428-2872 ----------------------------------------------------------------------------------------------- NFS LLC FEBO 2,174.8880 Investor 5.98% FMT CO CUST IRA Rollover FBO Richard Robert Russo 3881 N 37th Ave Hollywood, FL 33021-1922 ----------------------------------------------------------------------------------------------- Polk Bros Foundation 1,536,594.1160 I 19.65% 20 W Kinzie St Suite 1110 Chicago, IL 60654-5815 ----------------------------------------------------------------------------------------------- Board of Trustees of Whitman College 1,340,842.5950 I 17.15% 345 Boyer Ave Walla Walla, WA 99362-2067 ----------------------------------------------------------------------------------------------- The Denver Foundation 1,235,357.8020 I 15.80% 55 Madison St 8th Floor Denver, CO 80206-5423 ----------------------------------------------------------------------------------------------- Rebecca Wood TR 784,341.7900 I 10.03% U/A 01/09/1996 The M L Lawrence Trust 10620 Treena St Suite 100 San Diego, CA 92131-1140 ----------------------------------------------------------------------------------------------- Lincoln Center for the Performing Arts Inc. 569,495.4520 I 7.28% 70 Lincoln Center Plaza 9th Floor New York, NY 10023-6548 ----------------------------------------------------------------------------------------------- Caring for Colorado Foundation 433,954.7580 I 5.55% 4100 E Mississippi Avenue Suite 605 Denver, CO 80246-3054 ----------------------------------------------------------------------------------------------- ALPHAONE U.S. EQUITY LONG SHORT FUND NAME AND ADDRESS NUMBER OF SHARES CLASS OF SHARES % OF FUND ----------------------------------------------------------------------------------------------- Charles Schwab & Co. Inc. 24,055.3520 Investor 32.71% Special Custody Acct FBO Customers Attn Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ----------------------------------------------------------------------------------------------- AlphaOne Capital Partners LLC 10,305.1180 Investor 14.01% 100 Front St Suite 1250 W Conshohocken, PA 19428-2872 ----------------------------------------------------------------------------------------------- NFS LLC FEBO 6,049.3300 Investor 8.23% FMTC Custodian -- Roth IRA FBO Paul James Hondros AlphaOne Capital Partners 100 Front Street-Suite 1250 West Conshohocken, PA 19428-2872 ----------------------------------------------------------------------------------------------- NFS LLC FEBO 3,864.4470 Investor 5.25% FMT CO CUST IRA Rollover FBO HAL Landy 432 Putnam Ave Cambridge, MA 02139-4609 ----------------------------------------------------------------------------------------------- AlphaOne Capital Partners LLC 82,436.1490 I 98.19% 100 Front St Suite 1250 W Conshohocken, PA 19428-2872 ----------------------------------------------------------------------------------------------- AlphaOne Capital Partners LLC 10,305.7200 R 99.90% 100 Front St Suite 1250 W Conshohocken, PA 19428-2872 |
APPENDIX A -- RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
ALPHAONE INVESTMENT SERVICES, LLC
APPENDIX E
ALPHAONE INVESTMENT SERVICES, LLC
PROXY VOTING POLICIES AND PROCEDURES
I. POLICY
AlphaOne Investment Services, LLC (the "ADVISER") acts as discretionary investment adviser for a private fund, clients who may be governed by the Employee Retirement Income Security Act of 1974, ("ERISA"), and as discretionary investment adviser to certain brokerage accounts. The Adviser's authority to vote proxies or act on other shareholder actions on behalf of its clients is established under the delegation of discretionary authority under its investment advisory contracts. Therefore, unless a client (including a "named fiduciary" under ERISA) specifically reserves the right, in writing, to vote its own proxies or to take shareholder action in other corporate actions, the Adviser will vote all proxies or act on all other actions received in sufficient time prior to their deadlines as part of its full discretionary authority over the assets in accordance with these Proxy Voting Policies and Procedures (these "POLICIES AND PROCEDURES"). Corporate actions may include, for example and without limitation, tender offers or exchanges, bankruptcy proceedings, and class actions.
When voting proxies or acting on corporate actions on behalf of clients, the Adviser will act in a manner deemed prudent and diligent and will exercise its voting authority in a manner that is in the best interests of its clients and consistent with the investment objectives of the Adviser's clients.
II. PURPOSE
The purpose of these Policies and Procedures is to memorialize the procedures and policies adopted by the Adviser to enable it to comply with its responsibilities and the requirements of Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended ("ADVISERS ACT"). THESE POLICIES AND PROCEDURES ALSO REFLECT THE FIDUCIARY STANDARDS AND RESPONSIBILITIES SET FORTH BY THE DEPARTMENT OF LABOR FOR ERISA ACCOUNTS.
III. PROCEDURES
The Adviser's Chief Compliance Officer ("CCO") shall be ultimately responsible for ensuring that all proxies and corporate actions received by the Adviser are voted in a timely manner and voted consistently across all portfolios or in accordance with any specific written instructions provided by a client. Although many proxy proposals can be voted in accordance with the Adviser's established guidelines (see Section VI below) (the "GUIDELINES"), the Adviser recognizes that certain proposals may require special consideration and that a client may provide the Adviser with specific voting instructions that may differ from the Adviser's general Guidelines. Under such circumstances, the Adviser may make an exception to its general voting Guidelines. The Adviser may engage a non-affiliated third party vendor to vote proxies on behalf of its clients.
A. CONFLICTS OF INTEREST. Where a proxy proposal raises a material conflict of interest between the Adviser's interests and that of one or more its clients, the Adviser shall resolve such conflict in the manner described below.
1. VOTE IN ACCORDANCE WITH THE GUIDELINES. To the extent that the Adviser has LITTLE OR NO DISCRETION to deviate from the Guidelines with respect to the proposal in question, the Adviser shall vote in accordance with the pre-determined voting policies set forth in the Guidelines.
2. OBTAIN CONSENT OF CLIENTS. To the extent that the Adviser has discretion to deviate from the Guidelines with respect to the proposal in question, the Adviser shall disclose the conflict to the relevant clients and obtain their consent to the proposed vote prior to voting the securities. The disclosure to the clients will include sufficient detail regarding the matter to be voted on and the nature of the Adviser's conflict that the clients would be able to make an informed decision regarding the vote. When a client does not respond to such a conflict disclosure request or denies the request, the Adviser will abstain from voting the securities held by that client's account.
B. LIMITATIONS. In certain circumstances, in accordance with a client's investment advisory contract (or other written directive) or where the Adviser has determined that it is in the client's best interest, the Adviser will not vote proxies received. The following are some circumstances where the Adviser will limit its role in voting proxies received on client securities:
1. CLIENT MAINTAINS PROXY VOTING AUTHORITY: Where client specifies in writing that it will maintain the authority to vote proxies itself or that it has delegated the right to vote proxies to a third party, the Adviser will not vote the securities and will direct the relevant custodian to send the proxy material directly to the client. If any proxy material is received by the Adviser, it will promptly be forwarded to the client.
2. LIMITED VALUE OR TERMINATED ACCOUNT: If the Adviser concludes that the client's economic interest or the value of the portfolio holding is indeterminable or insignificant, the Adviser will abstain from voting a client's proxies. The Adviser will also abstain from voting a client's proxies where a proxy is received for a client's account that has been terminated with the Adviser. Regardless of any applicable record date of an issuer, the Adviser will not vote proxies received for securities that are no longer held in a client's account. In addition, the Adviser generally will not vote securities where the economic value of the securities in the client account is less than $500.
3. UNJUSTIFIABLE COSTS: In certain circumstances, after doing a cost-benefit analysis, the Adviser may abstain from voting where the cost of voting a client's proxy would exceed any anticipated benefits of the proxy proposal.
IV. RECORD KEEPING
In accordance with Rule 204-2 under the Advisers Act, the Adviser will maintain for the time periods set forth in the Rule (i) these Policies and Procedures, and any amendments thereto; (ii) all proxy statements received regarding client securities (provided however, that the Adviser may rely on the proxy statement filed on EDGAR as its records so long as it maintains a separate record identifying the statements that were received and relied upon); (iii) a record of votes cast on behalf of clients (the Adviser may rely on records of proxy votes maintained by a proxy voting service if the service has undertaken to provide a copy of such records promptly upon request); (iv) records of client requests for proxy voting information and the Adviser's written responses to written or oral requests; (v) any documents prepared by the Adviser that were material to making a decision how to vote or that memorialized the basis for the decision; and (vi) records relating to requests made to clients regarding conflicts of interest in voting the proxy.
See Section XII of the Compliance Manual, Books and Records, as to the record retention requirements of the Advisers Act with respect to the above records.
Sub-advisers, such as AlphaOne, to mutual funds are typically delegated responsibility for voting proxies relating to portfolio securities held by the fund for which the sub-adviser has investment discretion or responsibility. The sub-advisers, such as AlphaOne, each have their own proxy voting policies and procedures.
Form N-PX. Rule 30b1-4 under the 1940 Act requires mutual funds, as registered investment companies, to file, by August 31 of each year, their complete proxy voting records on Form N-PX for the 12-month period ended June 30. The CCO will review all reports on Form N-PX of the mutual fund clients of AlphaOne and assist the funds in the timely filing of all such reports on Form N-PX.
V. DISCLOSURE TO CLIENTS
The Adviser will describe in its Part II of Form ADV (or other brochure fulfilling the requirement of Rule 204-3) its proxy voting policies and procedures and advising clients how they may obtain information on how the Adviser voted their securities. Clients may obtain information on how their securities were voted or a copy of the Adviser's Policies and Procedures by written request addressed to the Adviser. Finally, Rule 206(4)-6 under the Advisers Act requires registered investment advisers to provide clients with a concise summary of the adviser's proxy voting policies and procedures and, upon request, to provide clients with a copy of such policies and procedures.
VI. GUIDELINES
Each proxy proposal or shareholder action will be considered individually. The following is a guideline on how the Adviser will vote certain proposals that are subject to shareholder approval. The vote recommendations set forth below are guidelines with respect to certain proposals and are not intended to be rigid voting rules as the manner in which proxies are ultimately voted will depend on market conditions and other extenuating facts and circumstances (i.e. proxy contests and the performance of an issuer) that may affect the Adviser's voting decisions.
Where the Guidelines outline the Adviser's voting position to be determined on a "case by case" basis for such proxy proposal, or such or such proposal is not listed in the Guidelines, then the Adviser will choose either to vote the proxy in accordance with the voting recommendation of a non-affiliated third party vendor, or will vote the proxy pursuant to client direction. The method selected by the Adviser will depend on the facts and circumstances of each situation and the requirements of applicable law.
--------------------------------------------------------------------------------------------------------------- PROPOSAL VOTING ACTION --------------------------------------------------------------------------------------------------------------- Proposals relating to an issuer's board of directors such as the following: Approve proposals to elect of members of an issuer's board of directors, except if there is a proxy fight; proposals that provide for the limitation of directors' liability, provided however, that proposals providing for the indemnification of directors and or officers shall be evaluated and voted on a case-by-case basis after evaluating applicable laws and extent of protection required; and proposals that establish staggered terms for the board of directors --------------------------------------------------------------------------------------------------------------- Proposals relating to eliminating mandatory director retirement policies Case-by-Case basis --------------------------------------------------------------------------------------------------------------- Proposals relating to anti-takeover measures such as the following: proposals to Oppose limit the ability of shareholders to call special meetings; proposals to require super majority votes; proposals requesting excessive increases in authorized common or preferred stock where management provides no explanation for the need or use of capital stock; and proposals permitting "green mail" --------------------------------------------------------------------------------------------------------------- Proposals providing for cumulative voting rights Oppose --------------------------------------------------------------------------------------------------------------- Proposals approving the elimination of preemptive rights Approve Preemptive rights give current shareholders the opportunity to maintain their current percentage ownership through any subsequent equity offerings. These provisions are no longer common in the US and can restrict management's ability to raise new capital. The Adviser will approve the elimination of preemptive rights, but will oppose the elimination of limited preemptive rights, e.g. on proposed issues representing more than an acceptable level of total dilution. --------------------------------------------------------------------------------------------------------------- Proposals regarding the establishment as to the date and place of annual meetings Approve --------------------------------------------------------------------------------------------------------------- Proposals providing for confidential voting Approve Confidential voting is most often proposed by shareholders as a means of eliminating undue management pressure on shareholders regarding their vote in proxy issues. The Adviser will generally approve these proposals as shareholders can later divulge their votes to management on a selective basis if a legitimate reason arises --------------------------------------------------------------------------------------------------------------- Proposals approving the election of auditors recommended by management, Approve unless the issuer is seeking to replace the existing auditor due to a dispute over policies --------------------------------------------------------------------------------------------------------------- |
--------------------------------------------------------------------------------------------------------------- PROPOSAL VOTING ACTION --------------------------------------------------------------------------------------------------------------- Proposals providing for a limitation on charitable contributions or fees paid to Approve lawyers --------------------------------------------------------------------------------------------------------------- Proposals relating to social issues, unless otherwise specified by client mandate or Oppose guidelines --------------------------------------------------------------------------------------------------------------- Proposals approving the establishment of or amendment to existing employee stock Approve option plans, stock purchase plans and 401(k) Plans --------------------------------------------------------------------------------------------------------------- Proposals approving stock options and stock grants to management and directors Case-by-Case --------------------------------------------------------------------------------------------------------------- |
STATEMENT OF ADDITIONAL INFORMATION
CBRE CLARION LONG/SHORT FUND
(INSTITUTIONAL CLASS SHARES: CLSIX)
(INVESTOR CLASS SHARES: CLSVX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
CBRE CLARION SECURITIES LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the CBRE Clarion Long/Short Fund (the "Fund"); This SAI is incorporated by reference into and should be read in conjunction with the Fund's prospectuses dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectuses. The financial statements with respect to the Fund for the fiscal period ended October 31, 2012, including notes thereto and the report of Ernst & Young LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Fund's 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectuses or Annual Report, when available, free of charge by writing to the Trust at CBRE Clarion Long/Short Fund, P.O. Box 219009, Kansas City, MO 64121-9009 (Express Mail Address: CBRE Clarion Long/Short Fund, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105) or calling the Fund at 1-855-520-4CCS (4227).
TABLE OF CONTENTS
THE TRUST ..................................................................S-1 DESCRIPTION OF PERMITTED INVESTMENTS .......................................S-2 INVESTMENT LIMITATIONS .....................................................S-26 THE ADVISER ................................................................S-28 THE PORTFOLIO MANAGERS .....................................................S-29 THE ADMINISTRATOR ..........................................................S-31 THE DISTRIBUTOR ............................................................S-32 SHAREHOLDER SERVICES .......................................................S-33 PAYMENTS TO FINANCIAL INTERMEDIARIES .......................................S-33 THE TRANSFER AGENT .........................................................S-33 THE CUSTODIAN ..............................................................S-34 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ..............................S-34 LEGAL COUNSEL ..............................................................S-34 TRUSTEES AND OFFICERS OF THE TRUST .........................................S-34 PURCHASING AND REDEEMING SHARES ............................................S-44 DETERMINATION OF NET ASSET VALUE ...........................................S-44 TAXES ......................................................................S-45 FUND TRANSACTIONS ..........................................................S-51 PORTFOLIO HOLDINGS .........................................................S-53 DESCRIPTION OF SHARES ......................................................S-54 SHAREHOLDER LIABILITY ......................................................S-55 LIMITATION OF TRUSTEES' LIABILITY ..........................................S-55 PROXY VOTING ...............................................................S-55 |
CODES OF ETHICS ............................................................S-55 5% AND 25% SHAREHOLDERS ....................................................S-56 APPENDIX A -- DESCRIPTION OF RATINGS .......................................A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES .........................B-1 |
March 1, 2013 [INVENTORY CODE]
THE TRUST
GENERAL. The Fund is a separate series of the Trust, an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund, and all assets of such fund, belong solely to that fund and would be subject to any liabilities related thereto. Each fund of the Trust pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses and (ii) pro rata share of the fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information.
HISTORY OF THE FUND. The Fund is the successor to CBRE Clarion U.S., LP (the "Predecessor Fund"). The Predecessor Fund was managed by CBRE Clarion Securities LLC, the investment adviser of the Fund, using investment objectives, strategies, policies and restrictions that were in all material respects equivalent to those used in managing the Fund. The date of inception of the Predecessor Fund was November 30, 2000. The Predecessor Fund dissolved and reorganized into the Fund on December 30, 2011. All of the assets and liabilities of the Predecessor Fund were transferred to its successor in connection with the Fund's commencement of operations on December 30, 2011.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer shares of the Fund in Investor Class and Institutional Class Shares. The different classes provide for variations in certain distribution and shareholder servicing expenses and in the minimum initial investment requirements. Minimum investment requirements and investor eligibility are described in the Prospectus. The Trust reserves the right to create and issue additional classes of shares. For more information on shareholder servicing and distribution expenses, see "The Distributor."
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. Under the Declaration of Trust, the Trustees have the power to liquidate the Fund without shareholder approval. While the Trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
NON-DIVERSIFICATION. The Fund is non-diversified, as that term is defined in the 1940 Act, which means that a relatively high percentage of assets of the Fund may be invested in the obligations of a limited number of issuers. The value of the shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence than the shares of a diversified investment company would be. The Fund intends to satisfy the diversification requirements necessary to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), which requires that the Fund be diversified (i.e., will not invest more than 5% of its assets in the securities in any one issuer) with respect to 50% of its assets.
DESCRIPTION OF PERMITTED INVESTMENTS
The Fund's investment objective and principal investment strategies are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI. The following are descriptions of the permitted investments and investment practices of the Fund and the associated risk factors. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
AMERICAN DEPOSITARY RECEIPTS. ADRs, as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository" and may be sponsored or unsponsored. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer's home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. While the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts
agree to distribute notices of shareholders meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequency is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
For purposes of the Fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depositary receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers.
Investments in the securities of foreign issuers may subject the Fund to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments, possible imposition of withholding taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition, foreign issuers are, generally speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States.
EQUITY SECURITIES. Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants and rights to acquire common stock, securities convertible into common stock, and investments in master limited partnerships. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded on global securities exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o ROYALTY TRUSTS. Royalty trusts are structured similarly to REITs. A royalty trust generally acquires an interest in natural resource companies or chemical companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields.
o EXCHANGE-TRADED FUNDS. An ETF is a fund whose shares are bought and sold on a securities exchange as if it were a single security. An ETF holds a portfolio of securities designed to track a particular market segment or index. Some examples of ETFs are SPDRs([R]), DIAMONDS(SM), NASDAQ 100 Index Tracking Stock(SM) ("QQQs(SM)"), and iShares([R]). The Fund could purchase an ETF to temporarily gain exposure to a portion of the U. S. or foreign market while awaiting an opportunity to purchase securities directly. Similarly, the Fund may establish a
short position in an ETF to gain inverse exposure to a portion of the U. S. or foreign markets. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities and ETFs have management fees that increase their costs versus the costs of owning the underlying securities directly. See also "Investment Company Shares" below.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non- convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in general financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
REAL ESTATE INVESTMENT TRUSTS. A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Code. The Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders. Although the REIT structure originated in the U.S., a number of countries around the world have adopted, or are considering adopting, similar REIT and REIT-like structures.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which the Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Fund invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through the Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
MICRO, SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of micro, small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of micro and smaller companies are often traded in the over-the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of micro and smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
INITIAL PUBLIC OFFERINGS ("IPOS") - A Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on a Fund with a small asset base. The impact of IPOs on a Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to a Fund for investing, particularly as the Fund's asset base grows. Because IPO shares frequently are volatile in price, a Fund may hold IPO shares for a very short period of time. This may increase the turnover of a Fund's portfolio and may lead to increased expenses for a Fund, such as commissions and transaction costs. By selling IPO shares, a Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
A Fund's investment in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which presents risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product lines.
MASTER LIMITED PARTNERSHIPS. MLPs are limited partnerships or limited liability companies, whose partnership units or limited liability interests are listed and traded on a U.S. securities exchange, and are treated as publicly traded partnerships for federal income tax purposes. To qualify to be treated as a partnership for tax purposes, an MLP must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Code. These qualifying sources include activities such as the exploration, development, mining, production, processing, refining, transportation, storage and marketing of mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. MLPs that are formed as limited liability companies generally have two analogous classes of owners, the managing member and the members. For purposes of this section, references to general partners also apply to managing members and references to limited partners also apply to members. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an equity interest of as much as 2% in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the MLP through ownership of common units and have a limited role in the MLP's operations and management.
MLPs are typically structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount ("minimum quarterly distributions" or "MQD").
Common and general partner interests also accrue arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the partnership's cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such results benefit all security holders of the MLP.
General partner interests of MLPs are typically retained by an MLP's original sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and investors such as us. A holder of general partner interests can be liable under certain circumstances for amounts greater than the amount of the holder's investment in the general partner interest. General partner interests often confer direct board participation rights and in many cases, operating control, over the MLP. These interests themselves are not publicly traded, although they may be owned by publicly traded entities. General partner interests receive cash distributions, typically 2% of the MLP's aggregate cash distributions, which are contractually defined in the partnership agreement. In addition, holders of general partner interests typically hold incentive distribution rights ("IDRs"), which provide them with a larger share of the aggregate MLP cash distributions as the distributions to limited partner unit holders are increased to prescribed levels. General partner interests generally cannot be converted into common units. The general partner interest can be redeemed by the MLP if the MLP unitholders choose to remove the general partner, typically with a supermajority vote by limited partner unitholders.
FIXED INCOME SECURITIES. Fixed income securities include bonds, notes, debentures and other interest-bearing securities that represent indebtedness. The market value of the fixed income investments in which the Fund invests will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. Changes by recognized agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of these securities will not necessarily affect cash income derived from these securities but will affect the Fund's net asset value.
FOREIGN SECURITIES. Foreign securities include equity securities of foreign entities, obligations of foreign branches of U.S. banks and of foreign banks, including, without limitation, European Certificates of Deposit, European Time Deposits, European Bankers' Acceptances, Canadian Time Deposits, Europaper and Yankee Certificates of Deposit, and investments in Canadian Commercial Paper and foreign securities. These instruments have investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include future adverse political and economic developments, the possible imposition of withholding taxes on interest or other income, possible seizure, nationalization, or expropriation of foreign deposits, the possible establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations. Such investments may also entail higher custodial fees and sales commissions than domestic investments. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of U. S. banks.
EMERGING MARKETS -- An "emerging country" is generally a country that the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS -- Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If the Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses (including operating expenses and the fees of the Adviser), but also will bear indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS -- Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
o Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
o The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions;
o The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit the Fund's ability to invest in a particular country or make it
very expensive for the Fund to invest in that country. Some countries
require prior governmental approval or limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
INFORMATION AND SUPERVISION -- There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign countries more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK -- The Fund's investment managers anticipate that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards;
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis;
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States;
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated;
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights; and
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK -- While the Fund denominates its net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U. S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter- bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES -- Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for the Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Fund receives from its investments.
EMERGING MARKETS -- Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Rating Services ("S&P") or Moody's Investor Services, Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Description of Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation ("Farmer Mac").
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency. While other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Association ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments
are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Adviser will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by GNMA, FNMA and Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES - Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. The most significant differences of mortgage-backed securities are: 1) payments of interest and principal are more frequent (usually monthly) and 2) falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing the Fund to reinvest the money at a lower interest rate. In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. When prepayment occurs, the Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Fund may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. It is the current policy of the Fund not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% of the Fund's total assets. The investments of the
Fund in repurchase agreements, at times, may be substantial when, in the view
of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Generally, the effect of such a transaction is that the Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Fund intends to use the reverse repurchase technique only when it will be advantageous to the Fund. The Fund will in each instance establish a segregated account with the Trust's custodian bank in which the Fund will maintain cash or cash equivalents or other portfolio securities equal in value to the Fund's obligations in respect of reverse repurchase agreements.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Fund. The Fund's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the
operating expenses of such investment companies, including advisory fees, in
addition to paying the Fund's expenses. Unless an exception is available,
Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more
than 3% of the voting shares of any one investment company, (ii) investing more
than 5% of its total assets in any one investment company, and (iii) investing
more than 10% of its total assets in all investment companies combined,
including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise complies with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, or an underlying economic factor, such as an interest rate or a market benchmark. Unless otherwise stated in the Fund's prospectus, the Fund may use derivatives for risk management purposes, including to gain exposure to various markets in a cost efficient manner, to reduce transaction costs or to remain fully invested. The Fund may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates (a practice known as "hedging"). When hedging is successful, the Fund will have offset any depreciation in the value of its portfolio securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of the Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the Investment Company Act of 1940, as amended ("1940 Act"). Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets (or such assets are "earmarked" by the Custodian) in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), a Fund must either operate within certain guidelines and restrictions with respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Fund, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Fund is not subject to registration or regulation as a CPO
under the CEA. As a result, the Fund will operate within certain guidelines and restrictions with respect to its use of futures, options on such futures, commodity options and certain swaps.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade - known as "contract markets" - approved for such trading and regulated by the Commodity Futures Trading Commission ("CFTC"). These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC" options). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counter-party will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When the Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). The Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. The Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, the Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When the Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when the Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. The Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an OTC option by entering into an offsetting transaction with the counter-party to the option.
The Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, the Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, the Fund would hope to profit by closing out the put option at a lower price. If security prices fall, the Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive the Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. The Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, the Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Fund is permitted only to write covered options. At the time of selling the call option, the Fund may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, the Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
The Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. The Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. The Fund may buy call
options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to the Fund.
o COMBINED POSITIONS
The Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, the Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, the Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currencyat a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount);
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC;
o Do not require an initial margin deposit; and
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect the Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which the Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause the Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross-hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, the Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, the Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of the Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, if the counter-party's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. The Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counter-party is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Fund's gains or losses. In order to reduce the risk associated with leveraging, the Fund may cover its current obligations under swap agreements according to guidelines established by the Securities and Exchange Commission (the "SEC"). If the Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If the Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a stock, stock index or basket of stocks in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to stocks making up the index of securities without actually purchasing those stocks. Equity index swaps involve not only the risk associated with investment in the securities represented in the index, but also the risk that the performance of such securities, including dividends, will not exceed the return on the interest rate that the Fund will be committed to pay.
o TOTAL RETURN SWAPS
Total return swaps are contracts in which one party agrees to make payments of the total return from a reference instrument -- which may be a single asset, a pool of assets or an index of assets -- during a specified period, in return for payments equal to a fixed or floating rate of interest or the total return from another underlying reference instrument. The total return includes appreciation or depreciation on the underlying asset, plus any interest or dividend payments. Payments under the swap are based upon an agreed upon principal amount but, since the principal amount is not exchanged, it represents neither an asset nor a liability to either counterparty, and is referred to as notional. Total return swaps are marked to market daily using different sources, including quotations from counterparties, pricing services, brokers or market makers. The unrealized appreciation (depreciation) related to the change in the valuation of the notional amount of the swap is combined with the amount due to a Fund at termination or settlement. The primary risks associated with total return swaps are credit risks (if the counterparty fails to meet its obligations) and market risk (if there is no liquid market for the agreement or unfavorable changes occur to the underlying reference instrument).
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, the Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if the Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, the Fund may have to pay more money than it receives. Similarly, if the Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, the Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. The Fund may enter into a currency swap when it has one currency and desires a different currency. Typically, the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the
end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance of the Fund than if it had not entered into any derivatives transactions. Derivatives may magnify the Fund's gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose the Fund to greater risks.
CORRELATION OF PRICES - The Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities the Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if the Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, the Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of the Fund. A currency hedge, for example, should protect a yen-
denominated security from a decline in the yen, but will not protect the Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of the Fund's foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of the Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, the Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, the Fund may close out a futures contract only on the exchange the contract was initially traded. Although the Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, the Fund may not be able to close out its position. In an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and/or
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, the Fund may lose money by investing in derivatives. For example, if the Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if the Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into the Fund. If the Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to the Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. The Fund may lose its margin deposits if a broker-dealer with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (i.e., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Fund may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such a transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with these requirements, and subject to certain risks.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (i.e. within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board. Despite such good faith efforts to determine fair value prices, the Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon its sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Trust's Board, the Adviser determines the liquidity of the Fund's investments. In determining the liquidity of the Fund's investments, the Adviser may consider various factors, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not hold more than 15% of its net assets in illiquid securities.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund's Board of Trustees. These loans, if and when made, may not exceed 33 (1)3 % of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market
value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending their securities, the Fund may increase their income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. In such instances, the Adviser will vote the securities in
accordance with its proxy voting policies and procedures. The Board has adopted
procedures reasonably designed to ensure that the foregoing criteria will be
met. Loan agreements involve certain risks in the event of default or
insolvency of the borrower, including possible delays or restrictions upon the
Fund's ability to recover the loaned securities or dispose of the collateral
for the loan, which could give rise to loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
RESTRICTED SECURITIES. The Fund may purchase restricted securities. Restricted securities are securities that may not be sold freely to the public absent registration under the U.S. Securities Act of 1933, as amended (the "1933 Act") or an exemption from registration. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor" from 1933 Act registration requirements for qualifying sales to institutional investors. When Rule 144A restricted securities present an attractive investment opportunity and meet other selection criteria, the Fund may make such investments whether or not such securities are "illiquid" depending on the market that exists for the particular security. The Board has delegated the responsibility for determining the liquidity of Rule 144A restricted securities that the Fund may invest in to the Adviser.
SHORT SALES. As consistent with the Fund's investment objective, the Fund may engage in short sales that are either "uncovered" or "against the box." A short sale is "against the box" if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
Uncovered short sales are transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund
is required to pay the lender amounts equal to any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund may: (a) segregate cash or liquid securities at such a level that the amount segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short; or (b) otherwise cover the Fund's short position.
WHEN -ISSUED, DELAYED -- DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed-delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities the Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. The Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
The Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When the Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, the Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because the Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. The Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations
may be amended or interpreted from time to time; provided, however, that the Fund will concentrate its investments in securities of companies that are principally engaged in the real estate industry.
2. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
In addition to the investment objective of the Fund, the following limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
The Fund may not:
1. Hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an investment company's net assets in an industry or group of industries, with certain exceptions.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Fund's current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its SAI.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The 1940 Act does not directly restrict an investment company's
ability to invest in real estate, but does require that every investment
company have a fundamental investment policy governing such investments. The
Fund will not purchase or sell real estate, except that the Fund may purchase:
marketable securities issued by companies which own or invest in real estate
(including REITs).
COMMODITIES. The 1940 Act does not directly restrict an investment company's ability to invest in commodities, but does require that every investment company have a fundamental investment policy governing such investments. The Fund will not purchase or sell physical commodities or commodities contracts, except that the Fund may purchase: (i) marketable securities issued by companies which own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
THE ADVISER
GENERAL. CBRE Clarion Securities LLC, a Delaware limited liability company formed in 2009, located at 201 King of Prussia Road, Suite 600, Radnor, PA 19087, is a professional investment management firm registered with the SEC under the Investment Advisers Act of 1940. As of December 31, 2012, the Adviser had approximately $24 billion in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated December 19, 2011 (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.25% of the average daily net assets of the Fund. The
Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep the Fund's net operating expenses (excluding interest, dividend, interest and stock loan expense on securities sold short, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding the following levels until January 1, 2014 (the "contractual expense limit").
------------------- ------------- CLASS EXPENSE LIMIT ------------------- ------------- Investor Class 1.99% ------------------- ------------- Institutional Class 1.64% ------------------- ------------- |
If at any point total annual Fund operating expenses (not including excluded expenses) are below the contractual expense limit, the Adviser may retain the difference between the Fund's total annual Fund operating expenses (not including excluded expenses) and the contractual expense limit to recover all or a portion of its fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place.
For the fiscal period ended October 31, 2012, the Fund paid the Adviser the following advisory fees:
-------------------------------------------------------------------------------------------------------------------
FUND CONTRACTUAL FEES PAID FEES WAIVED BY THE TOTAL FEES PAID TO THE
ADVISER ADVISER (AFTER
WAIVERS
---------------------------------------------------------------------------------
2012(1) 2012(1) 2012(1)
-------------------------------------------------------------------------------------------------------------------
CBRE Clarion Long/Short Fund $1,792,958 $10,797 $1,782,161
-------------------------------------------------------------------------------------------------------------------
|
(1) Represents the period from December 30, 2011 (commencement of Fund operations) to October 31, 2012.
THE PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. There are five pieces of compensation for CBRE Clarion portfolio managers:
BASE SALARY-- Portfolio manager salaries are reviewed annually and fixed for each year at competitive market levels.
PROFIT PARTICIPATION-- Senior management, including the portfolio managers primarily responsible for the Fund, owns a minority interest in CBRE Clarion. Ownership entitles senior management to an increasing share of the firm's profit over time, although an owner's equity interest may be forfeited if the individual resigns voluntarily in the first several years.
BONUS-- Portfolio manager bonuses are drawn from an incentive compensation pool into which a significant percentage of CBRE Clarion's pre-tax profits is set aside. Bonuses are based upon the measurement of performance in the portfolio manager's respective area of coverage. Performance is quantified through a proprietary "scorecard" graded by the CEO and CIOs. In order to avoid the pitfalls of relying solely upon a rigid performance format, however, the overall bonus takes into account other important factors such as the portfolio manager's contribution to the team, firm, and overall process.
DEFERRED COMPENSATION-- A portion of the incentive compensation pool is set aside each year as deferred compensation for a large number of senior employees in the firm, including the portfolio managers. These awards have vesting and payout features, which encourage long-term stability of our senior staff.
OTHER COMPENSATION-- Portfolio managers may also participate in benefit plans and programs available generally to all employees, such as CBRE Clarion's 401(k) plan.
Portfolio manager compensation is not based on the performance of any particular account, including the Fund, nor is compensation based on the level of Fund assets.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES(1) -------------------------------------------------------------------------------- T. Ritson Ferguson Over $100,000 -------------------------------------------------------------------------------- Joseph P. Smith Over $100,000 -------------------------------------------------------------------------------- Steven D. Burton $0 - $50,000 -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Fund, certain portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED OTHER POOLED
INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- -------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
NAME ACCOUNTS (IN MILLIONS) ACCOUNTs(1) (IN MILLIONS) ACCOUNTS(2) (IN MILLIONS)
--------------- --------- --------------- --------- ---------------- --------- ----------------
T. Ritson
Ferguson 14 $11,349 37 $5,383 74 $6,056
--------------- --------- --------------- --------- ---------------- --------- ----------------
Joseph P. Smith 14 $9,571 35 $5,315 73 $5,278
--------------- --------- --------------- --------- ---------------- --------- ----------------
Steven D. 12 $11,349 36 $5,228 55 $5,366
Burton
--------------- --------- --------------- --------- ---------------- --------- ----------------
|
(1) Includes 4 accounts managed with a performance-based fee, representing $284 million in assets.
(2) Includes 7 accounts managed with a performance-based fee, representing $2,061 million in assets.
CONFLICTS OF INTEREST. The portfolio managers may be subject to potential conflicts of interest because the portfolio managers are responsible for other accounts in addition to the Fund. These other accounts may include, among others, other mutual funds, separately managed advisory accounts, commingled trust accounts, insurance company separate accounts and hedge funds. Potential conflicts may also arise out of the implementation of differing investment strategies for the portfolio managers' various accounts, the allocation of investment opportunities among those accounts or differences in the advisory fees paid by the portfolio managers' accounts.
A potential conflict of interest may arise as a result of the portfolio managers' responsibility for multiple accounts with similar investment guidelines. Under these circumstances, a potential investment may be suitable for more than one of the portfolio managers' accounts, but the quantity of the investment available for purchase is less than the aggregate amount the accounts would ideally devote to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment.
The portfolio managers may also manage accounts whose objectives and policies differ from those of the Fund. These differences may be such that under certain circumstances, trading activity appropriate for one account may have adverse consequences for another account. For example, an account may sell a significant position in a security, which could
cause the market price of that security to decrease, while the Fund maintains its position in that security.
A potential conflict may also arise when the portfolio managers are responsible for accounts that have different advisory fees -- the difference in the fees may create an incentive for the portfolio managers to favor one account over another, for example, in terms of access to particularly appealing investment opportunities. This conflict may be heightened where an account is subject to a performance-based fee.
The Adviser recognizes the duty of loyalty it owes to its clients and has established and implemented certain policies and procedures designed to control and mitigate conflicts of interest arising from the execution of a variety of portfolio management and trading strategies across the firm's diverse client base. Such policies and procedures include, but are not limited to, (i) investment process, portfolio management and trade allocation procedures (ii) procedures regarding short sales in securities recommended for other clients; and (iii) procedures regarding personal trading by the firm's employees (contained in the Code of Ethics).
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 and as amended (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is detailed below in the following schedule:
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $250 million
--------------------------------------------------------------------------------
0.10% $250 million - $500 million
--------------------------------------------------------------------------------
0.08% over $500 million
--------------------------------------------------------------------------------
|
The foregoing fee is subject to a minimum annual fee of $120,000.
o For each additional class of shares of the Fund established after the initial (1) class of shares, the minimum annual fee will be increased by $15,000.
The fees outlined above will remain in place for a period of five (5) years.
For the fiscal period ended October 31, 2012, the Fund paid the following administration fees:
--------------------------------------------------------------------------------
FUND ADMINISTRATION FEES PAID
------------------------------
2012(1)
--------------------------------------------------------------------------------
CBRE Clarion Long/Short Fund $171,566
--------------------------------------------------------------------------------
|
(1) Represents the period from December 30, 2011 (commencement of Fund operations) to October 31, 2012.
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
DISTRIBUTION PLAN. The Distribution Plan (the "Plan") provides that Investor Class Shares of the Fund pay the Distributor an annual fee of up to a maximum of 0.25% of the average daily net assets of the Investor Class Shares. Under the Plan, the Distributor may make payments pursuant to written agreements to financial institutions and intermediaries such as banks, savings and loan associations and insurance companies including, without limit, investment counselors, broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for services and reimbursement of expenses incurred in connection with distribution assistance. The Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution expenses incurred by the Distributor or the amount of payments made to other financial institutions and intermediaries. The Trust intends to operate the Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
The Trust has adopted the Plan in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or any agreements related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the Fund. All material amendments of the Plan will require approval by a majority of the Trustees of the Trust and of the Qualified Trustees.
SHAREHOLDER SERVICES
SHAREHOLDER SERVICING PLAN. The Fund has adopted a shareholder servicing plan (the "Service Plan") under which a shareholder servicing fee of up to 0.20% and 0.10% of the average daily net assets of Investor Class Shares and Institutional Class Shares of the Fund, respectively, will be paid to other service providers. Under the Service Plan, other service providers may perform, or may compensate other service providers for performing certain shareholder and administrative services as discussed below.
DESCRIPTION OF SHAREHOLDER SERVICES. Shareholder services may include: (i) maintaining accounts relating to clients that invest in shares; (ii) arranging for bank wires; (iii) responding to client inquiries relating to the services performed by the services provider; (iv) responding to inquiries from clients concerning their investment in shares; (v) assisting clients in changing dividend options, account designations and addresses; (vi) providing information periodically to clients showing their position in shares; (vii) forwarding shareholder communications from the Fund such as proxies, shareholder reports, annual reports, and dividend distribution and tax notices to clients; and (viii) processing dividend payments from the Fund on behalf of clients.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
Union Bank, N.A., 350 California Street, 6th Floor, San Francisco, CA 94104 (the "Custodian"), serves as the custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, Two Commerce Square, 2001 Market Street, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by Ernst & Young LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio
holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value
Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
Board of Trustees(1) present; currently Advisors' Inner Circle Fund II, Bishop
(08/17/46) performs various Street Funds, SEI Daily Income Trust, SEI
(since 1991) services on behalf of Institutional International Trust, SEI
SEI Investments for Institutional Investments Trust, SEI
which Mr. Nesher is Institutional Managed Trust, SEI Liquid
compensated. President Asset Trust, SEI Asset Allocation Trust, SEI
and Director of SEI Tax Exempt Trust, Adviser Managed Trust
Structured Credit Fund, and New Covenant Funds. Director of SEI
LP. President and Global Master Fund plc, SEI Global Assets
Chief Executive Fund plc, SEI Global Investments Fund plc,
Officer of SEI Alpha SEI Investments--Global Funds Services,
Strategy Portfolios, LP, Limited, SEI Investments Global, Limited,
June 2007 to present. SEI Investments (Europe) Ltd., SEI
President and Director Investments--Unit Trust Management (UK)
of SEI Opportunity Limited, SEI Multi-Strategy Funds PLC,
Fund, L.P. to 2010. SEI Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
------------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
Consultant since 2003. Advisors' Inner Circle Fund II, Bishop
(05/26/40) (since 1991) Partner at Morgan, Street Funds, SEI Daily Income Trust, SEI
Lewis & Bockius LLP Institutional International Trust, SEI
(law firm) from 1976 to Institutional Investments Trust, SEI
2003. Counsel to the Institutional Managed Trust, SEI Liquid
Trust, SEI Investments, Asset Trust, SEI Asset Allocation Trust, SEI
SIMC, the Tax Exempt Trust, Adviser Managed Trust
Administrator and the and New Covenant Funds. Director of SEI
------------------------------------------------------------------------------------------------------------------
S-36
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------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
------------------------------------------------------------------------------------------------------------------
Distributor. Alpha Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global, Limited,
SEI Investments (Asia), Limited, SEI Asset
Korea Co., Ltd., SEI Global Nominee Ltd.
and SEI Investments -- Unit Trust
Management (UK) Limited. Director of the
Distributor since 2003.
------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Current Directorships: Trustee of The
Business Consultant, Advisors' Inner Circle Fund II and Bishop
(08/20/34) (since 2005) Business Projects Inc., Street Funds. Director of Oregon Transfer
since 1997. Co.
------------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
Executive Officer, Advisors' Inner Circle Fund II and Bishop
(08/17/44) (since 2008) Office of Finance, Street Funds. Director of Federal Home
Federal Home Loan Loan Bank of Pittsburgh, Manna, Inc. (non-
Banks, from 1992 to profit developer of affordable housing for
2007. ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
------------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
Consultant since Advisors' Inner Circle Fund II and Bishop
(05/28/52) (since 2011) January 2012. Director Street Funds. Director of The Korea Fund,
of Endowments and Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010. Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
------------------------------------------------------------------------------------------------------------------
S-37
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------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
------------------------------------------------------------------------------------------------------------------
Mitchell A. Johnson Trustee Retired. Private Investor Current Directorships: Trustee of The
since 1994. Advisors' Inner Circle Fund II, Bishop
(03/01/42) (since 2005) Street Funds, SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Institutional
International Trust, SEI Institutional
Managed Trust, SEI Institutional
Investments Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds. Director of
SEI Alpha Strategy Portfolios, LP. Director
of Federal Agricultural Mortgage
Corporation (Farmer Mac) since 1997.
------------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
Compliance, AARP Advisors' Inner Circle Fund II and Bishop
(01/23/43) (since 2005) Financial Inc., from Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
------------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
Allocation, Manulife Advisors' Inner Circle Fund II and Bishop
(02/12/56) (since 2011) Asset Management Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
------------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships: Trustee/Director of
Practitioner since 1994. The Advisors' Inner Circle Fund II, Bishop
(04/12/31) (since 1994) Street Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust, SEI
Institutional International Trust, SEI
Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid
Asset Trust, SEI Asset Allocation Trust, SEI
Tax Exempt Trust and SEI Alpha Strategy
------------------------------------------------------------------------------------------------------------------
S-38
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------------------------------------------------------------------------------------------------------------------
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
------------------------------------------------------------------------------------------------------------------
Portfolios, L.P. until December 2010.
George J. Sullivan, Jr. Trustee Retired since January Current Directorships: Trustee/ Director of
2012. Self-employed State Street Navigator Securities Lending
(11/13/42) (since 1999) Consultant, Newfound Trust, The Advisors' Inner Circle Fund II,
Consultants Inc., April Bishop Street Funds, SEI Structured Credit
Lead Independent 1997 to December Fund, LP, SEI Daily Income Trust, SEI
Trustee 2011. Institutional International Trust, SEI
Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid
Asset Trust, SEI Asset Allocation Trust, SEI
Tax Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed Trust and
New Covenant Funds. Member of the
independent review committee for SEI's
Canadian-registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
------------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's independent registered public accounting firm and whether to terminate this relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence; (iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities;
serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
--------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service one on (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service one on (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive,
Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
---------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
---------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
---------------------------------------------------------------------------------------------------------
Michael Lawson Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) Fund Accounting at SEI Investments AVP from
(since 2005) April 1995 to February 1998 and November
1998 to July 2005.
---------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(since 2006) Credit Fund, LP and SEI Alpha Strategy
(12/18/62) Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed Trust and
New Covenant Funds. Chief Compliance Officer
of SEI Opportunity Fund, L.P. until 2010.
Director of Investment Product Management and
Development, SEI Investments, since February
2003; Senior Investment Analyst -- Equity Team,
SEI Investments, from March 2000 to February
2003.
---------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(since 1999) SIMC and the Administrator since 1999. Vice
(03/28/68) President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
---------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
from 2006 to 2010. Associate at Morrison &
(07/18/77) Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
---------------------------------------------------------------------------------------------------------
S-43
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---------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
---------------------------------------------------------------------------------------------------------
2002 to 2003.
---------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(since 2009) 2003.
(8/24/80)
AML Officer
(since 2011)
---------------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For
securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
This general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elect to be treated as a RIC under Subchapter M of the Code. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which they may be subject. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to be taxable as a RIC, the Fund must distribute at least 90% of its net investment income (which includes dividends taxable interest, and the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities, or foreign currencies, or certain other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stocks, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership (the "Qualifying Income Test"); (ii) at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount that does not exceed 5% of the value of the Fund's assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of the Fund's assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer or the securities (other than the securities of another RIC) of two or more issuers that the Fund controls and that are engaged in the same, similar or related trades or business, or the securities of one or more qualified publicly traded partnerships (the "Diversification Test"). Although the Fund intends to distribute substantially all of their net investment income and may distribute their capital gains for any taxable year, the Fund will be subject to federal income taxation to the extent any such income or gains are not distributed.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to qualify for any taxable year as a RIC and these relief provisions are not available, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and such distributions generally will be taxable to shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits. In this event, distributions generally will be eligible for the dividend-received deduction for corporate shareholders and for the lower capital gains rates on qualified dividend income for individual shareholders to the extent they would qualify if the Fund was a regular corporation. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
For taxable years beginning after December 22, 2010, the Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses. In addition, the carryover of capital losses may be limited under the general loss limitation rules if the Fund experiences an ownership change as defined in the Code.
FEDERAL EXCISE TAX. If the Fund fails to distribute in a calendar year at least 98% of its ordinary income for the year and 98.2% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses) for the one-year period ending October 31 of that year (and any retained amount from the prior calendar year on which the Fund paid no federal income tax), the Fund will be subject to a nondeductible 4% Federal excise tax on the undistributed amounts. The Fund intends to make sufficient distributions to avoid imposition of this tax, or to retain, at most their net capital gains and pay tax thereon.
DISTRIBUTIONS TO SHAREHOLDERS. The Fund may derive capital gains and losses in connection with sales or other dispositions of their portfolio of securities. Distributions of net short-term capital gains will be taxable to you as ordinary income. Distributions of net long-term capital gains will be taxable to you as long-term capital gain regardless of how long you have held your shares. Distributions of dividends will be taxed as ordinary income except that
distributions of qualified dividend income will be taxed at the lower capital gains rates available for individual shareholders.
Certain distributions by the Fund may be eligible for the reduced maximum tax rate to individuals of 20% (lower rates apply to individuals in lower tax brackets) to the extent that the Fund receives qualified dividend income on the securities it holds and the Fund designates the distributions as qualified dividend income. A distribution from the Fund generally qualifies as qualified dividend income to the extent it is designated as such by the Fund and was distributed from dividends received by the Fund from taxable domestic corporations and certain qualified foreign corporations, subject to limitations including holding period limitations, imposed on the Fund and its shareholders. Distributions the Fund receives from REITs generally will not be treated as qualified dividend income. Capital gain distributions consisting of the Fund's net capital gains will be taxable as long-term capital gains at a maximum rate of 20%.
The Fund will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. REITs in which the Fund may invest often do not provide complete and final tax information until after the time that the Fund issues the tax reporting statement. As a result, the Fund may at times find it necessary to reclassify the amount and character of its distributions to you after it issues your tax reporting statement. When such reclassification is necessary, the Fund will send you a corrected, final Form 1099-DIV to reflect the reclassified information. If you receive a corrected Form 1099-DIV, use the information on this corrected form, and not the information on the previously issued tax reporting statement, in completing your tax returns. If you have not held Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Fund.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
In the case of corporate shareholders, Fund distributions (other than capital gains distributions) generally qualify for the dividend-received deduction to the extent such distributions are so designated and do not exceed the gross amount of qualifying dividends received by the Fund for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
SALES OR REDEMPTIONS. Any gain or loss recognized on a sale or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
In certain cases, the Fund will be required to withhold at a rate of 28% and remit to the United States Treasury, back up withholding on any distributions paid to a shareholder who (1) has failed to provide a correct taxpayer identification number, (2) is subject to backup withholding by the Internal Revenue Service ("IRS"), (3) has not certified to the Fund that such shareholder is not subject to backup withholding, or (4) has failed to certify that he or she is a U.S. citizen or U.S. resident alien.
The Fund (or its administrative agent) must report to the IRS and furnish to Fund shareholders the cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares the Fund will permit Fund shareholders to elect from among several IRS-accepted cost basis methods, including the average basis. In the absence of an election, the Fund will use the average basis method as its default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them. The requirement to report only the gross proceeds from the sale of Fund shares continues to apply to all Fund shares acquired through December 31, 2011, and sold on and after that date.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a new 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of Fund shares).
The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses. In turn, those rules may affect the amount, timing or character of the income distributed to you by the Fund.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, the Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because the Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
The Fund intends to invest in certain MLPs which may be treated as qualified publicly traded partnerships. Income from qualified publicly traded partnerships is qualifying income for purposes of the Qualifying Income Test, but the Fund's investment in one or more of such qualified publicly traded partnerships is limited under the Diversification Test to no more than 25% of the value of the Fund's assets. The Fund will monitor its investment in such qualified publicly traded partnerships in order to ensure compliance with the Qualifying Income Test.
The Fund intends to invest in certain royalty trusts. The taxation of a royalty trust for U.S. tax purposes depends on the particular structure used by such trust and may be different from trust to trust. For example, some royalty trusts are taxable for U.S. tax purposes as grantor trusts, while others are taxable as corporations for U.S. tax purposes. The Fund will monitor its investment in such royalty trusts in order to ensure compliance with the Qualifying Income and Diversification Tests. There may be uncertainty regarding the Fund's compliance with these tests because compliance depends on the amount and character of income it receives and the type of security it holds from the royalty trusts. As a result, the Fund may fail to qualify as a RIC in a given tax year in which it fails the Qualifying Income Test or the Diversification Test. See discussion regarding the consequences of failing to qualify as a RIC above.
The Fund may invest in entities taxable as REITs under the Code. Investments in REIT equity securities may require the Fund to accrue and distribute income not yet received. To generate sufficient cash to make the requisite distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. The Fund's investments in REIT equity securities may at other times result in the Fund's receipt of cash in excess of the REIT's earnings if the Fund distributes these amounts, these distributions could constitute a return of capital to Fund shareholders for federal income tax purposes. Dividends paid by a REIT, other than capital gain distributions, will be taxable as ordinary income up to the amount of the REIT's current and accumulated earnings and profits. Capital gain dividends paid by a REIT to the Fund will be treated as long-term capital gains by the Fund and, in turn, may be distributed by the Fund to its shareholders as a capital gain distribution. Dividends received by the Fund from a REIT generally will not constitute qualified dividend income and will not qualify for the dividends received deduction. If a REIT is operated in a manner such that it fails to qualify as a REIT, an investment in the REIT would become subject to double taxation, meaning the taxable income of the REIT would be subject to federal income tax at regular corporate rates without any deduction for dividends paid to shareholders and the dividends would be taxable to shareholders as ordinary income (or possibly as qualified dividend income) to the extent of the REIT's current and accumulated earnings and profits.
Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their unrelated business taxable income ("UBTI"). Under current law, the Fund generally serves to block UBTI from being realized by its tax-exempt shareholders. However, notwithstanding the foregoing, the tax-exempt shareholder could realize UBTI by virtue of an investment in the Fund where, for example: (i) the Fund invests in residual interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund invests in a REIT that is a taxable mortgage pool (TMP) or that has a subsidiary that is a TMP or that invests in the residual interest of a REMIC; or (iii) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of section 514(b) of the Code. Charitable remainder trusts are subject to special rules and should consult their tax advisor. The IRS has issued guidance with respect to these issues and prospective shareholders, especially charitable remainder trusts, are encouraged to consult with their tax advisors regarding these issues.
Transactions by the Fund in foreign currencies and forward foreign currency contracts will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Fund (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund and defer losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also may require the Fund to mark-to-market certain types of positions in its portfolio (i.e., treat them as if they were closed out) which may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The Fund intends to monitor its transactions, intends to make the appropriate tax elections, and intends to make the appropriate entries in its books and records when it acquires any foreign currency or forward foreign currency contract in order to mitigate the effect of these rules so as to prevent disqualification of the Fund as a RIC and minimize the imposition of income and excise taxes.
If the Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies" or "PFIC," the Fund will be subject to one of the following special tax regimes: (i) the Fund will be liable for federal income tax, and an additional interest charge, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund is able and elect to treat a PFIC as a "qualifying electing fund" or "QEF," the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the PFIC, whether or not such earnings or gains are distributed to the Fund; or (iii) annually the Fund may be entitled to mark-to-market shares of the PFIC, and in such event, would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above and any market-to-market losses, as well as loss from an actual disposition of PFIC stock, would be reported as ordinary loss to the extent of any net market-to-market gains included in income in prior years.
FOREIGN TAXES. Dividends and interest received by the Fund may be subject to income, withholding or other taxes imposed by foreign countries and United States possessions that would reduce the yield on the Fund's securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors. If more than 50% of the value of the Fund's total assets at the close of its taxable year consists of stock or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that will enable shareholders, in effect, to receive the benefit of the foreign tax credit with respect to any foreign and United States possessions income taxes paid by the Fund. Pursuant to the election, the Fund will treat those taxes as dividends paid to its shareholders. Each shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating the foreign tax credit (subject to significant limitations) against the shareholder's federal income tax. If the Fund makes the election, it will report annually to its shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and United States possessions. Foreign tax credits, if any, received by the Fund as a result of an investment in an ETF which is taxable as a RIC will generally not be passed through to you.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxed to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
Under U.S. Treasury regulations, generally, if an individual shareholder recognizes a loss of $2 million or more or a corporate shareholder recognizes a loss of $10 million or more, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds
of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
STATE TAXES. It is expected that the Fund will not be liable for any corporate excise, income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes. Distributions by the Fund to shareholders and the ownership of shares may be subject to state and local taxes. Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a fund. Investment in Ginnie Mae or Fannie Mae securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, they will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal period ended October 31, 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF
BROKERAGE COMMISSIONS PAID
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FUND 2012(1)
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CBRE Clarion Long/Short Fund $500,422
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(1) Represents the period between December 30, 2011 (commencement of Fund operations) and October 31, 2012.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Fund's Adviser may select a broker
based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser in connection with the Fund or any other specific client account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal period ended October 31, 2012, the Fund paid the following in commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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FUND TOTAL DOLLAR AMOUNT OF TOTAL DOLLAR AMOUNT OF
BROKERAGE COMMISSIONS FOR TRANSACTIONS INVOLVING BROKERAGE
RESEARCH SERVICES(1) COMMISSIONS FOR RESEARCH
SERVICES(1)
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CBRE Clarion Long/Short Fund $XX $XX
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(1) Represents the period from December 30, 2011 (commencement of Fund operations) to October 31, 2012.
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
R
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter or any affiliated person of the Fund, its Adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer (the "Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in
conformity with the foregoing principles. The Authorized Person reports at least quarterly to the Board regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each October 31, January 31, April 30 and July 31). The Fund discloses a complete schedule of investments in each Semi-Annual Report and Annual Report to Fund shareholders or, following the first and third fiscal quarters, in quarterly holdings reports filed with the SEC on Form N-Q. Semi-Annual and Annual Reports are distributed to Fund shareholders. Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders, but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. The Fund publishes its top 5 long positions, approximately 10 business days following the end of each calendar quarter, on the internet at www.cbreclarion.com.
The Fund's policies and procedures provide that the Authorized Persons may authorize disclosure of portfolio holdings information to third parties at differing times and/or with different lag times then the information posted to the internet; provided that the recipient is, either by contractual agreement or otherwise by law, (i) required to maintain the confidentiality of the information and (ii) prohibited from using the information to facilitate or assist in any securities transactions or investment program. No compensation or other consideration is paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information. The Fund will review a third party's request for portfolio holdings information to determine whether the third party has legitimate business objectives in requesting such information.
The Trust's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
The Adviser currently has two arrangements to provide Fund portfolio holdings information to third parties prior to the date on which portfolio holdings information is posted on the Internet. These arrangements are with UBS Financial Services, Inc. and Oppenheimer & Co. Inc. In each arrangement, the Adviser provides to the third party portfolio holdings information with respect to the Fund as of the end of each month, no sooner than ten days after the end of the month. Pursuant to Non-Disclosure Agreements, the information provided to these third parties, until made publicly available, is treated as confidential and may not be distributed to the public nor traded upon. The Fund believes these disclosures serve a legitimate business purpose. No compensation is received by the Fund or the Adviser in connection with the disclosure of portfolio holdings information. The Adviser's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
In addition, the Fund's service providers, such as the Custodian, Administrator and Transfer Agent, may receive portfolio holdings information as frequently as daily in connection with their services to the Fund. In addition to any contractual provisions relating to confidentiality of information that may be included in the service providers contract with the Trust, these arrangements impose obligations on the Fund's service providers that would prohibit them from disclosing or trading on the Fund's non-public information. Financial printers and pricing information vendors may receive portfolio holdings information, as necessary, in connection with their services to the Fund.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or class of shares. All consideration received by the Trust for shares of any additional funds and all assets in which such consideration is invested would belong to that fund
and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Fund's shares, when issued, are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the Trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-855-520-4CCS (4227); and (ii) on the SEC's website at http://www.sec.gov.
CODE OF ETHICS
The Board on behalf of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Administrator and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, but are required to report their personal securities transactions for monitoring purposes. Access Persons are prohibited from engaging in personal securities transactions in securities that are held by the Fund. In addition, all Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Fund. The Fund believes that most of the shares referred to below were held by the persons listed below in accounts for its fiduciary, agency or custodial customers. Any shareholder listed below as owning, of record or beneficially, more than 25% of the Fund's outstanding shares may be deemed to "control" the Fund within the meaning of the 1940 Act. Shareholders controlling the Fund could have the ability to vote a majority of the shares of the Fund on any matter requiring the approval of Fund shares.
----------------------------------------------------------------------------------------------------- CBRE CLARION LONG/SHORT FUND ----------------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES CLASS OF SHARES % OF CLASS ----------------------------------------------------------------------------------------------------- Charles Schwab & Co Inc. 10,281,095.5710 Institutional 32.01 % Special Custody A/C FBO Customers Attn Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ----------------------------------------------------------------------------------------------------- National Financial Services LLC for 2,910,783.7660 Institutional 9.06 % Exclusive Benefit of Our Customers 200 Liberty Street One World Financial Center Attn: Mutual Funds Dept 5th Fl New York, NY 10281-1003 ----------------------------------------------------------------------------------------------------- Merrill Lynch Pierce Fenner & Smith Inc. 2,075,920.4290 Institutional 6.46 % For Sole Benefit of its Customers 4800 Deer Lake Dr. E Jacksonville, FL 32246-6486 Saxon & Co. 1,844,947.6780 Institutional 5.74 % P.O. Box 7780-1888 Philadelphia, PA 19182-0001 ----------------------------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S SHORT-TERM MIG/VMIG RATINGS - US TAX-EXEMPT MUNICIPALS. There are four rating categories for short-term obligations that define an investment grade situation. These are designated Moody's Investment Grade as MIG 1 (best quality) through MIG 4 (adequate quality). Short-term obligations of speculative quality are designated SG.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents an evaluation of the degree of risk associated with scheduled principal and interest payments, and the other represents an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
Issues that are subject to a periodic reoffer and resale in the secondary market in a "dutch auction" are assigned a long-term rating based only on Moody's assessment of the ability and willingness of the issuer to make timely principal and interest payments. Moody's expresses no opinion as to the ability of the holder to sell the security in a secondary market "dutch auction." Such issues are identified by the insertion of the words "dutch auction" into the name of the issue.
Issues or the features associated with MIG or VMIG ratings are identified by date of issue, date of maturity or maturities or rating expiration date and description to distinguish each rating from other ratings. Each rating designation is unique with no implication as to any other similar issue of the same obligor. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less
well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
SG This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
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An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined to possess a very strong capacity to pay a debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some vulnerability to adverse financial and economic changes over the term of the votes.
DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts,
senior bank obligations and insurance company senior policyholder and claims
obligations with an original maturity in excess of one year. Obligations
relying upon support mechanisms such as letters-of-credit and bonds of
indemnity are excluded unless explicitly rated. Obligations of a branch of a
bank are considered to be domiciled in the country in which the branch is
located.
Unless noted as an exception, Moody's rating on a bank's ability to repay
senior obligations extends only to branches located in countries which carry a
Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated
at the lower of the bank's rating or Moody's Sovereign Rating for the Bank
Deposits for the country in which the branch is located. When the currency in
which an obligation is denominated is not the same as the currency of the
country in which the obligation is domiciled, Moody's ratings do not
incorporate an opinion as to whether payment of the obligation will be affected
by the actions of the government controlling the currency of denomination. In
addition, risk associated with bilateral conflicts between an investor's home
country and either the issuer's home country or the country where an issuer
branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for Bank Deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by actions of the government controlling the currency of denomination. In addition, risks associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer's branch is located are not incorporated into Moody's short-term debt ratings.
Moody's makes no representation that rated bank or insurance company obligations are exempt from the registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within the parenthesis beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B --PROXY VOTING POLICIES AND PROCEDURES
PROXY VOTING POLICY AND PROCEDURES
CBRE CLARION SECURITIES
Proxy voting is an important right of shareholders, and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised. When CBRE Clarion has discretion to vote the proxies of its clients, it will vote those proxies in the best interest of its clients and in accordance with these policies and procedures.
CBRE Clarion has engaged ISS (formerly Risk Metrics Group) to provide services with respect to proxy voting, including the tracking of proxies received for clients, providing notice to CBRE Clarion concerning dates votes are due, the actual casting of ballots and recordkeeping. It is important to recognize that the ability of ISS and CBRE Clarion to process proxy voting decisions in a timely manner is contingent in large part on the custodian banks holding securities for CBRE Clarion clients. On a daily basis, CBRE Clarion provides ISS with a list of securities held in each account over which CBRE Clarion has voting authority. In addition, CBRE Clarion provides ISS with its proxy voting guidelines.
Voting decisions remain within the discretion of CBRE Clarion. On a daily basis, CBRE Clarion reviews an online system maintained by ISS in order to monitor for upcoming votes. When a pending vote is identified, the appropriate analyst reviews the ballots, along with supplemental information about the vote provided by ISS and -- if available -- other research providers employed by CBRE Clarion . The analyst makes the voting decision. If the analyst votes in contravention of the CBRE Clarion proxy voting guidelines, the analyst's decision must be approved by a senior member of the investment team based on completion of the applicable form containing an explanation documented by the analyst outlining the voting rationale. The Chief Compliance Officer or General Counsel must ensure that the appropriate approval has been received and evidence such review by signature.
Except as otherwise noted, operation of the proxy voting process is coordinated by Trade Settlement Operations. Compliance is responsible for oversight of and testing of the process. As noted above, ISS provides recordkeeping services, including retaining a copy of each proxy statement received and each vote cast. This information is available to CBRE Clarion upon request.
For the accounts over which CBRE Clarion maintains proxy voting authority, CBRE Clarion will vote proxies in accordance with its proxy voting guidelines. CBRE Clarion may, in certain circumstances, voluntarily adhere to guidelines established by its clients if doing so can be accomplished within the proxy voting process through ISS as described above. Otherwise, CBRE Clarion will not accept proxy voting authority to the extent clients wish to impose voting guidelines different from those of CBRE Clarion. As the responsibility for proxy voting is defined at the outset of the client relationship (and documented in the Investment Management Agreement), CBRE Clarion does not anticipate any confusion on the part of its clients in this respect.
CBRE Clarion will identify any conflicts that exist between the interests of CBRE Clarion and its clients. This examination will include a review of the relationship of CBRE Clarion with the companies comprising the firm's investable universe to determine if the issuer is a client of CBRE Clarion or has some other relationship with the firm. If a material conflict exists, CBRE Clarion will determine whether voting in accordance with its voting guidelines is in the best interests of its clients (or particular affected clients). CBRE Clarion will also determine whether it is appropriate to disclose the conflict to the affected clients and, except in the case of clients that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA Clients"), will give the clients the opportunity to vote their proxies themselves. In the case of ERISA Clients, if the Investment Management Agreement reserves to the ERISA Client the authority to vote proxies when CBRE Clarion determines it has a material conflict that affects its best judgment as an ERISA fiduciary, CBRE Clarion will give the ERISA Client the opportunity to vote the proxies themselves.
CBRE Clarion will maintain files relating to its proxy voting procedures in an easily accessible place. Records will be maintained and preserved for five years from the end of the fiscal year during which the last entry was made on a record, with records for the first two years kept on site. These files will include (1) copies of the proxy voting policies and procedures and any amendments thereto, (2) a copy of any document Clarion created that was material to making a decision how to vote proxies or that memorializes that decision, and (3) a copy of each written client request for information on how Clarion voted such client's proxies and a copy of any written response to any (written or oral) client request for information on how CBRE Clarion voted its proxies.
Clients may contact the Compliance Department at (610) 995-2500 to obtain a copy of these policies and procedures (and, if desired, the firm's proxy voting guidelines) or to request information on the voting of such client's proxies. A written response will list, with respect to each voted proxy that the client has inquired about, (1) the name of the issuer, (2) the proposal voted upon, and (3) how CBRE Clarion voted the client's proxy.
STATEMENT OF ADDITIONAL INFORMATION
CORNERSTONE ADVISORS GLOBAL PUBLIC EQUITY FUND
(TICKER SYMBOL: CAGLX)
CORNERSTONE ADVISORS INCOME OPPORTUNITIES FUND
(TICKER SYMBOL: CAIOX)
CORNERSTONE ADVISORS PUBLIC ALTERNATIVES FUND
(TICKER SYMBOL: CAALX)
CORNERSTONE ADVISORS REAL ASSETS FUND
(TICKER SYMBOL: CAREX)
EACH, A SERIES OF THE ADVISORS' INNER CIRCLE FUND
INSTITUTIONAL CLASS SHARES
MARCH 1, 2013
INVESTMENT ADVISER:
CORNERSTONE ADVISORS, INC.
INVESTMENT SUB-ADVISERS:
Acadian Asset Management LLC
Allianz Global Investors U.S. LLC
(formerly, Allianz Global Investors Capital LLC)
AlphaSimplex Group, LLC(1)
AQR Capital Management, LLC(1)
BlackRock Financial Management, LLC
ClariVest Asset Management LLC
Cramer Rosenthal McGlynn LLC
Driehaus Capital Management LLC
Fairpointe Capital LLC
Harris Associates L.P.
Kayne Anderson Capital Advisors, L.P.
LSV Asset Management
Marsico Capital Management, LLC
Parametric Portfolio Associates LLC
Phocas Financial Corporation
SteelPath Capital Management, LLC
TCW Investment Management Company
Thornburg Investment Management Inc
Turner Investments, L.P.
(1) As of the date of the SAI, no assets have been allocated to the Sub-Adviser.
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Cornerstone Advisors Global Public Equity Fund, Cornerstone Advisors Income Opportunities Fund, Cornerstone Advisors Public Alternatives Fund and the Cornerstone Advisors Real Assets Fund (each a "Fund" and together, the "Funds"). This SAI is
incorporated by reference into and should be read in conjunction with the Funds' prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Funds for the fiscal period ended October 31, 2012, including notes thereto and the report of Deloitte & Touche LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Fund's 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Funds' prospectus or Annual Report, when available, free of charge by writing to the Trust at Cornerstone Funds, c/o DST Systems, Inc., PO Box 219009, Kansas City, MO 64121-9009, or calling the Fund at 1-888-762-1442.
TABLE OF CONTENTS
THE TRUST .................................................................. S-1 DESCRIPTION OF PERMITTED INVESTMENTS ....................................... S-1 INVESTMENT LIMITATIONS .....................................................S-29 THE ADVISER AND SUB-ADVISERS ...............................................S-31 THE PORTFOLIO MANAGERS .....................................................S-35 THE ADMINISTRATOR ..........................................................S-65 THE DISTRIBUTOR ............................................................S-66 SHAREHOLDER SERVICES .......................................................S-67 PAYMENTS TO FINANCIAL INTERMEDIARIES .......................................S-67 THE TRANSFER AGENT .........................................................S-68 THE CUSTODIAN ..............................................................S-68 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ..............................S-68 LEGAL COUNSEL ..............................................................S-68 TRUSTEES AND OFFICERS OF THE TRUST .........................................S-68 PURCHASING AND REDEEMING SHARES ............................................S-79 DETERMINATION OF NET ASSET VALUE ...........................................S-79 TAXES ......................................................................S-80 FUND TRANSACTIONS ..........................................................S-87 PORTFOLIO HOLDINGS .........................................................S-90 DESCRIPTION OF SHARES ......................................................S-91 SHAREHOLDER LIABILITY ......................................................S-91 LIMITATION OF TRUSTEES' LIABILITY ..........................................S-91 PROXY VOTING ...............................................................S-91 CODES OF ETHICS ............................................................S-91 5% AND 25% SHAREHOLDERS ....................................................S-92 APPENDIX A -- DESCRIPTION OF RATINGS ....................................... A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ......................... B-1 |
March 1, 2013
THE TRUST
GENERAL. Each Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. Each fund of the Trust pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. Each Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate each Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
NON-DIVERSIFICATION. Each Fund is non-diversified, as that term is defined in the Investment Company Act of 1940, as amended ("1940 Act"), which means that a relatively high percentage of assets of a Fund may be invested in the obligations of a limited number of issuers. The value of the shares of a Fund may be more susceptible to any single economic, political or regulatory occurrence than the shares of a diversified investment company would be. The Funds intend to satisfy the diversification requirements necessary to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code").
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
Each Fund's investment objectives and principal investment strategies are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. The following are descriptions of the permitted investments and investment practices of the Funds. A Fund may purchase any of these instruments and/or engage in any of these investment practices if, in the opinion of the Adviser or a Sub-Adviser, such investments or investment practices will be advantageous to the Fund. A Fund is free to reduce or eliminate its activity in any of these areas. The Adviser or a Sub-Adviser, as applicable, may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by a Fund's stated investment policies, including those stated below.
EQUITY SECURITIES. Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants to acquire common stock, securities convertible into common stock, and investments in master limited partnerships. Investments in equity securities in general are subject to market risks that may cause their
prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the net asset value of a Fund to fluctuate. The Funds purchase equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o EXCHANGE-TRADED FUNDS. An ETF is a fund whose shares are bought and sold on a securities exchange as if it were a single security. An ETF holds a portfolio of securities designed to track a particular market segment or index. Some examples of ETFs are SPDRs([R]), DIAMONDS(SM), NASDAQ 100 Index Tracking Stock(SM) ("QQQs(SM)"), and iShares([R]). A Fund could purchase an ETF to temporarily gain exposure to a portion of the U. S. or foreign market while awaiting an opportunity to purchase securities directly. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities and ETFs have management fees that increase their costs versus the costs of owning the underlying securities directly. See "Securities of Other Investment Companies" below.
o EXCHANGE-TRADED NOTES. An ETN is a type of unsecured, unsubordinated debt security that differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees. No period coupon payments are distributed, and no principal protection exists. ETNs were designed to create a type of security that combines both the aspects of bonds and ETFs. Similar to ETFs, ETNs are traded on a major exchange, such as the NYSE during normal trading hours. However, investors can also hold the debt security until maturity. At that time the issuer will give the investor a cash amount that would be equal to principal amount.
One factor that affects the ETN's value is the credit rating of the issuer. The value of the ETN may drop despite no change in the underlying index. This might occur, for instance, due to a downgrade in the issuer's credit rating.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by a Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non- convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference
between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
The Funds may also invest in zero coupon convertible securities. Zero coupon convertible securities are debt securities which are issued at a discount to their face amount and do not entitle the holder to any periodic payments of interest prior to maturity. Rather, interest earned on zero coupon convertible securities accretes at a stated yield until the security reaches its face amount at maturity. Zero coupon convertible securities are convertible into a specific number of shares of the issuer's common stock. In addition, zero coupon convertible securities usually have put features that provide the holder with the opportunity to sell the securities back to the issuer at a stated price before maturity. Generally, the prices of zero coupon convertible securities may be more sensitive to market interest rate fluctuations then conventional convertible securities.
o MICRO, SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of micro, small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of micro and smaller companies are often traded in the over-the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of micro and smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
MASTER LIMITED PARTNERSHIPS. MLPs are limited partnerships or limited liability companies, whose partnership units or limited liability interests are listed and traded on a U.S. securities exchange, and are treated as publicly traded partnerships for federal income tax purposes. To qualify to be treated as a partnership for tax purposes, an MLP must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Code. These qualifying sources include activities such as the exploration, development, mining, production, processing, refining, transportation, storage and marketing of mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. MLPs that are formed as limited liability companies generally have two analogous classes of owners, the managing member and the members. For purposes of this section, references to general partners also apply to managing members and references to limited partners also apply to members. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an equity interest of as much as 2% in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the MLP through ownership of common units and have a limited role in the MLP's operations and management.
MLPs are typically structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount ("minimum quarterly distributions" or "MQD"). Common and general partner interests also accrue arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in
distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the partnership's cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such results benefit all security holders of the MLP.
General partner interests of MLPs are typically retained by an MLP's original sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and investors such as us. A holder of general partner interests can be liable under certain circumstances for amounts greater than the amount of the holder's investment in the general partner interest. General partner interests often confer direct board participation rights and in many cases, operating control, over the MLP. These interests themselves are not publicly traded, although they may be owned by publicly traded entities. General partner interests receive cash distributions, typically 2% of the MLP's aggregate cash distributions, which are contractually defined in the partnership agreement. In addition, holders of general partner interests typically hold incentive distribution rights ("IDRs"), which provide them with a larger share of the aggregate MLP cash distributions as the distributions to limited partner unit holders are increased to prescribed levels. General partner interests generally cannot be converted into common units. The general partner interest can be redeemed by the MLP if the MLP unitholders choose to remove the general partner, typically with a supermajority vote by limited partner unitholders.
MLP AFFILIATES. A Fund may invest in the debt and equity securities issued by MLP affiliates and companies that own MLP general partner interests that are energy infrastructure companies. MLP affiliates also include publicly traded limited liability companies that own, directly or indirectly, general partner interests of MLPs. A Fund may invest in MLP I-Shares, which represent an indirect ownership interest in MLP common units. MLP I-Shares differ from MLP common units primarily in that, instead of receiving cash distributions, holders of MLP I-Shares receive distributions in the form of additional I-Shares. As discussed further below in the "Taxes" section, a Fund's investment in one or more MLPs that are treated as qualified publicly traded partnerships is limited under the "Asset Test" to no more than 25% of the value of the Fund's assets. However, because issuers of MLP I-Shares are treated as corporations and not partnerships for tax purposes, a Fund's investment in MLP I-Shares is not counted for purposes of this 25% limitation.
DEBT SECURITIES. Corporations and governments use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
o CORPORATE BONDS - Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
o MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage- backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Funds' adviser (the "Adviser") will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets
its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by GNMA, FNMA & Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES - Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. The most significant differences of mortgage-backed securities are: 1) payments of interest and principal are more frequent (usually monthly) and 2) falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing the Fund to reinvest the money at a lower interest rate. In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. When prepayment occurs, the Funds may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to pre-payment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Funds may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual
prepayment experience on the underlying assets.
INFLATION PROTECTED SECURITIES -- The Funds may invest in inflation protected securities, which are fixed income securities whose value is periodically adjusted according to the rate of inflation. These securities may be issued by U.S. and foreign governments and corporations. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index ("CPI") accruals as part of a semiannual coupon. Inflation protected securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation adjusted principal amount. If the periodic adjustment rate measuring inflation falls, the principal value of inflation protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed and will fluctuate. A Fund may also invest in other U.S. and foreign inflation related bonds that may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity may be less than the original principal amount and, therefore, is subject to credit risk. The value of inflation protected bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation protected bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation protected bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure. The periodic adjustment of U.S. inflation protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers ("CPI-U"), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. Any increase in principal for an inflation protected security resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. A Fund's distributions to shareholders include interest income and the income attributable to principal adjustments, both of which will be taxable to shareholders. The tax treatment of the income attributable to principal adjustments may result in the situation where a Fund needs to make its required annual distributions to shareholders in amounts that exceed the cash received. As a result, a Fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation protected security is adjusted downward due to deflation, amounts previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
SHORT-TERM INVESTMENTS - To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, a Fund may invest a portion of its assets in the short-term securities listed below, U.S. Government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS - The Funds will only invest in a security issued by a commercial bank if the bank:
o Has total assets of at least $1 billion, or the equivalent in other currencies (based on the most recent publicly available information about the bank);
o Is a U.S. bank and a member of the Federal Deposit Insurance Corporation; and
o Is a foreign branch of a U.S. bank and the Adviser believes the security is of an investment quality comparable with other debt securities that the Funds may purchase.
TIME DEPOSITS - Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation.
CERTIFICATES OF DEPOSIT - Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or savings and loan association for a definite period of time and earning a specified return.
BANKERS' ACCEPTANCE - A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods).
COMMERCIAL PAPER - Commercial paper is a short-term obligation with a maturity ranging from 1 to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. The Funds may invest in commercial paper rated A-1 or A-2 by Standard and Poor's Ratings Services ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service, Inc. ("Moody's"), or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A - Ratings" for a description of commercial paper ratings.
STRIPPED MORTGAGE-BACKED SECURITIES - Stripped mortgage-backed securities are derivative multiple-class mortgage-backed securities. Stripped mortgage-backed securities usually have two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. Typically, one class will receive some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In extreme cases, one class will receive all of the interest ("interest only" or "IO" class) while the other class will receive the entire principal ("principal only" or "PO" class). The cash flow and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs and could cause the total loss of investment. Slower than anticipated prepayments of principal may adversely affect the yield to maturity of a PO. The yields and market risk of interest only and principal only stripped mortgage-backed securities, respectively, may be more volatile than those of other fixed income securities, including traditional mortgage-backed securities.
U.S. SMALL BUSINESS ADMINISTRATION ("SBA") STRIPPED SECURITIES - The Funds may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obligations. These participations, issued by the U.S. Small Business Administration, are issued at a discount to their "face value." Stripped securities may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors, and they are often illiquid. The Fund accrues income on these securities prior to the receipt of cash payments. The Fund intends to distribute substantially all of its income to its shareholders to qualify for pass-through treatment under the tax laws and may, therefore, need to use its cash reserves to satisfy distribution requirements.
YANKEE BONDS - Yankee bonds are dollar-denominated bonds issued inside the U.S. by foreign entities. Investment in these securities involves certain risks which are not typically associated with investing in domestic securities. See "Foreign Securities."
ZERO COUPON BONDS - These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with the same maturity. A Fund's investments
in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its portfolio securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once the
holder of the security has stripped or separated corpus and coupons, it may
sell each component separately. The principal or corpus is then sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of
the owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," a Fund may record its beneficial ownership of the coupon or corpus.
TERMS TO UNDERSTAND:
MATURITY - Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security held by the mutual fund, with the maturity of each security weighted by the percentage of the assets of the mutual fund it represents.
DURATION - Duration is a calculation that seeks to measure the price sensitivity of a debt security, or of a mutual fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration. Effective duration takes into account call features and sinking fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES - The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding period and coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument, therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (i.e., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected, resulting in prepayments on the securities. A Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of a Fund. If left unattended, drifts in the average maturity of a Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of the Fund.
o EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause a Fund's average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of a Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. Government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term Treasury securities, such as three-month treasury bills, are considered "risk-free." Corporate securities offer higher yields than Treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." Since an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which affects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called investment-grade because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, the Adviser may determine that it is of investment-grade. The Adviser may retain securities that are downgraded, if it believes that keeping those securities is warranted. Securities rated BBB, while investment-grade, still possess speculative characteristics.
Debt securities rated below investment-grade ("junk bonds") are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may
make it more difficult to dispose of junk bonds and may cause the Funds to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's assessment of the issuer's financial strength. The Funds currently use ratings compiled by Moody's, S&P, and Fitch. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk. The section "Appendix A -- Description of Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
The Adviser may use ratings produced by rating agencies as guidelines to determine the rating of a security at the time a Fund buys it. A rating agency may change its credit ratings at any time. The Adviser monitors the rating of the security and will take appropriate actions if a rating agency reduces the security's rating. The Funds are not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded. The Funds may invest in securities of any rating.
FOREIGN SECURITIES. Foreign securities are debt and equity securities that are traded in markets outside of the U.S. The markets in which these securities are located can be developed or emerging. The Funds can invest in foreign securities in a number of ways:
o A Fund can invest directly in foreign securities denominated in a foreign currency.
o A Fund can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments.
o A Fund can invest in investment funds.
AMERICAN DEPOSITARY RECEIPTS ("ADRS") -- ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
Investments in the securities of foreign issuers may subject a Fund to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments, possible imposition of withholding taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition, foreign issuers are, generally speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as
unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS - An "emerging country" is generally a country that the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS - Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds may be subject to the provisions of the 1940 Act. If the Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS - Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U. S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U. S. investment. A country may restrict control foreign
investments in its securities markets. These restrictions could limit a Fund's ability to invest in a particular country or make it very expensive for the Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION - There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign companies more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Adviser anticipates that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards;
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis;
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States;
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated;
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights; and
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK - While the Funds denominate their net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S.
dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES - Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for the Funds to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Funds receive from their investments. The Funds do not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS - Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Rating Services ("S&P") or Moody's Investor Services, Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Description of Ratings" to this SAI.
REAL ESTATE INVESTMENT TRUSTS. A real estate investment trust ("REIT") is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Code. The Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which a Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Fund invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of a Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through a Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation ("Farmer Mac").
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Association ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow
from the U.S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U.S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of a Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Funds may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by a Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with financial institutions. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The acquisition of a repurchase agreement may be deemed to be an acquisition of the underlying securities as long as the obligation of the seller to repurchase the securities is collateralized fully. The Funds follow certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with creditworthy financial institutions whose condition will be continually monitored by the Adviser. The repurchase agreements entered into by the Funds will provide that the underlying collateral at all times shall have a value at least equal to 102% of the resale price stated in the agreement and consist only of securities permissible under Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance with this requirement). Under all repurchase agreements entered into by the Funds, the custodian or its agent must take possession of the underlying collateral. In the event of a default or bankruptcy by a selling financial institution, the Funds will seek to liquidate such collateral. However, the exercising of the Funds' right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, a Fund could suffer a loss. It is the current policy of the Funds not to invest in repurchase agreements that do not mature within seven days if any such investment, together with
any other illiquid assets held by that Fund, amounts to more than 15% of the Fund's total assets. The investments of the Funds in repurchase agreements, at times, may be substantial when, in the view of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions in which a Fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a Fund. At the time a Fund enters into a reverse repurchase agreement, it will earmark on the books of the Fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by a Fund may increase the Fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to a Fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a Fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the Fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
SECURITIES LENDING. The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Trust's Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of a Fund (including the loan collateral). The Funds will not lend portfolio securities to their Adviser or their affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Funds.
The Funds may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Funds' securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, a Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. The Funds will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon a Fund's ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Funds may invest in shares of other affiliated and unaffiliated investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Funds. A Fund's purchase of such
investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying a Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments. The Board has authorized the Trust's officers to request an order from the SEC that would permit a Fund to operate as a "fund of funds." Assuming that the SEC approves the requested order, it is anticipated that, at some time in the future the Funds may invest in other investment companies beyond the limitations set forth in Section 12(d)(1)(A) of the 1940 Act.
For hedging or other purposes, the Funds may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Certain affiliated and unaffiliated investment companies, including certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore),Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds have been issued orders by the SEC pursuant to which the Funds may invest in such investment companies in excess of the 3% limit described above, provided that the Funds comply with the conditions of the SEC order as it may be amended, procedures approved by the Board, and any other applicable investment limitations. Neither the investment companies issued such SEC orders nor their investment advisers make any representations regarding the advisability of investing in the investment companies.
WHEN ISSUED, DELAYED--DELIVERY AND FORWARD TRANSACTIONS. A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, a Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities a Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. A Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
A Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When a Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, a Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, a Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because the Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
A Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. A Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments, such Fund's liquidity and the ability of the Adviser to manage it might be affected in the event its commitments to purchase "when-issued" securities ever exceed 25% of the value of its total assets. Under normal market conditions, however, a Fund's commitment to purchase "when-issued" or "delayed-delivery" securities
will not exceed 25% of the value of its total assets.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, or an underlying economic factor, such as an interest rate or a market benchmark. Unless otherwise stated in the Funds' prospectuses, the Funds may use derivatives for risk management purposes, including to gain exposure to various markets in a cost efficient manner, to reduce transaction costs or to remain fully invested. A Fund may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates (a practice known as "hedging"). When hedging is successful, a Fund will have offset any depreciation in the value of its portfolio securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of a Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by a Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), a Fund must either operate within certain guidelines and restrictions with respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Cornerstone Advisors Global Public Equity Fund, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Cornerstone Advisors Global Public Equity Fund is not subject to registration or regulation as a CPO under the CEA. As a result, the Cornerstone Advisors Global Public Equity Fund will operate within certain guidelines and restrictions with respect to its use of futures, options on such futures, commodity options and certain swaps.
The CFTC has also issued a limited extension to operators of funds of funds from the obligation to register as a CPO until the later of June 30, 2013, or six months after the effective date (or compliance date, if later) of the CFTC's issuance of revised guidance regarding the application of the CFTC de minimis thresholds to funds of funds. The Adviser has filed with the CFTC to avail itself of this extension from the CPO registration requirements with respect to the Cornerstone Advisors Income Opportunities Fund, the Cornerstone Advisors Public Alternatives Fund and the Cornerstone Advisors Real Assets Fund, and, therefore, neither these Funds nor the Adviser with respect to these Funds is currently subject to registration or regulation as a CPO under the CEA.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade - known as "contract
markets" - approved for such trading and regulated by the Commodity Futures Trading Commission ("CFTC"). These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
A Fund may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC" options). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counter-party will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When a Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). A Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that a Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. A Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, a Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When a Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when a Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. A Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an OTC option by entering into an offsetting transaction with the counter-party to the option.
A Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, a Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, a Fund would hope to profit by closing out the put option at a lower price. If security prices fall, a Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. A Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, a Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Funds are permitted only to write covered options. At the time of selling the call option, the Funds may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, a Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
A Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. A Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. A Fund may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
A Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to a Fund.
o COMBINED POSITIONS
A Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, a Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, a Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount);
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC;
o Do not require an initial margin deposit; and
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect a Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. A Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
A Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. A Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which a Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that a Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
A Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross-hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, a Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, a Fund
may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
EQUITY-LINKED SECURITIES - A Fund may invest in privately issued securities whose investment results are designed to correspond generally to the performance of a specified stock index or "basket" of securities, or sometimes a single stock (referred to as "equity-linked securities"). These securities are used for many of the same purposes as derivative instruments and share many of the same risks. Equity-linked securities may be considered illiquid and thus subject to a Fund's restrictions on investments in illiquid securities.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of a Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from a Fund. If a swap agreement calls for payments by a Fund, the Fund must be prepared to make such payments when due. In addition, if the counter-party's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. A Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counter-party is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, a Fund may not be able to recover the money it expected to receive under the contract. The Fund will not enter into any swap agreement unless the Adviser believes that the other party to the transaction is creditworthy.
A swap agreement can be a form of leverage, which can magnify a Fund's gains or losses. In order to reduce the risk associated with leveraging, a Fund may cover its current obligations under swap agreements according to guidelines established by the Securities and Exchange Commission (the "SEC"). If a Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can
gain exposure to stocks making up the index of securities without actually
purchasing those stocks. Equity index swaps involve not only the risk
associated with investment in the securities represented in the index, but also
the risk that the performance of such securities, including dividends, will not
exceed the return on the interest rate that a Fund will be committed to pay.
o TOTAL RETURN SWAPS
Total return swaps are contracts in which one party agrees to make payments of the total return from a reference
instrument -- which may be a single asset, a pool of assets or an index of assets -- during a specified period, in return for payments equal to a fixed or floating rate of interest or the total return from another underlying reference instrument. The total return includes appreciation or depreciation on the underlying asset, plus any interest or dividend payments. Payments under the swap are based upon an agreed upon principal amount but, since the principal amount is not exchanged, it represents neither an asset nor a liability to either counterparty, and is referred to as notional. Total return swaps are marked to market daily using different sources, including quotations from counterparties, pricing services, brokers or market makers. The unrealized appreciation (depreciation) related to the change in the valuation of the notional amount of the swap is combined with the amount due to a Fund at termination or settlement. The primary risks associated with total return swaps are credit risks (if the counterparty fails to meet its obligations) and market risk (if there is no liquid market for the agreement or unfavorable changes occur to the underlying reference instrument).
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if a Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, a Fund may have to pay more money than it receives. Similarly, if a Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, a Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. A Fund may enter into a currency swap when it has one currency and desires a different currency. Typically, the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
o INFLATION SWAPS
Inflation swaps are fixed-maturity, over-the-counter derivatives where one party pays a fixed rate in exchange for payments tied to an inflation index, such as the Consumer Price Index ("CPI"). The fixed rate, which is set by the parties at the initiation of the swap, is often referred to as the "breakeven inflation" rate and generally represents the current difference between treasury yields and TIPS yields of similar maturities at the initiation of the swap agreement. Inflation swaps are typically designated as "zero coupon," where all cash flows are exchanged at maturity. The value of an inflation swap is expected to fluctuate in response to changes in the relationship between nominal interest rates and the rate of inflation. An inflation swap can lose value if the realized rate of inflation over the life of the swap is less than the fixed market implied inflation rate (the breakeven inflation rate) the investor agreed to pay at the initiation of the swap.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of
buying a cap and selling a floor.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of a Fund than if it had not entered into any
derivatives transactions. Derivatives may magnify a Fund's gains or losses,
causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities a Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose a Fund to greater risks.
CORRELATION OF PRICES - A Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities a Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if a Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, a Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin
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requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of a Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect a Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of a Fund's foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of a Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, a Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, a Fund may close out a futures contract only on the exchange the contract was initially traded. Although a Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, a Fund may not be able to close out its position. In an illiquid market, a Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and/or
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, a Fund may lose money by investing in derivatives. For example, if a Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, a Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if a Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, a Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if a Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into a Fund. If a Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to a Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, a Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. A Fund may lose its margin deposits if a broker-dealer with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (i.e., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, a Fund may not trade that
derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such a transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with these requirements, and subject to certain risks.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board. Despite such good faith efforts to determine fair value prices, a Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon their sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. A Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of a Fund's net assets held in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act, and restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board. Under the supervision of the Trust's Board, the Adviser determines the liquidity of the Funds' investments. In determining the liquidity of the Funds' investments, the Adviser may consider various factors, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security).
SHORT SALES. As consistent with each Fund's investment objectives, the Funds may engage in short sales that are either "uncovered" or "against the box." A short sale is "against the box" if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Funds with respect to the securities that are sold short.
Uncovered short sales are transactions under which a Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the
short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund may: (a) segregate cash or liquid securities at such a level that the amount segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short or (b) otherwise cover the Fund's short position.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental, which means that a Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less.
1. Each Fund may not concentrate its investments in a particular industry, as
concentration is defined under the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time, except that
each Fund may invest without limitation in: (i) securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; and
(ii) tax-exempt obligations of state or municipal governments and their
political subdivisions.
2. Each Fund may borrow money, except as prohibited under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Each Fund may not issue senior securities, as such term is defined under the 1940 Act, the rules or regulations thereunder or any exemption therefrom as amended or interpreted from time to time, except as permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Each Fund may make loans, except as prohibited under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Each Fund may purchase or sell commodities or real estate, except as prohibited under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
6. Each Fund may underwrite securities issued by other persons, except as prohibited under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
In addition to the investment objectives of each Fund, the following limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval. In addition, the investment objectives of the Funds are non-fundamental policies that may be changed by the Trust's Board without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
1. Each Fund may not purchase any securities which would cause 25% or more of the net assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities. For purposes
of this limitation, (i) utility companies will be classified according to their services, for example, gas distribution, gas transmission, electric and telephone will each be considered a separate industry; and (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry.
2. Each Fund may not borrow money from a bank in an amount exceeding 33 1/3% of the value of its total assets, provided that investment strategies that either obligate a Fund to purchase securities or require a Fund to cover a position by segregating assets or entering into an offsetting position shall not be subject to this limitation. Asset coverage of at least 300% is required for all borrowing, except where a Fund has borrowed money, from any source, for temporary purposes in an amount not exceeding 5% of its total assets.
3. Each Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that a Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) lend its securities.
4. Each Fund may not invest in unmarketable interests in real estate limited partnerships or invest directly in real estate except as permitted by the 1940 Act. For the avoidance of doubt, the foregoing policy does not prevent a Fund from, among other things; purchasing marketable securities of companies that deal in real estate or interests therein (including REITs).
5. Each Fund may purchase or sell financial and physical commodities, commodity contracts based on (or relating to) physical commodities or financial commodities and securities and derivative instruments whose values are derived from (in whole or in part) physical commodities or financial commodities.
6. Each Fund may not hold illiquid securities in an amount exceeding, in the aggregate, 15% of a Fund's net assets.
In addition:
1. The Public Alternatives Fund may not change its investment strategy to invest at least 80% of its net assets, plus any borrowings for investment purposes, in publicly-traded investments, and derivatives and other instruments with economic characteristics similar to publicly traded, equity investments, and/or shares of Underlying Funds (as defined below) that are publicly available at the time of purchase without 60 days' prior notice to shareholders.
2. The Global Public Equity Fund may not change its investment strategy to invest at least 80% of its net assets, plus any borrowings for investment purposes, in publicly-traded, equity investments, and derivatives with economic characteristics similar to publicly-traded, equity investments, and/or shares of Underlying Funds (as defined below) that primarily invest in publicly traded, equity investments, at the time of purchase without 60 days' notice to shareholders.
3. The Real Assets Fund may not change its investment strategy to invest at least 80% of its net assets, plus any borrowings for investment purposes, in global corporate and government-issued inflation-protected securities, MLPs and securities of MLP affiliates, and commodity futures ("Real Assets"), and derivatives and other instruments with economic characteristics similar to Real Assets, without 60 days' notice to shareholders.
"Underlying Funds" are affiliated and unaffiliated open-end funds, closed-end funds, unregistered funds and exchange-traded funds.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes a Fund to exceed its limitation, the Fund will take steps to bring the
aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries, with certain exceptions.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Funds' current investment policy on lending is as follows: a Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its SAI.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in real estate, but does require that every investment company have a fundamental investment policy governing such investments. The Funds will not purchase or sell real estate, except that the Funds may purchase: (i) marketable securities issued by companies which own or invest in real estate (including REITs).
THE ADVISER AND SUB-ADVISERS
MULTI-MANAGER STRUCTURE. As noted in the Prospectus, each of the Funds is authorized to operate on a "multi-manager" basis. This means that a single Fund may be managed by one or more sub-advisers. The multi-manager structure is generally designed to combine multiple investment strategies. The Board is responsible for making decisions with respect to the engagement and/or termination of sub-advisers based on a recommendation of Cornerstone Advisors, Inc. (the "Adviser"). The Adviser is responsible for the oversight of sub-advisers and recommendations with respect to their hiring, termination or replacement. The Board has authorized the Trust's officers to request an order from the SEC that would exempt the Trust from the provisions of Section 15(a) and certain related provisions of the Investment Company Act. If issued, such an order would permit the Trust to enter into portfolio management agreements with sub-advisers upon the approval of the Board but without submitting such contracts for the approval of the shareholders of the relevant Fund. The shareholders of each Fund have approved this structure. There can be no assurance that the requested order will be issued by the SEC.
The Adviser is responsible for determining the level of assets that will be allocated among the sub-advisers in these
Funds. The Adviser is also responsible for determining the level of assets that will be allocated to Underlying Funds, to the extent the Adviser determines to pursue a Fund's investment strategies through investment in other funds. The Adviser monitors the performance of both the overall Fund and of each sub-adviser and, from time to time, may make changes in the allocation of assets to the sub-adviser that serve a particular Fund, as described in the Prospectus. For its services, the Adviser receives an annual fee of 0.01% of each Fund's average net assets.
ADVISORY AGREEMENT WITH THE TRUST. The services provided to the Trust by the Adviser are governed by an Advisory Agreement between the Trust and the Adviser dated June 22, 2012 (the "Advisory Agreement").
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Funds; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" or of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of the Funds, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
For the fiscal period from August 30, 2012 to October 31, 2012, the Funds paid the Adviser the following advisory fees:
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CONTRACTUAL
FUND FEES PAID
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Cornerstone Advisors Global Public Equity Fund $9,061
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Cornerstone Advisors Income Opportunities Fund $1,994
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Cornerstone Advisors Public Alternatives Fund $5,087
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Cornerstone Advisors Real Assets Funds $2,013
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SUB-ADVISERS
Initially, the Adviser has delegated the authority to manage assets of each Fund, as allocated by the Adviser, to the following sub-advisers (each a "Sub-Adviser" and collectively, the "Sub-Advisers"):
FUND SUB-ADVISER
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Global Public Equity Fund Acadian Asset Management LLC
Allianz Global Investors U.S. LLC
Cramer Rosenthal McGlynn LLC
Driehaus Capital Management LLC
Fairpointe Capital LLC
Harris Associates L.P.
LSV Asset Management
Marsico Capital Management, LLC
Parametric Portfolio Associates LLC
Phocas Financial Corporation
TCW Investment Management Company
Thornburg Investment Management Inc
Turner Investments, L.P.
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Income Opportunities Fund OFI SteelPath, Inc.
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Public Alternatives Fund AlphaSimplex Group, LLC (1)
AQR Capital Management, LLC (1)
ClariVest Asset Management LLC
Turner Investments, L.P.
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Real Assets Fund BlackRock Financial Management, LLC
Kayne Anderson Capital Advisors, L.P.
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(1) As of the date of the SAI, no assets have been allocated to the Sub-Adviser.
SUB-ADVISORY AGREEMENTS. The provision of investment advisory services by the various sub-advisors is governed by individual investment advisory agreements (the "Sub-Advisory Agreements") between the relevant Sub-Adviser and the Adviser. Under each Sub-Advisory Agreement, each Sub-Adviser is responsible for the day-to-day management of the assets for the Fund(s) for which it is responsible, makes investment decisions for such Fund(s) and administers the investment program of the assets of a Fund that it manages, subject to the supervision of, and policies established by, the Adviser and the Board. After the initial two-year term, the continuance of each Sub-Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not parties to the Sub-Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. A Sub-Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Board.
SUB-ADVISORY FEES. For its services, each Sub-Adviser receives a fee calculated at an annual rate of the following percentages of each Fund's average net assets allocated to that particular Sub-Adviser.
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SUB-ADVISER FEE
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GLOBAL PUBLIC EQUITY
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Acadian Asset Management LLC 0.75%
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Allianz Global Investors U.S. LLC 1.25%
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Cramer Rosenthal McGlynn LLC 0.70% on $0-50 million
0.50% above $50 million
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Driehaus Capital Management LLC Strategy # 1 and # 2 Combined:
0.90% on $0-20 million
0.80% on the next $20 million
0.70% above $40 million
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Fairpointe Capital LLC First $10 million: 0.80%
Next $10 million: 0.70%
Over $20 million: 0.60%
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Harris Associates L.P. 1.00% on $0-50 million
0.56% above $50 million
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LSV Asset Management Strategy #1: 1.00%
Strategy #2: 1.25%
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Marsico Capital Management, LLC 0.75% on $0-50 million
0.65% on $50-100 million
0.55% on all assets between $100 million and
$300 million
0.50% on all assets above $300 million
0.45% on all assets above $400 million
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Parametric Portfolio Associates LLC 0.50% on $0-100 million
0.40% above $100 million
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Phocas Financial Corporation 0.75%
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TCW Investment Management Company 0.85% on $0-25 million
0.80% above $25 million
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Thornburg Investment Management Inc 0.75% on $0-25 million
0.65% on the next $50 million
0.55 % above $75 million
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SUB-ADVISER FEE
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Turner Investments, L.P. 0.75% on $0-75 million
0.65% above $75 million
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PUBLIC ALTERNATIVES
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AlphaSimplex Group, LLC(1) 0.90% on the first $100 million
0.75% on the balance above $100 million
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AQR Capital Management, LLC(1) 1.10%
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ClariVest Asset Management LLC 2.25%
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Turner Investments, L.P. 1.25% on $0-100 million
1.00% above $100 million
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INCOME OPPORTUNITIES
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OFI SteelPath, Inc. 0.75% on $0-50 million
0.50% above $50 million
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REAL ASSETS
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Kayne Anderson Capital Advisors, L.P. 1.25%
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BlackRock Financial Management, LLC 0.20% on $0-50 million
0.15% on the next $50 million
0.10% thereafter
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(1) As of the date of this SAI, no assets have been allocated to this Sub-Adviser.
For the fiscal period from August 30, 2012 to October 31, 2012, the Adviser paid the Sub-Advisers the following sub-advisory fees:
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CONTRACTUAL
FUND FEES PAID
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Cornerstone Advisors Global Public Equity Fund $630,508
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Cornerstone Advisors Income Opportunities Fund $37,099
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Cornerstone Advisors Public Alternatives Fund $221,030
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Cornerstone Advisors Real Assets Funds $98,217
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The Board has authorized the Trust's officers to request an order from the SEC that would exempt the Trust from the provisions of certain disclosure requirements under various rules and forms. If issued, such an order would permit the Trust to disclose (as a dollar amount and a percentage of a Fund's net assets) only (i) the aggregate fees paid to the Adviser and any affiliated sub-advisers, and (ii) the aggregate fees paid to unaffiliated sub-advisers (collectively, the "Aggregate Fee Disclosure"). Assuming that the SEC approves the requested order, it is anticipated that, at some time in the future, the Funds will provide the Aggregate Fee Disclosure in lieu of disclosing the fees paid to each sub-adviser. A Fund that employs an affiliated sub-adviser would continue to provide separate disclosure of any fees paid to such affiliated sub-adviser.
THE PORTFOLIO MANAGERS
This section includes information about the Funds' portfolio managers, including information about the dollar range of Fund shares they own, other accounts they manage and how they are compensated.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Funds are required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Funds as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act"). Because the Funds are new, as of the date of this SAI, the portfolio managers did not beneficially own shares of the Funds.
ACADIAN ASSET MANAGEMENT LLC
Acadian Asset Management LLC ("Acadian"), 260 Franklin Street, Boston, Massachusetts 02110, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Acadian, a Delaware limited liability company, was founded in 1986 and is a subsidiary of Old Mutual Asset Managers (US) LLC, which is an indirect wholly owned subsidiary of Old Mutual plc. Old Mutual plc is a publicly traded company listed on the U.K. and South African stock exchanges. As of December 31, 2012, Acadian had approximately $51.9 billion in assets under management.
COMPENSATION. Acadian receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between Acadian and the Adviser.
Compensation structure varies among professionals, although the basic package involves a generous base salary, strong bonus potential, profit sharing potential, various fringe benefits, and, among the majority of senior investment professionals and certain other key employees, equity ownership in the firm as part of the Acadian Key Employee Limited Partnership ("KELP").
Compensation is highly incentive-driven, with Acadian paying up to and sometimes in excess of 100% of base pay for performance bonuses. Bonuses are tied directly to the individual's contribution and performance during the year, with members of the investment team evaluated on such factors as their contributions to the investment process, account retention, portfolio performance, asset growth, and overall firm performance. Since portfolio management is a team approach, investment team members' compensation is not linked to the performance of specific accounts but rather to the individual's overall contribution to the success of the team and the firm's profitability.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) John R. Chisholm, CFA None (Cornerstone Advisors Global Public Equity Fund) Asha Mehta, CFA None (Cornerstone Advisors Global Public Equity Fund) Joshua S. White, Ph.D. None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. These investment professionals function as a core equity team of 18 portfolio managers and are not segregated along product lines or by client type. The individuals noted below worked on all products, and the data shown reflects firm-level numbers of accounts and assets under management, segregated by investment vehicle type. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- -------------------------- ------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
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John R. Chisholm, CFA,
Asha Mehta, CFA and
Joshua S. White, Ph.D. 11 $ 4,323 58 $10,940 135 $ 33,117
2* $ 1,274 4* $ 577 13* $ 5,560
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. A conflict of interest may arise as a result of a portfolio manager being responsible for multiple accounts, including the Global Public Equity Fund, which may have different investment guidelines and objectives. In addition to the Global Public Equity Fund, these accounts may include other mutual funds managed on an advisory or sub-advisory basis, separate accounts and collective trust accounts. An investment opportunity may be suitable for the Global Public Equity Fund as well as for any of the other managed accounts. However, the investment may not be available in sufficient quantity for all of the accounts to participate fully. In addition, there may be limited opportunity to sell an investment held by the Global Public Equity Fund and the other accounts. The other accounts may have similar investment objectives or strategies as the Global Public Equity Fund, may track the same benchmarks or indexes as the Global Public Equity Fund tracks, and may sell securities that are eligible to be held, sold or purchased by the Global Public Equity Fund. A portfolio manager may be responsible for accounts that have different advisory fee schedules, which may create the incentive for the portfolio manager to favor one account over another in terms of access to investment opportunities. A portfolio manager may also manage accounts whose investment objectives and policies differ from those of the Global Public Equity Fund, which may cause the portfolio manager to effect trading in one account that may have an adverse effect on the value of the holdings within another account, including the Global Public Equity Fund.
To address and manage these potential conflicts of interest, Acadian has adopted compliance policies and procedures to allocate investment opportunities and to ensure that each of its clients is treated on a fair and equitable basis. Such policies and procedures include, but are not limited to, trade allocation and trade aggregation policies and oversight by investment management and the firm's compliance team.
ALLIANZ GLOBAL INVESTORS U.S. LLC
Allianz Global Investors U.S. LLC ("Allianz Global Investors U.S."), 600 West Broadway, Suite 2900, San Diego, California 92101, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Allianz Global Investors U.S., a Delaware limited liability company, was founded in 2009 and is a wholly owned subsidiary of Allianz Asset Management of America LP. Allianz SE, a public company, indirectly holds a controlling interest in Allianz Asset Management of America LP. As of December 31, 2012, Allianz Global Investors U.S. had approximately $53 billion in assets under management.
COMPENSATION. Investment professional compensation is designed to align with Allianz Global Investors U.S. clients' interests, attract, motivate and retain top talent, and encourage long-term stability. The firm aims to provide rewards for exceptional investment performance and to build an enduring firm with a long-term culture of shared success. In support of these objectives, its compensation program includes a base salary, an annual cash bonus and long-term incentive. For some investment teams, compensation is funded by team revenue adjusted by investment performance.
BASE SALARY. Investment professionals are provided a competitive base salary that reflects the scope and responsibilities of the position and experience level of the individual. Salaries are periodically evaluated against industry peers using market data provided by independent third-party compensation surveys. Salaries represent a larger percentage of total compensation for more junior positions and for more senior positions is a smaller percentage and subject to less frequent
adjustments. Typically, salary comprises 30%-50% of total compensation for junior portfolio managers and 10%-30% of total compensation for senior portfolio managers.
ANNUAL CASH BONUS. Investment professionals are eligible for an annual, discretionary bonus. Bonuses are awarded based on achievement to set goals, investment performance and individual contribution. Investment performance is measured relative to the relevant fund/strategy benchmark (as specified in the Global Public Equity Fund's summary prospectus) and/or peer group ranking through measurement periods that are trailing one, three and five years, but vary by investment team and fund. The differences in measurement periods are not arbitrary, but are linked to the nature of the investment process, strategies and investment turnover.
LONG-TERM INCENTIVE. Allianz Global Investors U.S.' long-term incentive plan is designed to align compensation of key staff, managers and executives with longer-term company performance. Awards are granted annually with award appreciation determined by the earnings growth of Allianz Global Investors in the U.S. and globally. Each award has a three-year vesting schedule and is paid in cash upon vesting.
The portion of individual incentive received as annual cash bonus versus long-term deferred incentive is standardized globally across Allianz Global Investors U.S.. Senior investment professionals receive a higher proportion of incentive compensation in long-term award. Typically, long-term incentive represents 10%-20% of junior portfolio manager total compensation while long-term incentive represents 25%-35% of senior portfolio manager total compensation.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) John C. McCraw None (Cornerstone Advisors Global Public Equity Fund) Robert S. Marren None (Cornerstone Advisors Global Public Equity Fund) K. Mathew Axline, CFA None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
John C. McCraw 3 $ 63.7 0 $ 0 14 $ 720.9
0 $ 0 0 $ 0 2* $ 90.9
Robert S. Marren 3 $ 63.7 0 $ 0 14 $ 720.9
0 $ 0 0 $ 0 2* $ 90.9
K. Mathew Axline, CFA 3 $ 63.7 0 $ 0 14 $ 720.9
0 $ 0 0 $ 0 2* $ 90.9
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Like other investment professionals with multiple clients, a portfolio manager may face certain
potential conflicts of interest in connection with managing both the Global Public Equity Fund and other accounts at the same time. The paragraphs below describe some of these potential conflicts, which Allianz Global Investors U.S. believes are faced by investment professionals at most major financial firms.
Allianz Global Investors U.S. has adopted compliance policies and procedures that address certain of these potential conflicts. The management of accounts with different advisory fee rates and/or fee structures, including accounts that pay advisory fees based on account performance ("performance fee accounts"), may raise potential conflicts of interest by creating an incentive to favor higher-fee accounts. These potential conflicts may include, among others:
o The most attractive investments could be allocated to higher-fee accounts or performance fee accounts.
o The trading of higher-fee accounts could be favored as to timing and/or execution price. For example, higher-fee accounts could be permitted to sell securities earlier than other accounts when a prompt sale is desirable or to buy securities at an earlier and more opportune time.
o The investment management team could focus their time and efforts primarily on higher-fee accounts due to a personal stake in compensation.
When Allianz Global Investors U.S. considers the purchase or sale of a security to be in the best interest of a fund and other accounts, the trading desk may, to the extent permitted by applicable laws and regulations, aggregate the securities to be sold or purchased. Aggregation of trades may create the potential for unfairness to a fund or another account if one account is favored over another in allocating the securities purchased or sold, for example, by allocating a disproportionate amount of a security that is likely to increase in value to a favored account. Allianz Global Investors U.S. considers many factors when allocating securities among accounts, including the account's investment style, applicable investment restrictions, availability of securities, available cash and other current holdings. Allianz Global Investors U.S. attempts to allocate investment opportunities among accounts in a fair and equitable manner. However, accounts are not assured of participating equally or at all in particular investment allocations due to such factors as noted above. "Cross trades," in which one Allianz Global Investors U.S. account sells a particular security to another account (potentially saving transaction costs for both accounts) may also pose a potential conflict of interest when cross trades are effected in a manner perceived to favor one client over another. For example, Allianz Global Investors U.S. may cross a trade between performance fee account and a fixed fee account that results in a benefit to the performance fee account and a detriment to the fixed fee account. Allianz Global Investors U.S. has adopted compliance procedures that provide that all cross trades are to be made at an independent current market price, as required by law.
Another potential conflict of interest may arise from the different investment objectives and strategies of a fund and other accounts. For example, another account may have a shorter-term investment horizon or different investment objectives, policies or restrictions than a fund. Depending on another account's objectives or other factors, a portfolio manager may give advice and make decisions that may differ from advice given, or the timing or nature of decisions made, with respect to a fund. In addition, investment decisions are subject to suitability for the particular account involved. Thus, a particular security may not be bought or sold for certain accounts even though it was bought or sold for other accounts at the same time. More rarely, a particular security may be bought for one or more accounts managed by a portfolio manager when one or more other accounts are selling the security (including short sales). There may be circumstances when purchases or sales of portfolio securities for one or more accounts may have an adverse effect on other accounts. Allianz Global Investors U.S. maintains trading policies designed to provide portfolio managers an opportunity to minimize the effect that short sales in one portfolio may have on holdings in other portfolios.
A portfolio manager who is responsible for managing multiple accounts may devote unequal time and attention to the management of those accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
A fund's portfolio manager(s) may be able to select or influence the selection of the brokers/dealers that are used to execute securities transactions for that fund. In addition to executing trades, some brokers and dealers provide Allianz Global Investors U.S. with brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934), which may result in the payment of higher brokerage fees than might have otherwise be available. These services may be more beneficial to certain funds or accounts than to others. In order to be assured of continuing to receive services considered of value to its clients, Allianz Global Investors U.S. has adopted a brokerage allocation policy embodying the concepts of Section 28(e) of the Securities Exchange Act of 1934. The payment of brokerage commissions is subject to the requirement that the portfolio manager determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to a fund.
A fund's portfolio manager(s) may also face other potential conflicts of interest in managing a fund, and the description above is not a complete description of every conflict that could be deemed to exist in managing both a fund and other accounts. In addition, a fund's portfolio manager may also manage other accounts (including their personal assets or the assets of family members) in their personal capacity.
Allianz Global Investors U.S. investment personnel, including each fund's portfolio manager, are subject to restrictions on engaging in personal securities transactions pursuant to the Code of Ethics, which contains provisions and requirements designed to identify and address conflicts of interest between personal investment activities and the interests of the Global Public Equity Fund. The Code of Ethics is designed to ensure that the personal securities transactions, activities and interests of the employees of Allianz Global Investors U.S. will not interfere with: (i) making decisions in the best interest of advisory clients (including the Global Public Equity Fund); or (ii) implementing such decisions while at the same time allowing employees to invest for their own accounts.
ALPHASIMPLEX GROUP, LLC
AlphaSimplex Group, LLC ("AlphaSimplex"), One Cambridge Center, Cambridge, Massachusetts 02142, is a Delaware limited liability company founded in 1999. AlphaSimplex is a subsidiary of Natixis US. As of December 31, 2012, AlphaSimplex had approximately $2.41 billion in assets under management. While the Board of Trustees of the Public Alternatives Fund and the Fund's sole initial shareholder have approved the appointment of AlphaSimplex as a sub-adviser to the Fund and the investment sub-advisory agreement with AlphaSimplex, as of the date of this SAI, no assets of the Fund have been allocated to AlphaSimplex.
The Adviser, on any future date as is agreed between the Adviser and AlphaSimplex and without any further action being taken by shareholders, may allocate Fund assets to AlphaSimplex in accordance with the terms of the investment sub-advisory agreement with AlphaSimplex.
COMPENSATION. AlphaSimplex will receive a fee based on the assets under management of the Public Alternatives Fund as set forth in the Investment Sub-Advisory Agreement between AlphaSimplex and the Adviser.
All AlphaSimplex investment professionals, including portfolio managers, may receive compensation in three ways: salary, year-end bonuses and supplemental bonuses. The bonus amounts are decided by the AlphaSimplex Compensation Committee. As a retention tool, AlphaSimplex has implemented a three-year deferral of 30% of bonus amounts for senior professionals.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Andrew W. Lo, Ph.D. None (Cornerstone Advisors Public Alternatives Fund) Jeremiah H. Chafkin None (Cornerstone Advisors Public Alternatives Fund) Philippe P. Lodi, Ph.D., CFA None (Cornerstone Advisors Public Alternatives Fund) Robert W. Sinnott None (Cornerstone Advisors Public Alternatives Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. The portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Andrew W. Lo, Ph.D. 5 $ 2,477 3 $ 196 5 $ 699**
0 $ 0 2* $ 157 0 $ 0
Jeremiah H. Chafkin 5 $ 2,477 3 $ 196 5 $ 699**
0 $ 0 2* $ 157 0 $ 0
Philippe P. Ludi, Ph.D., 1 $ 247 2 $ 157 0 $ 0
CFA
0 $ 0 2* $ 157 0 $ 0
Robert W. Sinnott 1 $ 825 0 $ 0 0 $ 0
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
** Includes notional value.
CONFLICTS OF INTEREST. AlphaSimplex manages other accounts using investment strategies that may or may not be similar to that of the Public Alternatives Fund. A conflict of interest may exist in connection with AlphaSimplex's management of the Public Alternatives Fund, on the one hand, and AlphaSimplex's management of other accounts, on the other hand. AlphaSimplex makes investment decisions for each account based on the client's investment objectives, policies, practices, cash flows and other relevant investment considerations. Consequently, AlphaSimplex may purchase or sell securities or other instruments for one account and not for another account, and the performance of securities or other instruments purchased for one account may vary from the performance of securities or other instruments purchased for other accounts. Another conflict of interest may arise because accounts other than the Public Alternatives Fund may have fee structures, such as performance-based fees, that differ from those of the Public Alternatives Fund. In addition, a potential conflict of interest may arise as a result of the portfolio managers' day-to-day management of the Public Alternatives Fund. Because of their roles in managing the Public Alternatives Fund, AlphaSimplex's portfolio managers know the size, timing and possible market impact of Public Alternatives Fund trades and this information could in theory be used to the detriment of the Public Alternatives Fund. AlphaSimplex has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time and to address conflicts of interest relating to the management of multiple accounts. Finally, AlphaSimplex has adopted trade allocation procedures that require equitable allocation of trade orders for a particular security among participating accounts. The implementation of these procedures is monitored by AlphaSimplex's Chief Compliance Officer.
AQR CAPITAL MANAGEMENT, LLC
While the Board of Trustees of the Public Alternatives Fund and the Fund's sole initial shareholder have approved the appointment of AQR as a sub-adviser to the Fund and the investment sub-advisory agreement between the Adviser, the
Trust and AQR, as of the date of this SAI, no assets of the Fund have been allocated to AQR.
The Adviser, on any future date as is agreed between the Adviser and AQR and without any further action being taken by shareholders, may allocate Fund assets to AQR in accordance with the terms of the investment sub-advisory agreement between the Adviser, the Trust and AQR. Until such time, AQR will not have any responsibilities with respect to the management of Fund assets, nor any obligations to the Fund or the Trust. As of December 31, 2012, AQR and its affiliates had approximately $71.2 billion in assets under management.
AQR is a Delaware limited liability company formed in 1998 and is located at Two Greenwich Plaza, 3rd Floor, Greenwich, Connecticut 06830. AQR is a wholly owned subsidiary of AQR Capital Management Holdings, LLC ("AQR Holdings"), which has no activities other than holding the interest of AQR. AQR Holdings is a subsidiary of AQR Capital Management Group, L.P. ("AQR LP") which has no activities other than holding the interests of AQR Holdings. Clifford S. Asness, Ph.D. may be deemed to control AQR indirectly through his significant ownership in AQR LP.
COMPENSATION. AQR will receive a fee based on the assets under management of the Public Alternatives Fund as set forth in the Investment Sub-Advisory Agreement between AQR and the Adviser.
COMPENSATION FOR PORTFOLIO MANAGERS THAT ARE PRINCIPALS:
The compensation for each of the portfolio managers that are a Principal of AQR is in the form of distributions based on the revenues generated by AQR. Distributions to each portfolio manager are based on cumulative research, leadership and other contributions to AQR. Revenue distributions are also a function of assets under management and performance of the funds managed by AQR. There is no direct linkage between performance and compensation. However, there is an indirect linkage in that superior performance tends to attract assets and thus increase revenues.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1)
Brian Hurst None (Cornerstone Advisors Public Alternatives Fund)
Yao Hua Ooi None (Cornerstone Advisors Public Alternatives Fund)
Michael Mendelson None (Cornerstone Advisors Public Alternatives Fund)
|
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. The portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER+ ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Brian Hurst 10 $ 10,008 42 $ 18,431 25 $ 6,701
0 $ 0 12* $ 3,395 2* $ 657
Yao Hua Ooi 10 $ 10,008 24 $ 12,452 2 $ 173
0 $ 0 3* $ 318 0 $ 0
Michael Mendelson 3 $ 6,434 25 $ 12,405 1 $ 74
0 $ 0 3* $ 563 0 $ 0
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
+ AQR utilizes a team-based approach to portfolio management, and each of the portfolio managers listed above is jointly responsible for the management of a portion of the accounts listed in each category.
CONFLICTS OF INTEREST. Each of the portfolio managers is responsible for managing other accounts, including other accounts of AQR or its affiliates, such as separately managed accounts for foundations, endowments, pension plans and high net-worth families. Other accounts may also include accounts managed by the portfolio managers in a personal or other capacity and may include registered investment companies and unregistered investment companies relying on either Section 3(c)(1) or Section 3(c)(7) of the 1940 Act (such companies are commonly referred to as "hedge funds"). Management of other accounts in addition to the Public Alternatives Fund (upon the allocation of Public Alternative Fund assets to AQR) can present certain conflicts of interest, as described below.
From time to time, upon the allocation of Public Alternative Fund assets to AQR, potential conflicts of interest may arise between a portfolio manager's management of the investments of the Public Alternatives Fund, on the one hand, and the management of other accounts, on the other. The other accounts might have similar investment objectives or strategies as the Public Alternatives Fund, or otherwise hold, purchase or sell securities that are eligible to be held, purchased or sold by the Public Alternatives Fund. Because of their positions with the Public Alternatives Fund, the portfolio managers will know the size, timing and possible market impact of the Public Alternatives Fund's trades. It is theoretically possible that the portfolio managers could use this information to the advantage of other accounts they manage and to the possible detriment of the Public Alternatives Fund. A potential conflict of interest may arise as a result of a portfolio manager's management of a number of accounts with similar investment guidelines. Often, an investment opportunity may be suitable for both the Public Alternatives Fund and other accounts managed by AQR, but may not be available in sufficient quantities for both the Public Alternatives Fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by the Public Alternatives Fund and another account. Whenever decisions are made to buy or sell securities by the Public Alternatives Fund and one or more of the other accounts simultaneously, AQR or a portfolio manager may aggregate the purchases and sales of the securities and will allocate the securities transactions in a manner that it believes to be equitable under the circumstances. As a result of the allocations, there may be instances when the Public Alternatives Fund will not participate in a transaction that is allocated among other accounts or that may not be allocated the full amount of the securities sought to be traded. While these aggregation and allocation policies could have a detrimental effect on the price or amount of the securities available to the Public Alternatives Fund from time to time, it is the opinion of AQR that the overall benefits outweigh any disadvantages that may arise from this practice. Subject to applicable laws and/or account restrictions, AQR may buy, sell or hold securities for other accounts while entering into a different or opposite investment decision for the Public Alternatives Fund.
AQR and the portfolio managers may also face a conflict of interest where some accounts pay higher fees to AQR than others, such as by means of performance fees.
AQR has implemented specific policies and procedures (e.g., a code of ethics and trade allocation policies) to seek to address potential conflicts that may arise in connection with the management of the Public Alternatives Fund, separately managed accounts and other accounts.
BLACKROCK FINANCIAL MANAGEMENT, LLC
BlackRock Financial Management, LLC ("BlackRock"), 55 East 52nd Street New York, New York 10055, serves as investment sub-adviser to a portion of the assets of the Real Assets Fund. BlackRock is a wholly-owned subsidiary of BlackRock, Inc., a New York limited liability company, was established in 1988. The PNC Financial Services Group, Inc. owns economic interests in BlackRock, Inc. approximating 21.8% and institutional investors, employees and the public own economic interest of 78.2% . As of December 31, 2012, BlackRock had approximately $3.79 trillion in assets under management.
PORTFOLIO MANAGER COMPENSATION OVERVIEW
BlackRock's financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by BlackRock.
BASE COMPENSATION. Generally, portfolio managers receive base compensation based on their position with the firm.
DISCRETIONARY INCENTIVE COMPENSATION.
Discretionary incentive compensation is a function of several components:
the performance of BlackRock, Inc., the performance of the portfolio
manager's group within BlackRock, the investment performance, including
risk-adjusted returns, of the firm's assets under management or supervision
by that portfolio manager relative to predetermined benchmarks, and the
individual's performance and contribution to the overall performance of
these portfolios and BlackRock. In most cases, these benchmarks are the
same as the benchmark or benchmarks against which the performance of the
Real Assets Fund or other accounts managed by the portfolio managers are
measured. Among other things, BlackRock's Chief Investment Officers make a
subjective determination with respect to each portfolio manager's
compensation based on the performance of the Real Assets Fund and other
accounts managed by each portfolio manager relative to the various
benchmarks. Performance of fixed income funds is measured on a pre-tax
and/or after-tax basis over various time periods including 1-, 3- and 5-
year periods, as applicable. With respect to these portfolio managers, such
benchmarks for the Fund and other accounts are:
-----------------------------------------------------------------------------------------------------
PORTFOLIO MANAGER APPLICABLE BENCHMARK
-----------------------------------------------------------------------------------------------------
Martin Hegarty A combination of market-based indices (e.g.,
Barclays Capital US TIPS Index), certain
customized indices and certain fund industry
peer groups.
-----------------------------------------------------------------------------------------------------
Brian Weinstein A combination of market-based indices (e.g.,
Barclays Capital U.S. Aggregate Bond Index),
certain customized indices and certain fund
industry peer groups.
-----------------------------------------------------------------------------------------------------
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DISTRIBUTION OF DISCRETIONARY INCENTIVE COMPENSATION
Discretionary incentive compensation is distributed to portfolio managers in a combination of cash and BlackRock, Inc. restricted stock units which vest ratably over a number of years. For some portfolio managers, discretionary incentive compensation is also distributed in deferred cash awards that notionally track the returns of select BlackRock investment products they manage and that vest ratably over a number of years. The BlackRock, Inc. restricted stock units, upon vesting, will be settled in BlackRock, Inc. common stock. Typically, the cash portion of the discretionary incentive compensation, when combined with base salary, represents more than 60% of total compensation for the portfolio managers. Paying a portion of discretionary incentive compensation in BlackRock stock puts compensation earned by a portfolio manager for a given year "at risk" based on BlackRock's ability to sustain and improve its performance over future periods. Providing a portion of discretionary incentive compensation in deferred cash awards that notionally track the BlackRock investment products they manage provides direct alignment with investment product results.
LONG-TERM INCENTIVE PLAN AWARDS -- From time to time long-term incentive equity awards are granted to certain key employees to aid in retention, align their interests with long-term shareholder interests and motivate performance.
Equity awards are generally granted in the form of BlackRock, Inc. restricted stock units that, once vested, settle in BlackRock, Inc. common stock. Mr. Weinstein has received long-term incentive awards.
DEFERRED COMPENSATION PROGRAM -- A portion of the compensation paid to eligible BlackRock employees may be voluntarily deferred at their election for defined periods of time into an account that tracks the performance of certain of the firm's investment products. All of the eligible portfolio managers have participated in the deferred compensation program.
OTHER COMPENSATION BENEFITS. In addition to base compensation and discretionary incentive compensation, portfolio managers may be eligible to receive or participate in one or more of the following:
INCENTIVE SAVINGS PLANS -- BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP) and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year and a company retirement contribution equal to 3-5% of eligible compensation up to the IRS limit ($250,000 for 2012). The RSP offers a range of investment options, including registered investment companies and collective investment funds managed by the firm. BlackRock contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into an index target date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the Purchase Date. Messrs. Hegarty and Weinstein are each eligible to participate in these plans.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Brian Weinstein None (Cornerstone Advisors Real Assets Fund) Martin Hegarty None (Cornerstone Advisors Real Assets Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Real Assets Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN BILLIONS) ACCOUNTS (IN BILLIONS) ACCOUNTS (IN BILLIONS)
---------------------------------------------------------------------------------------------------------
Brian Weinstein 15 $ 14.13 25 $ 7.18 168 $ 77.14
0 $ 0 0 $ 0 6* $ 1.41
Martin Hegarty 11 $ 12.93 3 $ 0.329 31 $ 16.1
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
POTENTIAL MATERIAL CONFLICTS OF INTEREST
BlackRock has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management and advisory services to numerous clients in addition to the Real Assets Fund, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Real Assets Fund. In addition, BlackRock, its affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Real Assets Fund. BlackRock, or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Real Assets Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock's (or its affiliates' or significant shareholders') officers, directors or employees are directors or officers, or companies as to which BlackRock or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that Messrs. Hegarty and Weinstein may be managing hedge fund and/or long only accounts, or may be part of a team managing hedge fund and/or long only accounts, subject to incentive fees. Messrs. Hegarty and Weinstein may therefore be entitled to receive a portion of any incentive fees earned on such accounts.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
CLARIVEST ASSET MANAGEMENT LLC
ClariVest Asset Management LLC ("ClariVest"), 11452 El Camino Real, Suite 250, San Diego, California 92130, serves as investment sub-adviser to a portion of the assets of the Public Alternatives Fund. ClariVest, a Delaware limited liability company established in 2006, is majority owned by its employees. Eagle Asset Management holds a 45% interest in ClariVest and may be deemed to control ClariVest. As of December 31, 2012, ClariVest had approximately $3.1 billion in assets under management.
COMPENSATION. ClariVest receives a fee based on the assets under management of the Public Alternatives Fund as set forth in the Investment Sub-Advisory Agreement between ClariVest and the Adviser.
Compensation paid by ClariVest to its portfolio managers has three primary components: (1) a base salary, (2) a discretionary bonus, and (3) for those employees with equity in the firm, distributions from ClariVest. The portfolio managers also receive certain retirement, insurance and other benefits that are broadly available to all ClariVest employees. The intent of this compensation plan is to achieve a market competitive structure with a high degree of variable compensation through participation in a bonus pool and equity distributions.
ClariVest seeks to compensate portfolio managers in a manner commensurate with their responsibilities, contributions and performance, and that is competitive with other firms within the investment management industry. Salaries, bonuses, and distributions are also influenced by the operating performance of ClariVest.
Bonuses are based on a variety of factors, including overall profitability of the firm as well as individual contribution to the firm. Bonuses are not simply tied to individual product performance. ClariVest believes that payment of bonuses based on short-term performance is counterproductive to the environment at ClariVest. All members of the investment team are expected to actively participate in ongoing research, some of which may not primarily benefit the product on which they are the named portfolio manager. Bonuses based on short-term individual performance would not incentivize investment team members to do so. The firm's overall annual cash bonus pool is typically based on a fixed percentage of pre-bonus operating income.
ClariVest believes that equity ownership in the firm (or the potential for such) is a tool for both attracting and retaining employees. Currently, one of the portfolio managers for the Public Alternatives Fund is an equity owner in the firm.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Todd Wolter, CFA None (Cornerstone Advisors Public Alternatives Fund) Michael Waterman, CFA None (Cornerstone Advisors Public Alternatives Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Public Alternatives Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Todd Wolter, CFA 2 $ 161 2 $ 30.9 10 $ 653
0 $ 0 1* $ 3.72 0 $ 0
Michael Waterman, CFA 2 $ 161 2 $ 30.9 9 $ 651
0 $ 0 1* $ 3.72 0 $ 0
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Because portfolio managers may manage multiple accounts for multiple clients, conflicts of interest may arise in connection with a portfolio manager's management of the Public Alternatives Fund's investments, on the one hand, and the investments of other accounts or vehicles on the other hand. For example, a portfolio manager may have conflicts of interest in allocating management time, resources and investment opportunities among the Public Alternatives Fund and the other accounts or vehicles he manages. In addition, due to differences in the investment strategies or restrictions between the Public Alternatives Fund and the other accounts or vehicles, a portfolio manager may take action with respect to another account or vehicle that differs from the action taken with respect to the Public Alternatives Fund. In some cases, another account managed by a portfolio manager may compensate the investment adviser based on the performance of the securities held by that account or otherwise provide more revenue to the investment adviser. While these factors may create conflicts of interest for a portfolio manager in the allocation of management time, resources and investment opportunities, the portfolio managers will endeavor to exercise their discretion in a manner that they believe is equitable to all interested persons.
CORNERSTONE ADVISORS, INC.
COMPENSATION. Portfolio managers are compensated via base salary and bonus. The cash bonus incentive is currently a company-wide bonus opportunity tied to firm revenues and allocated as a percentage of annual base salary.
OWNERSHIP OF FUND SHARES. The Funds are required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Funds as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1)
Paul W. Pedalino, CFA $10,001 - $50,000 (Cornerstone Advisors Global Public Equity Fund)
$1 - $10,000 (Cornerstone Advisors Income Opportunities Fund)
$1 - $10,000 (Cornerstone Advisors Public Alternatives Fund)
$1 - $10,000 (Cornerstone Advisors Real Assets Fund)
Michael G. Hughes, CFA, CAIA $100,001 - $500,000 (Cornerstone Advisors Global Public Equity Fund)
$10,001 - $50,000 (Cornerstone Advisors Income Opportunities Fund)
$100,001 - $500,000 (Cornerstone Advisors Public Alternatives Fund)
$10,001 - $50,000 (Cornerstone Advisors Real Assets Fund)
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(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity, Income Opportunities, Public Alternatives and Real Assets Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF NUMBER OF NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS (IN THOUSANDS)
---------------------------------------------------------------------------------------------------------
Paul W. Pedalino, CFA 0 $ 0 1 $ 25,681 0 $ 0
Michael G. Hughes, 0** $ 0 12** $ 250,039 342** $ 1,089,579
CFA, CAIA
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** Chief Investment Officer, Mike Hughes, is responsible for total firm asset strategies/accounts.
None of the accounts listed above is subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Cornerstone's portfolio managers' management of other accounts may give rise to potential conflicts of interest in connection with their management of the Funds' investments, on the one hand, and the investments of the other accounts, on the other. The other accounts might have similar investment objectives as the Funds or hold, purchase or sell securities that are eligible to be held, purchased or sold by the Funds. While the portfolio managers' management of other accounts may give rise to the following potential conflicts of interest, Cornerstone does not believe that the conflicts, if any, are material or, to the extent any such conflicts are material, Cornerstone believes that it has designed policies and procedures to manage those conflicts in an appropriate way.
A potential conflict of interest may arise as a result of Cornerstone's portfolio managers' day-to-day management of the Funds. Because of their positions with the Funds, the portfolio managers may know the size, timing and possible market impact of Fund trades. It is theoretically possible that the portfolio managers could use this information to the advantage of other accounts they manage and to the possible detriment of the Funds. However, Cornerstone has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.
CRAMER ROSENTHAL MCGLYNN LLC
Cramer Rosenthal McGlynn LLC ("CRM"), 520 Madison Avenue, 20th Floor, New York, New York 10022, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. CRM, a Delaware limited liability company, was established in 1973. WT Investments, Inc., a subsidiary of Wilmington Trust Corporation, owns 79.45% of CRM. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. As of December 31, 2012, CRM had approximately $13.5 billion in assets under management.
COMPENSATION. CRM receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between CRM and the Adviser.
CRM's portfolio managers are generally responsible for multiple accounts with similar investment strategies. For example, the managers of CRM's mid cap value investment strategy are responsible for investment decisions for registered investment companies and separately-managed institutional accounts that pursue a mid cap value investment strategy. Portfolio managers are compensated on portfolio management of the aggregate group of similar accounts rather than for a specific account.
The compensation package for portfolio managers consists of several components:
base pay, annual incentive and long-term incentive. The base pay program
provides a level of base pay that is competitive with the marketplace and
reflects a portfolio manager's contribution to CRM's success. The annual
incentive plan provides cash bonuses dependent on portfolio performance and
individual contributions. The most significant portion of the bonus is
determined based on the aggregate portfolio pre-tax performance results over
one, two and three year periods relative to peer groups and benchmarks, and the
remaining portion is based on certain qualitative factors discussed below.
For purposes of determining a portfolio manager's bonus, the appropriate strategy benchmark is used. The benchmark used to determine the bonuses of the portfolio managers of the Mid Cap Value Fund is the Russell Midcap Value Index. Bonuses for portfolio managers vary depending on the scope of accountability and experience level of the individual portfolio manager. An individual's bonus is based upon relative performance of his or her assigned portfolios compared to a peer group and benchmark and is generally geared to rewarding top quartile performance on a trailing three-year basis. Qualitative factors such as leadership, teamwork and overall contribution made during the year are also considered.
OWNERSHIP OF FUND SHARES. The Global Public Equity Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act").
NAME DOLLAR RANGE OF FUND SHARES OWNED(1)
Robert Rewey III None (Cornerstone Advisors Global Public Equity Fund)
Jay Abramson None (Cornerstone Advisors Global Public Equity Fund)
Thad Pollock None (Cornerstone Advisors Global Public Equity Fund)
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(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Robert Rewey III 2 $ 501.7 0 $ 0 155 $ 5,871
Jay Abramson 2 $ 503 2 $ 356 155 $ 5,871
Thad Pollock 0 $ 501.7 0 $ 0 52 $ 2,143
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None of the accounts listed above is subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. CRM has established written policies and procedures relating to trade allocation and aggregation, which provide for equitable treatment of all clients when aggregating or "bunching" orders and allocating trades among client accounts, including across the long only and long/short products. According to these policies, allocations must never be based on account performance or on performance -based versus assets managed-based fees. A pre-trade allocation sheet is also developed. In instances where a manager for a long/short product decides to sell short a security that may be held in a long product and recognizing that such a situation could appear to be a conflict, CRM will take the following steps: (i) when a long/short manager submits a transaction to the trading desk in a security that is held in a long account, trading personnel shall immediately notify such manager that the security is held on behalf of client accounts; and (ii) the manager for long/short will communicate directly with the manager for the product(s) holding stock such that the long manager is aware of the action and that an investment basis exists that explains the divergence in the stock selection (e.g., time horizon).
DRIEHAUS CAPITAL MANAGEMENT LLC
Driehaus Capital Management LLC ("Driehaus"), 25 East Erie Street, Chicago, Illinois 60611, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Driehaus, a Delaware limited liability company established in 1982, is controlled by Richard H. Driehaus. The principal nature of Mr. Driehaus' business is investment advisory and distribution services. As of December 31, 2012, Driehaus had approximately $8.685 billion in assets under management.
COMPENSATION. Driehaus receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between Driehaus and the Adviser.
Each portfolio manager and assistant portfolio manager is paid a fixed salary plus a bonus. They each receive bonuses that are based on a percentage of management fees paid by the accounts managed. In addition, if the performance of certain accounts exceeds certain percentile benchmarks when compared to peer groups (using Lipper rankings), they each earn a specified additional percentage of the management fees paid by the accounts. They also each receive a bonus based on a percentage of any performance-based fees paid by the accounts, if applicable. Messrs. Cleaver and Carpenter also receive a bonus based on a percentage of their salary, which has both subjective and objective components.
If Driehaus declares a profit sharing plan contribution, the portfolio managers and assistant portfolio managers also would receive such contribution. Each portfolio manager and assistant portfolio manager is eligible to participate in an equity purchase plan available to certain key employees of Driehaus. Messrs. Schwab, Cleaver and Mouser are also eligible to participate in a deferred compensation plan.
OWNERSHIP OF FUND SHARES. The Global Public Equity Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Howard Schwab None (Cornerstone Advisors Global Public Equity Fund) Chad Cleaver, CFA None (Cornerstone Advisors Global Public Equity Fund) David Mouser None (Cornerstone Advisors Global Public Equity Fund) Ryan Carpenter None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Howard Schwab 3 $ 1,183.5 0 $ 0 9 $ 559.1
0 $ 0 0 $ 0 3* $ 251.6
Chad Cleaver, CFA 2 $ 954.2 0 $ 0 3 $ 163.7
0 $ 0 0 $ 0 2* $ 82.7
David Mouser 1 $ 229.2 0 $ 0 6 $ 395.3
0 $ 0 0 $ 0 1* $ 168.9
Ryan Carpenter 1 $ 229.2 1 $ 47.7 8 $ 431.1
0 $ 0 0 $ 0 2* $ 187
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. As shown in the table above, the portfolio managers may manage the assets of more than one registered investment company, other pooled investment vehicles and/or other accounts (collectively, the "Accounts") for Driehaus. Both clients and affiliated persons of Driehaus, including the portfolio managers, may own interests in these Accounts. The same or related securities may be appropriate and desirable investments for both the Global Public Equity Fund and the Accounts (including another fund) and they may compete in the marketplace for the same investment opportunities, which may be limited. In addition, transactions by the Accounts in securities held by the Global Public Equity Fund or that the Global Public Equity Fund is seeking to buy or sell (or transactions in related securities) may have an adverse impact on the prices that the Global Public Equity Fund pays for those securities or can realize upon sale, or on the ability of Driehaus to buy or sell the desired amount of such securities for the Global Public Equity Fund at favorable prices. This is particularly true when the Accounts' transactions occur at a point in time close to when trades in the same or related securities are effected for the Global Public Equity Fund. This presents a conflict between the interests of the Global Public Equity Fund and the interests of the Accounts as well as the affiliates of Driehaus who invest in the Accounts.
Conflicts also may arise between the interests of the Global Public Equity Fund and the interests of Driehaus and its affiliates, including the portfolio managers. These conflicts can occur as one or more of the Accounts pay advisory fees to Driehaus, including performance-based compensation, at a higher rate than the rate of fees paid by the Global Public Equity Fund. In addition, Driehaus' affiliates, including the Global Public Equity Fund's portfolio managers, may personally own interests in the Accounts or have other financial incentives (including that a portfolio manager's compensation is based, in part, on assets under management). For example, portfolio managers could favor an Account
over the Global Public Equity Fund when dividing their time and attention between them or when presented with limited investment opportunities that would be desirable and suitable for both the Global Public Equity Fund and the Accounts or when making trading decisions.
Driehaus, through trade allocation and other policies and procedures, seeks to manage these conflicts of interest to reduce any adverse effects on either the Global Public Equity Fund or the Accounts. These policies and procedures include requirements that transactions by the Global Public Equity Fund and the Accounts in the same securities that occur on the same day are average priced when feasible and allocated on a fair and equitable basis. In addition, Driehaus conducts periodic reviews of transactions in and holdings of the same or related securities by the Global Public Equity Fund and the Accounts for compliance with Driehaus' policies and procedures.
FAIRPOINTE CAPITAL LLC
Fairpointe Capital LLC ("Fairpointe"), One N. Franklin Street, Suite 3300, Chicago, Illinois 60606, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Fairpointe, a Delaware limited liability company established in 2011, is 100% employee owned. As of December 31, 2012, Fairpointe had $3.9 billion in assets under management.
COMPENSATION. Fairpointe receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between Fairpointe and the Adviser.
Mses. Zerhusen, Lorden and Pierson are principals in the business of Fairpointe. Each receives a base salary and participates in the profits of Fairpointe. The majority of their compensation is tied to the success of Fairpointe.
OWNERSHIP OF FUND SHARES. The Global Public Equity Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Thyra Zerhusen None (Cornerstone Advisors Global Public Equity Fund) Marie Lorden None (Cornerstone Advisors Global Public Equity Fund) Mary Pierson None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Thyra Zerhusen 2 $ 3,391 0 $ 0 11 $ 312
Marie Lorden 2 $ 3,391 0 $ 0 11 $ 312
Mary Pierson 2 $ 3,391 0 $ 0 11 $ 312
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None of the accounts listed above is subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. The portfolio managers manage multiple accounts, including the Global Public Equity Fund. The portfolio managers make investment decisions for each account based on the investment objectives, polices and other relevant investment consideration that the portfolio managers believe are applicable to each account. Such actions may be taken for one account and not another and may result in varying holding and performance among clients. Fairpointe has adopted policies and procedures designed to prevent conflicts among multiple accounts, although there can be no assurance that such policies and procedures will adequately address such conflicts.
HARRIS ASSOCIATES L.P.
Harris Associates L.P. ("Harris"), Two North LaSalle Street, Suite 500, Chicago, Illinois, 60602-3790, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Harris, a Delaware limited partnership, is managed by its general partner, Harris Associates, Inc. ("HAI"). Harris and HAI are wholly owned subsidiaries of Natixis Global Asset Management, L.P., which is an indirect subsidiary of Natixis Global Asset Management U.S. ("NGAM"). NGAM is part of Natixis Global Asset Management. As of December 31, 2012, Harris had approximately $76 billion in assets under management.
Each of the portfolio managers of the Global Public Equity Fund are compensated solely by Harris. Compensation for each of the portfolio managers is based on Harris' assessment of the individual's long-term contribution to the investment success of Harris and is structured as follows:
1) Base salary. The base salary is a fixed amount, and each portfolio manager receives the same base salary.
2) Participation in a discretionary bonus pool. A discretionary bonus pool for each of the Harris domestic and international investment groups is divided among the senior level employees of each group and is paid annually.
3) Participation in a long-term compensation plan that provides current compensation to certain key employees of Harris and deferred compensation to both current and former key employees. The compensation plan consists of bonus units awarded to participants that vest and pay out over a period of time.
The determination of the amount of each portfolio manager's participation in the discretionary bonus pool and the long-term compensation plan is based on a variety of qualitative and quantitative factors. The factor given the most significant weight is the subjective assessment of the individual's contribution to the overall investment results of Harris' domestic or international investment group, whether as a portfolio manager, a research analyst, or both.
The quantitative factors considered in evaluating the contribution of a portfolio manager include the performance of the portfolios managed by that individual relative to benchmarks, peers and other portfolio managers, as well as the assets under management in the accounts managed by the portfolio manager. The portfolio managers' compensation is not based solely on an evaluation of performance or the amount of assets under management. Performance is measured in a number of ways, including by accounts and by strategy, and is compared to one or more of the following benchmarks: S&P 500, Russell Mid-Cap Value, Russell 1000 Value, Lipper Balanced, 60/40 S&P/Barclays Capital (60% S&P 500 and 40% Barclays Capital Bond Index), Morgan Stanley Capital International ("MSCI") World Index, MCSI World ex-U.S. Index and Harris' approved lists of stocks, depending on whether the portfolio manager manages accounts in the particular strategy to which these benchmarks would be applicable. Performance is measured over shorter- and longer-term periods, including one year, three years, five years, ten years, since inception or since a portfolio manager has been managing the assets, as applicable. Performance is measured on a pre-tax and after-tax basis to the extent such information is available.
If a portfolio manager also serves as a research analyst, then his or her compensation is also based on the contribution made to Harris in that role. The specific quantitative and qualitative factors considered in evaluating a research analyst's contributions include, among other things, new investment ideas, the performance of investment ideas covered by the analyst during the current year as well as over longer-term periods, the portfolio impact of the analyst's investment ideas, other contributions to the research process and an assessment of the quality of analytical work. In addition, an individual's other contributions to Harris, such as a role in investment through leadership and management of the firm, are taken into
account in the overall compensation process.
OWNERSHIP OF FUND SHARES. The Global Public Equity Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) David Herro, CFA None (Cornerstone Advisors Global Public Equity Fund) William Nygren, CFA None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
David Herro 9 $ 15,800 15 $ 4,100 28 $ 5,670
William Nygren, CFA 4 $ 10,600 0 $ 0 2 $ 205
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None of the accounts listed above is subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Conflicts of interest may arise in the allocation of investment opportunities and the allocation of aggregated orders among the Global Public Equity Fund and the other accounts managed by the portfolio managers. A portfolio manager potentially could give favorable treatment to some accounts for a variety of reasons, including favoring larger accounts, accounts that have a different advisory fee arrangement (including any accounts that pay performance-based fees), accounts of affiliated companies, or accounts in which the portfolio manager has a personal investment. With respect to the allocation of investment opportunities, Harris makes decisions to recommend, purchase, sell or hold securities for all of its client accounts, including the Global Public Equity Fund, based on each account's specific investment objectives, guidelines, restrictions and circumstances. It is Harris' policy to allocate investment opportunities to each account, including the Global Public Equity Fund, over a period of time on a fair and equitable basis relative to its other accounts. With respect to the allocation of aggregated orders, each account that participates in an aggregated order will participate at the average share price, and where the order has not been completely filled, each institutional account, including the Global Public Equity Fund, will generally participate on a pro rata basis. Harris has compliance policies and procedures in place that it believes are reasonably designed to mitigate these conflicts. However, there is no guarantee that such procedures will detect each and every situation in which an actual or potential conflict may arise.
KAYNE ANDERSON CAPITAL ADVISORS, L.P.
Kayne Anderson Capital Advisors, L.P. ("KACALP"), 1800 Avenue of the Stars, Third Floor, Los Angeles, California, 90067, serves as investment sub-adviser to a portion of the assets of the Real Assets Fund. KACALP, a California limited partnership established in 1984, is entirely owned by its investment professionals and management. As of December 31, 2012, KACALP had approximately $18 billion in assets under management.
COMPENSATION. KACALP receives a fee based on the assets under management of the Real Assets Fund as set forth in the Investment Sub-Advisory Agreement between KACALP and the Adviser. The portfolio manager and general partner (KACALP) split management fees and performance fees after expenses, including analyst salaries, allocated overhead and commissions.
OWNERSHIP OF FUND SHARES. The Real Assets Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) John (J.C.) Frey None (Cornerstone Advisors Real Assets Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Real Assets Fund, the portfolio manager is responsible for the day-today management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES(1) INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
John (J.C.) Frey 4 $ 6,826 10 $ 2,457 12 $ 889
4* $ 6,826 10* $ 2,457 2* $ 24
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1 Includes four closed-end funds managed by KA Fund Advisors, LLC, an affiliated registered investment adviser of KACALP.
* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. The results of the investment activities of the Real Assets Fund may differ significantly from the results achieved by KACALP for other client accounts. KACALP will manage the assets of a client in accordance with the investment mandate of the applicable fund or as selected by such client. However, because of differing guidelines, risk profiles, timing issues and other possible considerations, KACALP may give advice, and take action, with respect to a client account, that may differ from the advice KACALP may give to, or an investment action KACALP may take on behalf of, another client account. KACALP generally receives a performance-based or incentive fee or allocation in its pooled vehicles and separate accounts. All such arrangements conform to Section 205(a)(1) of the Investment Advisers Act of 1940. In measuring clients' assets for the calculation of performance-based fees, in KACALP's redeemable funds (funds where capital contributions and withdrawals are permitted at stated intervals at then-current net asset values), KACALP includes realized and unrealized capital gains and losses. KACALP's redeemable fund fee arrangements may create an incentive to favor higher potential fee paying accounts over other accounts in the allocation of investment opportunities. Similarly, KACALP or its affiliates or employees may have a significant proprietary investment in a fund or account, and KACALP may have an incentive to favor such fund or account to the detriment of other funds or accounts. KACALP's procedures are designed to ensure that all investment decisions are made without consideration of KACALP's (or its affiliates' or employees') pecuniary interest but, instead, in accordance with KACALP's fiduciary duties to its clients.
LSV ASSET MANAGEMENT
LSV Asset Management ("LSV"), 155 North Wacker Drive, Suite 4600, Chicago, Illinois 60606, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. LSV is organized as a Delaware general partnership. Its employees own approximately 60% of the firm, while SEI Investments owns approximately 40%.
As of the December 31, 2012, LSV had approximately $65 billion in assets under management.
COMPENSATION. LSV receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between LSV and the Adviser.
LSV compensates the portfolio managers for their management of the Global Public Equity Fund. The portfolio managers' compensation consists of a salary and discretionary bonus. Each of the portfolio managers is a partner of LSV and thereby receives a portion of the overall profit of the firm as part of his ownership interests. The bonus is based upon the profitability of the firm and individual performance. Individual performance is subjective and may be based on a number of factors, such as the individual's leadership and contribution to the strategic planning and development of the investment group.
OWNERSHIP OF FUND SHARES. The Global Public Equity Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Josef Lakonishok, Ph.D. None (Cornerstone Advisors Global Public Equity Fund) Menno Vermeulen, CFA None (Cornerstone Advisors Global Public Equity Fund) Puneet Mansharamani, CFA None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Josef Lakonishok, Ph.D. 29 $ 8,250 44 $ 10,500 410 $ 44,000
0 $ 0 6* $ 568 29* $ 6,500
Menno Vermeulen, CFA 29 $ 8,250 44 $ 10,500 410 $ 44,000
0 $ 0 6* $ 568 29* $ 6,500
Puneet Mansharamani, CFA 29 $ 8,250 44 $ 10,500 410 $ 44,000
0 $ 0 6* $ 568 29* $ 6,500
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. LSV's portfolio managers' management of other accounts may give rise to potential conflicts of interest in connection with their management of the Global Public Equity Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Global Public Equity Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby a portfolio manager could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of Global Public Equity Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Global Public Equity Fund. In addition, it is also possible that a potential conflict of interest may arise because a portfolio
manager manages an account with a performance-based management fee in addition to the Global Public Equity Fund and other accounts without a performance-based fee, and accounts in which employees may be invested. However, LSV has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
MARSICO CAPITAL MANAGEMENT, LLC
Marsico Capital Management, LLC ("Marsico"), 1200 17th Street, Suite 1600, Denver, Colorado 80202, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Marsico is a Delaware limited liability company established in 1997. Marsico Group, LLC ("Marsico Group"), a company controlled by employees of Marsico and their family interests, holds 100% of the voting rights and 38% of all common equity interests in another company, Marsico Holdings, LLC ("Marsico Holdings"), which in turn indirectly owns 100% of all common equity interests in Marsico. Marsico Group retains complete voting control over matters pertaining to the ongoing management and day-today operations of Marsico through its control of the managing member of Marsico Holdings. As of December 31, 2012, Marsico had approximately $26.8 billion in assets under management.
COMPENSATION. Marsico receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between Marsico and the Adviser.
The compensation package for portfolio managers of Marsico is structured as a combination of base salary and periodic cash bonuses. Bonuses are typically based on two primary factors: (1) Marsico's overall profitability for the period, and (2) individual efforts and achievements and other contributions benefitting the firm and/or clients. Base salaries may also be adjusted upward or downward based on those factors. No other special employee incentive arrangements are currently in place or being planned.
Portfolio manager compensation takes into account, among other factors, the overall performance of all accounts for which the portfolio manager provides investment advisory services. In receiving compensation such as bonuses, portfolio managers do not receive special consideration based on the performance of particular accounts and do not receive compensation from accounts charging performance-based fees. In addition to salary and bonus, Marsico's portfolio managers may participate in other benefits such as health insurance and retirement plans on the same basis as other Marsico employees. Marsico's portfolio managers also may be offered the opportunity to acquire equity interests in the firm's parent company.
As a general matter, Marsico does not tie portfolio manager compensation to specific levels of performance relative to fixed benchmarks (e.g., S&P 500 Index). Although performance is a relevant consideration, comparisons with fixed benchmarks may not always be useful. Relevant benchmarks vary depending on specific investment styles and client guidelines or restrictions, and comparisons to benchmark performance may at times reveal more about market sentiment than about a portfolio manager's performance or abilities. To encourage a long-term horizon for managing client assets and concurrently minimizing potential conflicts of interest and portfolios risks, Marsico evaluates a portfolio manager's performance over periods longer than the immediate compensation period, and may consider a variety of measures in determining compensation, such as the performance of unaffiliated mutual funds or other portfolios having similar strategies as well as other measurements. Other factors that may be significant in determining portfolio manager compensation include, without limitation, the effectiveness of the manager's leadership within Marsico's investment management team, contributions to Marsico's overall performance, discrete securities analysis, idea generation, the ability and willingness to support and train other analysts, and other considerations.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Thomas F. Marsico None (Cornerstone Advisors Global Public Equity Fund) James G. Gendelman None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Thomas F. Marsico 27 $ 13,647 11 $ 1,514 78* $ 6,672
James G. Gendelman 15 $ 2,616 0 $ 0 8 $ 425
|
* 1 of the accounts is a wrap fee platform, which includes approximately 2,962 underlying clients for total assets of approximately $817 million; 3 of the accounts represent model portfolios for total assets of approximately $1,677 million.
None of the accounts listed above is subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. A portfolio manager may manage accounts for other clients. These accounts may include registered investment companies, other types of pooled accounts (e.g., collective investment funds) and separate accounts (i.e., accounts managed on behalf of individuals or public or private institutions). Portfolio managers of Marsico make investment decisions for each account based on the investment objectives and policies and other relevant investment considerations applicable to that account. The management of multiple accounts may result in a portfolio manager devoting unequal time and attention to the management of each account. Although Marsico does not track the time a portfolio manager spends on a single portfolio, it does assess whether a portfolio manager has adequate time and resources to effectively manage all of the accounts for which he is responsible. Marsico seeks to manage competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline or complementary investment disciplines. Accounts within a particular investment discipline may often be managed by using generally similar investment strategies, subject to factors including particular account restrictions and objectives, account opening dates, cash flows and other considerations. Even where multiple accounts are managed by the same portfolio manager within the same investment discipline, however, Marsico may take action with respect to one account that may differ from the timing or nature of action taken with respect to another account because of different investment platforms, account types, opening or funding dates, cash flows, client-specific objectives or restrictions or for other reasons. Accordingly, the performance of each account managed by a portfolio manager will vary.
Potential conflicts of interest may also arise when allocating and/or aggregating trades. Marsico often aggregates into a single trade order several individual contemporaneous client trade orders in a single security. Under Marsico's trade management policy and procedures, when trades are aggregated on behalf of more than one account, such transactions will be allocated to participating client accounts in a fair and equitable manner. With respect to initial public offerings and other syndicated or limited offerings, it is Marsico's policy to seek to ensure that over the long term, accounts with the same or similar investment objectives or strategies will receive an equitable opportunity to participate meaningfully in such offerings and will not be unfairly disadvantaged. Consistent with this approach, Marsico has adopted policies and procedures for allocating transactions fairly across multiple accounts. Marsico's policies also seek to ensure that portfolio managers do not systematically allocate other types of trades in a manner that would be more beneficial to one account than another. Marsico's compliance department monitors transactions made on behalf of multiple clients to seek to ensure adherence to its policies.
OFI STEELPATH, INC.
OFI SteelPath, Inc. ("OFI SteelPath"), 2100 McKinney Avenue, Suite 1401, Dallas, TX 75201, serves as investment sub-adviser to the Cornerstone Advisors Income Opportunities Fund. OFI SteelPath is a successor to SteelPath Capital Management, LLC and SteelPath Fund Advisors, LLC, which were established in 2004. OFI SteelPath is a wholly-owned subsidiary of Oppenheimer Funds, Inc., and also advises individuals, financial institutions, private equity funds and other pooled investment vehicles. As of December 31, 2012, OFI SteelPath had approximately $3.2 billion in assets under management.
COMPENSATION. OFI SteelPath receives a fee based on the assets under management of the Income Opportunities Fund as set forth in the Investment Sub-Advisory Agreement between OFI SteelPath and the Adviser.
All investment professionals at OFI SteelPath receive competitive base salaries commensurate with their experience and roles. In addition, they receive discretionary bonuses that are determined based on a number of factors including investment performance, firm profitability and performance of duties. The firm's partnership structure helps to attract and retain superior individuals.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Gabriel Hammond None (Cornerstone Advisors Income Opportunities Fund) Stuart Cartner None (Cornerstone Advisors Income Opportunities Fund) Brian Watson None (Cornerstone Advisors Income Opportunities Fund) |
(1) Valuation date is December 31, 2012.
OTHER ACCOUNTS. In addition to the Income Opportunities Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of December 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Gabriel Hammond 5 $ 2,355 3 $ 355 136 $ 378
Stuart Cartner 5 $ 2,355 3 $ 355 136 $ 378
Brian Watson 5 $ 2,355 3 $ 355 136 $ 378
|
None of the accounts above is subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Real, potential or apparent conflicts of interest may arise when a portfolio manager has day-to-day portfolio management responsibilities with respect to more than one fund. The portfolio managers may manage other accounts with investment strategies similar to the Income Opportunities Fund, including other pooled investment vehicles and separately managed accounts. Fees earned by OFI SteelPath may vary among these accounts, and the portfolio managers may personally invest in these accounts. These factors could create conflicts of interest because portfolio managers have potential incentives to favor certain accounts over others (including the Income Opportunities Fund), which could result in other accounts outperforming the Income Opportunities Fund.
A conflict may also exist if the portfolio managers identify a limited investment opportunity that may be appropriate for more than one account, but the Income Opportunities Fund is not able to take full advantage of that opportunity because of the need to allocate that opportunity among multiple accounts. If a limited opportunity is appropriate for all of the funds, OFI SteelPath will allocate the opportunity among the funds based on the average assets in each class of shares. In addition, the portfolio managers may execute transactions for another account that may adversely affect the value of securities held by the Income Opportunities Fund. However, OFI SteelPath believes that these risks are mitigated by the fact that accounts with like investment strategies managed by the portfolio managers are generally managed in a similar fashion and that OFI SteelPath has a policy that seeks to allocate opportunities on a fair and equitable basis.
OFI SteelPath and the portfolio managers may carry on investment activities for their own accounts and for those of their families and other clients in which the Income Opportunities Fund has no interest, and thus may have certain additional conflicts of interest. In addition, OFI SteelPath may act as the investment advisor to accounts pursuing a range of traditional and alternative investment strategies. As a consequence of managing multiple investment products with varying investment programs, securities may be purchased or sold for some accounts but not others, and securities that are being sold for some accounts may be purchased for others. Factors that could lead to differences in trading decisions for various investment strategies include, among others, in the case of conflicting positions: differing portfolio manager analyses, different investment horizons, implementation of a particular hedging strategy and differing desired market exposures. When making allocations, portfolio managers may also consider a number of factors, such as cash flow situations, tax considerations, different investment horizons and different investment strategies. All portfolio managers are aware that trades may not be made in one client account for the purpose of benefiting another client account. Investment decisions must be made only on the basis of the investment considerations relevant to the particular account for which a trade is being made.
OFI SteelPath has adopted a Code of Ethics, among other policies and procedures, that seek to ensure that clients' accounts are not harmed by potential conflicts of interests. OFI SteelPath also has procedures to assure that fair and appropriate allocation of investments purchased and sold is made among all clients.
PARAMETRIC PORTFOLIO ASSOCIATES LLC
Parametric Portfolio Associates LLC ("Parametric"), 1918 Eighth Avenue, Suite 3100, Seattle, Washington 98101, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Parametric is 93% owned by Eaton Vance Corporation, a Boston-based investment management firm, and is 7% owned by Parametric's executives and employees. As of December 31, 2012, Parametric had approximately $91.7 billion in assets under management.
COMPENSATION. Parametric receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between Parametric and the Adviser.
EMPLOYEE COMPENSATION. Compensation of Parametric's portfolio managers and
other investment professionals has three primary components: (i) a base salary;
(ii) an annual cash bonus; and (iii) annual stock-based compensation consisting
of options to purchase shares of Parametric's parent company, Eaton Vance
Corporation's ("EV") nonvoting common stock, restricted stock in EV and profit
units that participate in the earnings and equity growth of Parametric.
Parametric's investment professionals also receive certain retirement,
insurance and other benefits that are broadly available to Parametric
employees. Compensation of Parametric's investment professionals is reviewed
primarily on an annual basis. Stock-based compensation awards and adjustments
in base salary and bonus are typically paid and/or put into effect at or
shortly after Parametric's October 31 fiscal year end.
METHOD TO DETERMINE EMPLOYEE COMPENSATION. Parametric seeks to compensate portfolio managers commensurate with their responsibilities and performance and remain competitive with other firms within the investment management industry. The performance of portfolio managers is evaluated primarily based on success in achieving portfolio objectives for managed funds and accounts. The compensation of portfolio managers with other job responsibilities (such as product
development) will include consideration of the scope of such responsibilities and the managers' performance in meeting them. Salaries, bonuses and stock-based compensation are also influenced by the operating performance of Parametric and EV. Cash bonuses are determined based on a target percentage of Parametric profits. While the base salaries of Parametric's portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate substantially from year to year based on changes in financial performance and other factors.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Thomas Seto None (Cornerstone Advisors Global Public Equity Fund) David Stein, Ph.D. None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Thomas Seto 20 $ 12,183 2 $ 1,452 13,969 $ 36,095
0 $ 0 0 $ 0 2* $ 1,071
David Stein, Ph.D. 20 $ 12,183 2 $ 1,452 13,969 $ 36,095
0 $ 0 0 $ 0 2* $ 1,071
|
* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Parametric's portfolio managers' management of other accounts may give rise to potential conflicts of interest in connection with their management of the Global Public Equity Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts include other investment company accounts and separately managed accounts. The other accounts might have similar investment objectives as the Global Public Equity Fund or hold, purchase or sell securities that are eligible to be held, purchased or sold by the Global Public Equity Fund. While the portfolio managers' management of other accounts may give rise to potential conflicts of interest, Parametric does not believe that the conflicts, if any, are material or, to the extent any such conflicts are material, Parametric believes that it has designed policies and procedures to manage those conflicts in an appropriate way.
PHOCAS FINANCIAL CORPORATION
Phocas Financial Corporation ("Phocas"), 980 Atlantic Avenue, Suite 106, Alameda, California 94501, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. Phocas, a California corporation established in 2005, is employee-owned. As of December 31, 2012, Phocas had approximately $1.1 billion in assets under management.
COMPENSATION. Phocas receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between Phocas and the Adviser.
The portfolio managers are paid equal base salaries and equal portions of Phocas' net profits after bonuses are paid to staff who are not principals of Phocas.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) William Schaff None (Cornerstone Advisors Global Public Equity Fund) Stephen Block None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
William Schaff 6 $ 351.2 1 $ 34.6 28 $ 536.9
Stephen Block 5 $ 346.5 1 $ 34.6 128 $ 79.2
|
None of the accounts listed above is subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Phocas has no affiliates and does not manage any hedge funds or other products whose strategies may create conflicts of interest.
TCW INVESTMENT MANAGEMENT COMPANY
TCW Investment Management Company ("TIMCO"), 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. TIMCO, a California corporation established in 1987, is a wholly-owned subsidiary of TCW Group, Inc. Socioto Gonorale Holding de Participations may be deemed to be a control person of TIMCO by reason of its ownership of more than 25% of the outstanding voting stock of the TCW Group, Inc. Societe Generale Holding de Participations is a wholly-owned subsidiary of Societe Generale, S.A. As of December 31, 2012, TIMCO had approximately $29.15 billion in assets under management.
COMPENSATION. TIMCO receives a fee based on the assets under management of the Global Public Equity Fund as set forth in the Investment Sub-Advisory Agreement between TIMCO and the Adviser.
At TIMCO, the overall objective of the compensation program for portfolio managers is for TIMCO to attract what it considers competent and expert investment professionals and to retain them over the long-term. Compensation is comprised of several components, which, in the aggregate, are designed to achieve these objectives and to reward the portfolio managers for their contribution to the success of their clients and TIMCO and its affiliates within TIMCO's immediate parent, The TCW Group, Inc ("TCW"). Portfolio managers are compensated through a combination of base salary, profit sharing based compensation ("profit sharing"), bonus and equity incentive participation in TCW and/or TCW's ultimate parent, Societe Generale ("equity incentives"). Profit sharing and equity incentives generally represent
most of the portfolio managers' compensation. In some cases, portfolio managers are eligible for discretionary bonuses.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Chang Lee None (Cornerstone Advisors Global Public Equity Fund) Mike Olson None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of November 30, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Chang Lee 9 $ 1,139 10 $ 263 31 $ 1,627
0 $ 0 1* $ 23 3* $ 395
Mike Olsen 9 $ 1,139 10 $ 263 31 $ 1,627
0 $ 0 1* $ 23 3* $ 395
|
* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities to more than one account (including the Global Public Equity Fund), such as devotion of unequal time and attention to the management of the accounts, inability to allocate limited investment opportunities across a broad band of accounts and incentive to allocate opportunities to an account where the portfolio manager or TIMCO has a greater financial incentive, such as a performance fee account or where an account or fund managed by a portfolio manager has a higher fee sharing percentage than the portfolio manager's fee sharing percentage with respect to the Global Public Equity Fund. TIMCO has adopted policies and procedures reasonably designed to address these types of conflicts and TIMCO believes its policies and procedures serve to operate in a manner that is fair and equitable among its clients, including the Global Public Equity Fund.
THORNBURG INVESTMENT MANAGEMENT INC
Thornburg Investment Management Inc. ("TIM"), 2300 North Ridgetop Road, Santa Fe, New Mexico 87506, serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund. TIM was incorporated in Delaware in 1982 and is an independent, employee-owned organization. As of December 31, 2012, thirty-six of the firm's professionals (approximately 15% of the firm's employees) share in the ownership of the firm, sixteen of whom are investment professionals. TIM has both voting and non-voting shares. Garrett Thornburg owns 100% of the voting shares and 39% of the non-voting shares, representing 39% of all equity interests. Other TIM employees, in aggregate, own 26% of the equity interests. The remaining 35% is held by employee family trusts and employee family members. As of December 31, 2012, TIM had approximately $84 billion in assets under management.
COMPENSATION. TIM receives a fee based on the assets under management of the Global Public Equity Fund as set forth in
the Investment Sub-Advisory Agreement between TIM and the Adviser.
TIM compensates the portfolio managers for their management of the Global Public Equity Fund. The compensation for each portfolio manager includes an annual salary, annual bonus and company-wide profit sharing. The portfolio managers also own equity shares in TIM. Both the salary and bonus are reviewed approximately annually for comparability with salaries of other portfolio managers in the industry, using survey data obtained from compensation consultants. The annual bonus is subjective. Criteria that are considered in formulating the bonus include, but are not limited to, the following: revenues available to pay compensation of the portfolio manager and all other expenses related to supporting the accounts managed by the portfolio manager, including the Global Public Equity Fund; multiple year historical total return of accounts managed by the portfolio manager, including the Global Public Equity Fund, relative to market performance and similar investment companies; single year historical total return of accounts managed by the portfolio manager, including the Global Public Equity Fund, relative to market performance and similar investment companies; and the degree of sensitivity of the portfolio manager to potential tax liabilities created for account holders in generating returns, relative to overall return. There is no material difference in the method used to calculate the portfolio manager's compensation with respect to the Global Public Equity Fund and other accounts managed by the portfolio manager, except that certain accounts managed by the portfolio manager may have no income or capital gains tax considerations. To the extent that the portfolio manager realizes benefits from capital appreciation and dividends paid to shareholders of TIM, such benefits accrue from the overall financial performance of TIM.
OWNERSHIP OF FUND SHARES. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1) Brian J. McMahon None (Cornerstone Advisors Global Public Equity Fund) W. Vinson Walden, CFA None (Cornerstone Advisors Global Public Equity Fund) |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Brian J. McMahon 2 $ 11,560 6 $ 639 4 $ 788
0 $ 0 2* $ 543 0 $ 0
W. Vinson Walden, CFA 3 $ 682 5 $ 637 5 $ 789
0 $ 0 2* $ 543 0 $ 0
|
* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. Most investment advisors and their portfolio managers
manage investments for multiple clients, including mutual funds, private
accounts and retirement plans. In any case where a portfolio or co-portfolio
manager manages the investments of two or more accounts, there is a possibility
that conflicts of interest could arise between the portfolio manager's
management of the Global Public Equity Fund's investments and the portfolio
manager's management of other accounts. These conflicts could include: (i)
allocating a favorable investment opportunity to one account but not another;
(ii) directing one account to buy a security before purchases through other
accounts increase the price of the
security in the marketplace; (iii) giving substantially inconsistent investment directions at the same time to similar accounts, so as to benefit one account over another; and (iv) obtaining services from brokers conducting trades for one account, which are used to benefit another account. TIM has considered the likelihood that any material conflicts of interest could arise between a portfolio manager's management of the Global Public Equity Fund's investments and the portfolio manager's management of other accounts. TIM has not identified any such conflicts that may arise and has concluded that it has implemented policies and procedures to identify and resolve any such conflict if it did arise.
TURNER INVESTMENTS, L.P.
Turner Investments, L.P. ("Turner"), a Pennsylvania limited partnership, is located at 1205 Westlakes Drive, Suite 100, Berwyn, Pennsylvania 19312-2414 and serves as investment sub-adviser to a portion of the assets of the Global Public Equity Fund and the Public Alternatives Fund. Turner was founded in 1990 by Robert E. Turner, Mark D. Turner and Christopher K. McHugh and is an independent, 100% employee-owned investment management firm. As of December 31, 2012, Turner had approximately $10.7 billion in assets under management.
COMPENSATION. Turner receives a fee based on the assets under management of the Global Public Equity and Public Alternatives Funds as set forth in the Investment Sub-Advisory Agreement between Turner and the Adviser.
Turner's compensation program is designed to promote excellence, accountability and teamwork. Portfolio managers are compensated for superior investment results, not the level of assets in a strategy. The analyst role is compensated based upon the performance of individual stocks recommendations, within an industry specialty, that make it into a portfolio. A portion of investment professional bonus compensation is linked to a subjective teamwork and peer assessment. Merit bonuses are capped at a multiple of base salary, and performance targets are set and measured over multiple time periods to discourage undue risk in execution. Base salary, as well as the potential range of earnings for an individual, is benchmarked to the industry and to the individual's level of experience. Finally, all of Turner's investment professionals are principals of the firm and, as such, have a long-term vested interest in the success of all its investment strategies. Each employee has the opportunity to become an equity owner, which Turner believes is a key factor in promoting accountability and in attracting and retaining top-tier professionals within all areas of the firm.
OWNERSHIP OF FUND SHARES. The Global Public Equity and the Public Alternatives Funds are required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Funds as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
NAME DOLLAR RANGE OF FUND SHARES OWNED(1)
Christopher McHugh None (Cornerstone Advisors Global Public Equity Fund)
David Honold, Jr., CFA None (Cornerstone Advisors Public Alternatives Fund)
Frank Sustersic, CFA None (Cornerstone Advisors Public Alternatives Fund)
Jason Schrotberger, CFA None (Cornerstone Advisors Public Alternatives Fund)
Vijay Shankaran, MD, Ph.D. None (Cornerstone Advisors Public Alternatives Fund)
Christopher Baggini, CFA None (Cornerstone Advisors Public Alternatives Fund)
Donald Smith, CFA None (Cornerstone Advisors Public Alternatives Fund)
Matthew Glaser None (Cornerstone Advisors Public Alternatives Fund)
Joshua Kohn, CFA None (Cornerstone Advisors Public Alternatives Fund)
|
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Global Public Equity and Public Alternatives Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- --------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
PORTFOLIO MANAGER ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
---------------------------------------------------------------------------------------------------------
Christopher McHugh 6 $ 1,530 11 $ 179.02 15 $ 793.02
1* $ 23.22 1* $ 6.58 2* $ 305.96
David Honold, Jr., CFA 3 $ 162.34 1 $ 14.17 0 $ 0
0 $ 0 1* $ 14.17 0 $ 0
Frank Sustersic, CFA 6 $ 478.83 1 $ 12.37 3 $ 133.15
0 $ 0 1* $ 12.37 0 $ 0
Jason Schrotberger, CFA 4 $ 185.59 6 $ 47.52 4 $ 238.81
0 $ 0 1* $ 0.89 0 $ 0
Vijay Shankaran, MD, Ph.D. 5 $ 196.12 3 $ 41.55 1 $ 19.76
0 $ 0 3* $ 41.55 1* $ 19.76
Christopher Baggini, CFA 6 $ 402.23 1 $ 1.00 0 $ 0
0 $ 0 1* $ 1.00 0 $ 0
Donald Smith, CFA 2 $ 143.23 2 $ 2.43 1 $ 86.62
0 $ 0 2* $ 2.43 0 $ 0
Matthew Glaser 4 $ 200.15 2 $ 1.77 0 $ 0
0 $ 0 2* $ 1.77 0 $ 0
Joshua Kohn, CFA 2 $ 143.23 1 $ 1.23 0 $ 0
0 $ 0 1* $ 1.23 0 $ 0
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* These accounts, which are a subset of the accounts in the preceding row, are subject to a performance-based advisory fee.
CONFLICTS OF INTEREST. As is typical for many money managers, potential conflicts of interest may arise relating to Turner's management of accounts including the Global Public Equity and Public Alternatives Funds where not all accounts are able to participate in a desired IPO, or other limited opportunity; relating to use of soft dollars and other brokerage practices; relating to the voting of proxies; relating to employee personal securities trading; and relating to a variety of other circumstances. In all cases, however, Turner believes it has written policies and procedures in place reasonably designed to prevent violations of the federal securities laws and to prevent material conflicts of interest from arising.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Funds whereby the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $250 million
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0.10% $250 - $350 million
--------------------------------------------------------------------------------
0.08% $350 - $450 million
--------------------------------------------------------------------------------
0.06% $450 - $550 million
--------------------------------------------------------------------------------
0.05% Over $550 million
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The foregoing fee is applicable to each Fund and is subject to a minimum aggregate annual fee of $800,000 for the Funds.
o For each additional class of shares of a Fund established after the initial one (1) class of shares per Fund, the minimum annual fee will be increased by $15,000.
The fees outlined above will remain in place for a period of three (3) years.
During the fiscal period from August 30, 2012 to October 31, 2012, the Funds paid the following administration fees:
-------------------------------------------------------------------------------- FUND ADMINISTRATION FEES PAID -------------------------------------------------------------------------------- Cornerstone Advisors Global Public Equity Fund $67,714 -------------------------------------------------------------------------------- Cornerstone Advisors Income Opportunities Fund $14,900 -------------------------------------------------------------------------------- Cornerstone Advisors Public Alternatives Fund $38,018 -------------------------------------------------------------------------------- Cornerstone Advisors Real Assets Funds $15,040 -------------------------------------------------------------------------------- |
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"), whereby the Distributor acts as principal underwriter for the Trust's shares, including the shares of the Funds. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
SHAREHOLDER SERVICES
SHAREHOLDER SERVICING PLAN. The Funds have adopted a shareholder servicing plan (the "Service Plan") under which a shareholder servicing fee of up to 0.05% of average daily net assets of either Fund will be paid to other service providers. Under the Service Plan, other service providers may perform, or may compensate other service providers for performing certain shareholder and administrative services as discussed below.
DESCRIPTION OF SHAREHOLDER SERVICES. Shareholder services may include: (i) maintaining accounts relating to clients that invest in shares; (ii) arranging for bank wires; (iii) responding to client inquiries relating to the services performed by the services provider; (iv) responding to inquiries from clients concerning their investment in shares; (v) assisting clients in changing dividend options, account designations and addresses; (vi) providing information periodically to clients showing their position in shares; (vii) forwarding shareholder communications from the Fund such as proxies, shareholder reports, annual reports, and dividend distribution and tax notices to clients; and (viii) processing dividend payments from the Fund on behalf of clients.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates, as incentives to help market and promote the Funds and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Funds, the Distributor or shareholders of the Funds through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Funds in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Funds; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Funds by financial intermediaries customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Funds shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Funds' transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
Citibank, N.A., (the "Custodian"), serves as the custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP, serves as independent registered public accounting firm for the Funds. The financial statements with respect to the Funds for the fiscal period ended October 31, 2012, including notes thereto and the report of Deloitte & Touche LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review
such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, Jr., an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
---------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(08/17/46) performs various Bishop Street Funds, SEI Daily
(since 1991) services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd. and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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S-70
|
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
Consultant since 2003. Advisors' Inner Circle Fund II,
(05/26/40) (since 1991) Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust,
Administrator and the SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
Management (UK) Limited. Director
of the Distributor since 2003.
---------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
---------------------------------------------------------------------------------------------------------------
Charles E. Trustee Self-Employed Current Directorships: Trustee of The
Carlbom Business Consultant, Advisors' Inner Circle Fund II and
(since 2005) Business Projects Inc., Bishop Street Funds. Director of
(08/20/34) since 1997. Oregon Transfer Co.
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John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
Executive Officer, Advisors' Inner Circle Fund II and
(08/17/44) (since 2008) Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
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S-71
|
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of The
Jr. Consultant since Advisors' Inner Circle Fund II and
(since 2011) January 2012. Director Bishop Street Funds. Director of The
(05/28/52) of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
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Mitchell A. Trustee Retired. Private Current Directorships: Trustee of The
Johnson Investor since 1994. Advisors' Inner Circle Fund II,
(since 2005) Bishop Street Funds, SEI Asset
(03/01/42) Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
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Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
Compliance, AARP Advisors' Inner Circle Fund II and
(01/23/43) (since 2005) Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
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S-72
|
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
Allocation, Manulife Advisors' Inner Circle Fund II and
(02/12/56) (since 2011) Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
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James M. Storey Trustee Attorney, Solo Current Directorships:
Practitioner since 1994. Trustee/Director of The Advisors'
(04/12/31) (since 1994) Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
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S-73
|
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
---------------------------------------------------------------------------------------------------------------
George J. Trustee Retired since January Current Directorships: Trustee/
Sullivan, Jr. (since 1999) 2012. Self-employed Director of State Street Navigator
(11/13/42) Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II,
1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Funds as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Funds provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Funds, and to exercise their business judgment in a manner that serves the best interests of the Funds' shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business
experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a
whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
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INDEPENDENT TRUSTEES
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Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
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Krikorian None None
--------------------------------------------------------------------------------
Speca None None
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Storey None None
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Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
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AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
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INTERESTED TRUSTEES
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Doran $0 N/A N/A $0 for service on one (1) board
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Nesher $0 N/A N/A $0 for service on one (1) board
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INDEPENDENT TRUSTEES
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Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
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Darr $52,654 N/A N/A $52,654 for service on one (1) board
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Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Johnson $52,654 N/A N/A $52,654 for service on one (1) board
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Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
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Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Storey $52,654 N/A N/A $52,654 for service on one (1) board
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Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
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NAME AND POSITION WITH TRUST AND
DATE OF BIRTH LENGTH OF TERM PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
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Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
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Michael Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Lawson Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) (since 2005) Fund Accounting at SEI Investments AVP
from April 1995 to February 1998 and
November 1998 to July 2005.
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Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional
International Trust, SEI Institutional
Investments Trust, SEI Daily Income Trust,
SEI Liquid Asset Trust, SEI Tax Exempt
Trust, Adviser Managed Trust and New
Covenant Funds. Chief Compliance Officer of
SEI Opportunity Fund, L.P. until 2010.
Director of Investment Product Management
and Development, SEI Investments, since
February 2003; Senior Investment Analyst --
Equity Team, SEI Investments, from March
2000 to February 2003.
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Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and
Barto Secretary the Administrator since 2004. Vice President
(03/28/68) (since 1999) of SIMC and the Administrator since 1999.
Vice President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from
1999 to 2003.
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Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
(07/18/77) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
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John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
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Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
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PURCHASING AND REDEEMING SHARES
Shares of the Funds are offered exclusively to certain advisory clients of the Adviser. Shares of the Funds are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Funds in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Funds' securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Funds for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Funds adhere to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Funds' pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such
factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Funds and their shareholders that is intended to supplement the discussion contained in the Funds' prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussion here and in the Funds' prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
This general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Funds each intend to qualify and elect to be treated as a RIC. By following such a policy, each Fund expects to eliminate or reduce to a nominal amount the federal taxes to which they may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Funds as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the Code, each Fund must distribute at least 90% of its net investment income (which, includes dividends, taxable interest, and the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of each Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities, or foreign currencies, or certain other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stocks, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership (the "Qualifying Income Test"); (ii) at the close of each quarter of the Funds' taxable year, at least 50% of the value of each Fund's total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount that does not exceed 5% of the value of each Fund's assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the close of each quarter of the Funds' taxable year, not more than 25% of the value of each Fund's assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer or the securities (other than the securities of another RIC) of two or more issuers that the Funds control and that are engaged in the same, similar or related trades or business, or the securities of one or more qualified publicly traded partnerships ("Asset Test"). In general, for purposes of the 90% of gross income requirement described in (i) above, income derived from a partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership that would be qualifying income if realized directly by the Fund. However, 100% of the net income derived from an interest in a "qualified publicly traded partnership" (generally, a partnership (i) interests in which are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof, (ii) that derives at least 90% of its income from the passive income sources
specified in Code section 7704(d), and (iii) that derives less than 90% of its income from the qualifying income described in (i) of the prior paragraph) will be treated as qualifying income. In addition, although in general the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded partnership.
The U.S. Treasury Department has authority to issue regulations that would exclude foreign currency gains from the Qualifying Income Test described in (a) above if such gains are not directly related to a fund's business of investing in stock or securities (or options and futures with respect to stock or securities). Accordingly, regulations may be issued in the future that could treat some or all of the Fund's non-U.S. currency gains as non-qualifying income, thereby potentially jeopardizing the Fund's status as a RIC for all years to which the regulations are applicable.
Although the Funds intend to distribute substantially all of their net investment income and may distribute their capital gains for any taxable year, the Funds will be subject to federal income taxation to the extent any such income or gains are not distributed. Each Fund is treated as a separate corporation for federal income tax purposes. A Fund therefore is considered to be a separate entity in determining its treatment under the rules for RICs described herein. Losses in one Fund do not offset gains in another and the requirements (other than certain organizational requirements) for qualifying RIC status are determined at the Fund level rather than at the Trust level.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to qualify for any taxable year as a RIC and these relief provisions are not available, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and such distributions generally will be taxable to shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits. In this event, distributions generally will be eligible for the dividend-received deduction for corporate shareholders (subject to certain limitations) and for the lower capital gains rates on qualified dividend income for individual shareholders to the extent they would qualify if the Fund was a regular corporation. In addition, the Funds could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC. The Board reserves the right not to maintain the qualification of a Fund as a RIC if it determines such course of action to be beneficial to shareholders.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. If a Fund fails to distribute in a calendar year at least 98% of its ordinary income for the year and 98.2% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital
losses) for the one-year period ending October 31 of such year (and any retained amount from the prior calendar year on which a Fund paid no federal income tax), the Fund will be subject to a nondeductible 4% Federal excise tax on the undistributed amounts. The Funds intend to make sufficient distributions to avoid imposition of this tax, or to retain, at most their net capital gains and pay tax thereon. The Funds intend to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Funds may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Funds to satisfy the requirement for qualification as a RIC.
DISTRIBUTIONS TO SHAREHOLDERS. The Funds receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Funds, constitutes the Funds' net investment income from which dividends may be paid to you. Any distributions by the Funds from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Funds will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Funds receive qualified dividend income on the securities
it holds and the Funds designate the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from each Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) each Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder), (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions by the Funds of their net short-term
capital gains will be taxable as ordinary income. Capital gain distributions
consisting of the Funds' net capital gains will be taxable as long-term capital
gains at a maximum rate of 20%. The Funds will report annually to their
shareholders the amount of the Funds' distributions that qualify for the
reduced tax rates on qualified dividend income.
In the case of corporate shareholders, Fund distributions (other than capital gains distributions) generally qualify for the dividend-received deduction to the extent such distributions are so designated and do not exceed the gross amount of qualifying dividends received by the Funds for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
In determining the amount a Fund may designate as capital gain dividends, a Fund generally may treat any net capital loss or any net long-term capital loss incurred after October 31 as if it had been incurred in the succeeding year.
To the extent that a Fund makes a distribution of income received by the Fund in lieu of dividends (a "substitute payment") with respect to securities on loan pursuant to a securities lending transaction, such income will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends received deduction for corporate shareholders.
If a Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in a Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are
sold.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
The Funds will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, the Funds may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Funds.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
SALES OR REDEMPTIONS. Any gain or loss recognized on a sale or redemption of shares of a Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period. For tax purposes, an exchange of your Fund shares for shares of a different fund is the same as a sale.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund). "Net investment income" does not include distributions of exempt-interest.
The Funds (or their administrative agent) must report to the Internal Revenue Services ("IRS") and furnish to Fund shareholders the cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition, the Funds are also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares the Funds will permit Fund shareholders to elect from among several IRS-accepted cost basis methods, including the average basis. In the absence of an election, the Funds will use the average basis method as their default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them. The requirement to report only the gross proceeds from the sale of Fund shares continues to apply to all Fund shares acquired through December 31, 2011, and sold on and after that date.
TAX TREATMENT OF COMPLEX SECURITIES. The Funds and the Underlying Funds (as defined above) may invest in complex securities. (References herein to investment by the Funds should be read as also being applicable to the Underlying Funds if such Underlying Funds are taxable as RICs.) These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Funds are treated as ordinary income or capital gain, accelerate the recognition of income to the Funds and/or defer the Funds' ability to recognize losses, and, in limited
cases, subject the Funds to U.S. federal income tax on income from certain of their foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Funds.
A Fund is required, for federal income tax purposes, to mark to market and recognize as income for each taxable year its net unrealized gains and losses as of the end of such year on certain regulated futures contracts, foreign currency contracts and options that qualify as Section 1256 Contracts in addition to the gains and losses actually realized with respect to such contracts during the year. Except as described below under "Certain Foreign Currency Tax Issues," gain or loss from Section 1256 Contracts that are required to be marked to market annually will generally be 60% long-term and 40% short-term capital gain or loss. Application of this rule may alter the timing and character of distributions to shareholders.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
A Fund may invest in inflation-linked debt securities. Any increase in the principal amount of an inflation-linked debt security will be original interest discount, which is taxable as ordinary income and is required to be distributed, even though the Fund will not receive the principal, including any increase thereto, until maturity. As noted above, if the Fund invests in such securities it may be required to liquidate other investments, including at times when it is not advantageous to do so, in order to satisfy its distribution requirements and to eliminate any possible taxation at the Fund level.
Any market discount recognized on a bond is taxable as ordinary income. A market discount bond is a bond acquired in the secondary market at a price below redemption value or adjusted issue price if issued with original issue discount. Absent an election by a Fund to include the market discount in income as it accrues, gain on the Fund's disposition of such an obligation will be treated as ordinary income rather than capital gain to the extent of the accrued market discount.
A Fund may invest in certain MLPs which may be treated as qualified publicly traded partnerships. Income from qualified publicly traded partnerships is qualifying income for purposes of the Qualifying Income Test, but a Fund's investment in one or more of such qualified publicly traded partnerships is limited under the Asset Test to no more than 25% of the value of the Fund's assets. A Fund may invest in MLP I-Shares. Because issuers of MLP I-Shares are treated as corporations and not partnerships for tax purposes, a Fund's investment in MLP I-Shares is not counted for purposes of this 25% limitation on investments in MLPs, however, they will be subject to the same limitations for other investments in issuers of securities. The Funds will monitor its investment in such qualified publicly traded partnerships in order to ensure compliance with the Asset Test.
The Fund may invest in MLPs which deliver Form K-1s to the Fund to report the Funds share of income, gains, losses, deductions and credits of the MLP. These Form K-1s may be delayed and may not be received until after the time that the Fund issues its tax reporting statements. As a result, the Fund may at times find it necessary to reclassify the amount and character of its distributions to you after it issues you your tax reporting statement.
A Fund may invest in REITs. Investments in REIT equity securities may require a Fund to accrue and distribute income not yet received. To generate sufficient cash to make the requisite distributions, a Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. A Fund's investments in REIT equity securities may at other times result in a Fund's receipt of cash in excess of the REIT's earnings; if a Fund distributes these amounts, these distributions could constitute a return of capital to such Fund's shareholders for federal income tax purposes. Dividends received by the Fund from a REIT generally will not constitute qualified dividend income.
CERTAIN FOREIGN CURRENCY TAX ISSUES. A Fund's gain or loss on foreign currency denominated debt securities and on certain other financial instruments, such as forward currency contracts and currency swaps, that is attributable to
fluctuations in exchange rates occurring between the date of acquisition and the date of settlement or disposition of such securities or instruments generally will be treated under Section 988 of the Code as ordinary income or loss. A Fund may elect out of the application of Section 988 of the Code with respect to the tax treatment of each of its foreign currency forward contracts to the extent that (i) such contract is a capital asset in the hands of a Fund and is not part of a straddle transaction and (ii) a Fund makes an election by the close of the day the contract is entered into to treat the gain or loss attributable to such contract as capital gain or loss.
A Fund's forward contracts may qualify as Section 1256 Contracts if the
underlying currencies are currencies for which there are futures contracts that
are traded on and subject to the rules of a qualified board or exchange.
However, a forward currency contract that is a Section 1256 Contract would,
absent an election out of Section 988 of the Code as described in the preceding
paragraph, be subject to Section 988. Accordingly, although such a forward
currency contract would be marked to market annually like other Section 1256
Contracts, the resulting gain or loss would be ordinary. If a Fund were to
elect out of Section 988 with respect to forward currency contracts that
qualify as Section 1256 Contracts, the tax treatment generally applicable to
Section 1256 Contracts would apply to those forward currency contracts: that
is, the contracts would be marked to market annually and gains and losses with
respect to the contracts would be treated as long-term capital gains or losses
to the extent of 60% thereof and short-term capital gains or losses to the
extent of 40% thereof. If a Fund were to elect out of Section 988 with respect
to any of its forward currency contracts that do not qualify as Section 1256
Contracts, such contracts will not be marked to market annually and a Fund will
recognize short-term or long-term capital gain or loss depending on a Fund's
holding period therein. A Fund may elect out of Section 988 with respect to
some, all or none of its forward currency contracts.
Finally, regulated futures contracts and non-equity options that qualify as
Section 1256 Contracts and are entered into by a Fund with respect to foreign
currencies or foreign currency denominated debt instruments will be subject to
the tax treatment generally applicable to Section 1256 Contracts unless a Fund
elects to have Section 988 apply to determine the character of gains and losses
from all such regulated futures contracts and non-equity options held or later
acquired by a Fund.
If a Fund purchases shares in certain foreign investment entities, called "passive foreign investment companies" ("PFICs"), it may be subject to U.S. federal income tax on a portion of any "excess distribution" or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Fund to its shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such distributions or gains.
If a Fund were to invest in a PFIC and elect to treat the PFIC as a "qualified electing fund" under the Code, in lieu of the foregoing requirements, such Fund might be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the Fund, and such amounts would be subject to the Qualifying Income Test and excise tax distribution requirements described above. In order to make this election, a Fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain. Alternatively, the Fund may make a mark-to-market election that will result in such Fund being treated as if it had sold and repurchased its PFIC stock at the end of each year. In such case, a Fund would report any such gains as ordinary income and would deduct any such losses as ordinary losses to the extent of previously recognized gains. The election must be made separately for each PFIC owned by a Fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the IRS. By making the election, a Fund could potentially ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions of PFIC stock. A Fund may have to distribute this "phantom" income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4% excise tax. Each Fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the effect of these rules.
FOREIGN TAXES. Dividends and interests received by a Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries
generally do not impose taxes on capital gains with respect to investments by foreign investors. If more than 50% of the value of a Fund's total assets at the close of their taxable year consists of stocks or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to the election, the Fund will treat those taxes as dividends paid to their shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders' federal income tax. If a Fund makes the election, the Fund will report annually to their shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and U.S. possessions.
Foreign tax credits, if any, received by a Fund as a result of an investment in another RIC (including an ETF which is taxable as a RIC) will not be passed through to you unless the Fund qualifies as a "qualified fund-of-funds" under the Code. If a Fund is a "qualified fund-of-funds" it will be eligible to file an election with the IRS that will enable the Fund to pass along these foreign tax credits to its shareholders. A Fund will be treated as a "qualified fund-of-funds" under the Code if at least 50% of the value of the Fund's total assets (at the close of each quarter of the Fund's taxable year) is represented by interests in other RICs.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Funds generally serve to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold at a rate of 28% and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Funds may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Funds.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. A Fund will not pay any additional amounts in respect to any amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's
treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by a Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. It is expected that a Fund will not be liable for any corporate excise, income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Funds will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Funds execute transactions in the over-the-counter market, they will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser or a Sub-Adviser may place a combined order for two or more accounts it manages, including the Funds, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Funds may obtain, it is the opinion of the Adviser and Sub-Advisers that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser and Sub-Advisers believe that the ability of the Funds to participate in higher volume transactions will generally be beneficial to the Funds.
During the fiscal period ended October 31, 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF
BROKERAGE COMMISSIONS PAID
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FUND 2012(1)
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Cornerstone Advisors Global Public Equity Fund $503,809
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Cornerstone Advisors Income Opportunities Fund $ 23,393
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Cornerstone Advisors Public Alternatives Fund $221,855
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Cornerstone Advisors Real Assets Fund $ 22,810
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(1) Represents the period between August 30, 2012 (commencement of Fund operations) and October 31, 2012.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Funds' Adviser or Sub-Advisers may select a broker based upon brokerage or research services provided to the Adviser or Sub-Advisers. The Adviser or Sub-Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser and Sub-Advisers, under certain circumstances, to cause the Funds to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser and Sub-Advisers may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser and Sub-Advisers believe that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Funds.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser and Sub-Advisers might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser and Sub-Advisers may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser or Sub-Adviser in connection with the Funds or any other specific client account that paid commissions to the broker providing such services. Information so received by the Adviser and Sub-Advisers will be in addition to and not in lieu of the services required to be performed by the Funds' Adviser and Sub-Advisers under the Advisory Agreement and Sub-Advisory Agreements. Any advisory or other fees paid to the Adviser or Sub-Advisers are not reduced as a result of the receipt of research services.
In some cases the Adviser or Sub-Advisers may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser or Sub-Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser or Sub-Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser and Sub-Advisers face a potential conflict of interest, but the Adviser and Sub-Advisers believe that their allocation procedures are reasonably designed to ensure that they appropriately allocate the anticipated use of such services to their research and non-research uses.
From time to time, the Funds may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser or a Sub-Adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
During the fiscal period ended October 31, 2012, the Funds paid the following in commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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FUND TOTAL DOLLAR AMOUNT OF TOTAL DOLLAR AMOUNT OF
BROKERAGE COMMISSIONS TRANSACTIONS INVOLVING
FOR RESEARCH SERVICES(1) BROKERAGE COMMISSIONS
FOR RESEARCH SERVICES(1)
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Cornerstone Advisors Global Public Equity Fund $146,552 $189,384,330
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Cornerstone Advisors Income Opportunities Fund $ 1,098 $ 1,921,500
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Cornerstone Advisors Public Alternatives Fund $ 22,487 $ 48,039,311
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Cornerstone Advisors Real Assets Fund $ 0 $ 0
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(1) Represents the period from August 30, 2012 (commencement of Fund operations) to October 31, 2012.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Funds, the Adviser, a Sub-Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules require that commissions paid to the affiliate by the Funds for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Funds, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
During the fiscal period from August 30, 2012 (commencement of Fund operations) to October 31, 2012, the Funds did not pay any brokerage commissions on portfolio transactions effected through affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of their "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Funds held during their most recent fiscal period. During the fiscal period from August 30, 2012 (commencement of Fund operations) to October 31, 2012, the Cornerstone Advisors Income Opportunities Fund, Cornerstone Advisors Public Alternatives Fund and Cornerstone Advisors Real Assets Fund did not hold any securities of "regular brokers and dealers." During the fiscal period from August 30, 2012 (commencement of Fund operations) to October 31, 2012, the Global Public Equity Fund held the following securities of "regular brokers and dealers:"
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FUND NAME OF ISSUER TYPE OF SECURITY AMOUNT
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Cornerstone Advisors Global Public JP Morgan Chase Equity $1,671,000
Equity Fund
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Citigroup Equity $1,430,000
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PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the greater of the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Funds may invest since such contracts generally have remaining maturities of less than one-year. The Funds may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover. During the fiscal period ended October 31, 2012, the Funds' portfolio turnovers were as follows:
2012(1)
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Cornerstone Advisors Global Public Equity Fund 17%
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Cornerstone Advisors Income Opportunities Fund 0%
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Cornerstone Advisors Public Alternatives Fund 19%
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Cornerstone Advisors Real Assets Fund 7%
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(1) Represents the period between August 30, 2012 (commencement of Fund operations) and October 31, 2012.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Funds' shareholders, on the one hand, and those of the Funds' Adviser, principal underwriter or any affiliated person of the Funds, their Adviser, or their principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer (the "Authorized Person") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person reports at least quarterly to the Board regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Funds are required to disclose their complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30 and July 31 and October 31). The Funds disclose a complete schedule of investments in each Semi-Annual Report and Annual Report to Fund shareholders or, following the first and third fiscal quarters, in quarterly holdings reports filed with the SEC on Form N-Q. Semi-Annual and Annual Reports are distributed to Fund shareholders. Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders, but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. Within 10 days of the end of each month end, each Fund will post its top ten portfolio holdings on the internet at http://www.aicfundholdings.com/cornerstone. The Funds provide information about their complete portfolio holdings, updated as of the most recent calendar month, on the internet at http://aicfundholdings.com/cornerstone. This information is provided with a lag of at least 30 days and is publicly available to shareholders.
The Funds' policies and procedures provide that the Authorized Person, may authorize disclosure of portfolio holdings information to third parties at differing times and/or with different lag times then the information posted to the internet; provided that the recipient is, either by contractual agreement or otherwise by law, (i) required to maintain the confidentiality of the information and (ii) prohibited from using the information to facilitate or assist in any securities transactions or investment program. No compensation or other consideration is paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipient of the Funds' portfolio holdings information. The Funds will review a third party's request for portfolio holdings information to determine whether the third party has legitimate business objectives in requesting such information.
In addition, the Funds' service providers, such as the Custodian, Administrator and Transfer Agent, may receive portfolio holdings information as frequently as daily in connection with their services to the Funds. In addition to any contractual provisions relating to confidentiality of information that may be included in the service providers contract with the Trust, these arrangements impose obligations on the Funds' service providers that would prohibit them from disclosing or trading on the Funds' non-public information. Financial printers and pricing information vendors may receive portfolio holdings information, as necessary, in connection with their services to the Funds.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or class of shares. All consideration received by the Trust for shares of any additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Funds' shares, when issued, are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the Trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Funds to the Adviser. When voting shares of an underlying fund, the Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. For assets that are managed directly by Sub-Advisers, the Adviser has delegated responsibility for decisions regarding proxy voting to the Sub-Advisers. Each Sub-Adviser will vote such proxies in accordance with its proxy policies and procedures, which are also included in Appendix B. The Board will periodically review the Funds' proxy voting record.
The Trust is required to disclose annually the Funds' complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available (i) without charge, upon request, by calling 1-888-762-1442 and (ii) on the SEC's website at http://www.sec.gov.
CODE OF ETHICS
The Board on behalf of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Sub-Advisers, the Administrator and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access
Persons"). Rule 17j-1 and the Codes are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, but are required to report their personal securities transactions for monitoring purposes. Access Persons are generally prohibited from engaging in personal securities transactions in securities that are held by the Funds. In addition, certain Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Funds. The Funds believe that most of the shares referred to below were held by the persons listed below in accounts for their fiduciary, agency or custodial customers. Any shareholder listed below as owning, of record or beneficially, more than 25% of a Fund's outstanding shares may be deemed to "control" the Fund within the meaning of the 1940 Act. Shareholders controlling a Fund could have the ability to vote a majority of the shares of the Fund on any matter requiring the approval of Fund shares.
------------------------------------------------------------------------------------------------------------------------------------ NAME AND ADDRESS NUMBER OF SHARES CLASS OF SHARES % OF FUND ------------------------------------------------------------------------------------------------------------------------------------ CORNERSTONE ADVISORS GLOBAL PUBLIC EQUITY FUND ------------------------------------------------------------------------------------------------------------------------------------ Charles Schwab & Co Inc 57,441,987.1560 Institutional 100.00 % Special Custody A/C FBO Customers ATTN Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ CORNERSTONE ADVISORS INCOME OPPORTUNITIES FUND ------------------------------------------------------------------------------------------------------------------------------------ Charles Schwab & Co Inc 12,734,515.5150 Institutional 100.00 % Special Custody A/C FBO Customers ATTN Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ CORNERSTONE ADVISORS PUBLIC ALTERNATIVES FUND ------------------------------------------------------------------------------------------------------------------------------------ Charles Schwab & Co Inc 32,943,054.3690 Institutional 100.00 % Special Custody A/C FBO Customers ATTN Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ CORNERSTONE ADVISORS REAL ASSETS FUND ------------------------------------------------------------------------------------------------------------------------------------ Charles Schwab & Co Inc 12,906,739.8890 Institutional 100.00 % Special Custody A/C FBO Customers ATTN Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------------------------------------------ |
APPENDIX A -- DESCRIPTION OF RATINGS
RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and indicates
that the degree of safety regarding timely payment is strong. Those issues
determined to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
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- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
- Well-established access to a range of financial markets and assured sources of alternate liquidity.
The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S SHORT-TERM MIG/VMIG RATINGS - US TAX-EXEMPT MUNICIPALS. There are four rating categories for short-term obligations that define an investment grade situation. These are designated Moody's Investment Grade as MIG 1 (best quality) through MIG 4 (adequate quality). Short-term obligations of speculative quality are designated SG.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents an evaluation of the degree of risk associated with scheduled principal and interest payments, and the other represents an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
Issues that are subject to a periodic reoffer and resale in the secondary market in a "dutch auction" are assigned a long-term rating based only on Moody's assessment of the ability and willingness of the issuer to make timely principal and interest payments. Moody's expresses no opinion as to the ability of the holder to sell the security in a secondary market "dutch auction." Such issues are identified by the insertion of the words "dutch auction" into the name of the issue.
Issues or the features associated with MIG or VMIG ratings are identified by date of issue, date of maturity or maturities or rating expiration date and description to distinguish each rating from other ratings. Each rating designation is unique with no implication as to any other similar issue of the same obligor. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection by
established cash flows, superior liquidity support or demonstrated broad-
based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded as
required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
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An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues
determined to possess a very strong capacity to pay a debt service is
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for Bank Deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by actions of the government controlling the currency of denomination. In addition, risks associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer's branch is located are not incorporated into Moody's short-term debt ratings.
Moody's makes no representation that rated bank or insurance company obligations are exempt from the registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within the parenthesis beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B --PROXY VOTING POLICIES AND PROCEDURES OF
CORNERSTONE AND SUB-ADVISERS
EXHIBIT INVESTMENT ADVISER OR SUB-ADVISER FUND
--------------------------------------------------------------------------------
A Cornerstone Advisors, Inc. Global Public Equity Fund
Income Opportunities Fund
Public Alternatives Fund
Real Assets Fund
B Acadian Asset Management LLC Global Public Equity Fund
C Allianz Global Investors U.S. LLC Global Public Equity Fund
D AlphaSimplex Group, LLC Public Alternatives Fund
E AQR Capital Management, LLC Public Alternatives Fund
F BlackRock Investment Management, LLC Real Assets Fund
G ClariVest Asset Management LLC Public Alternatives Fund
H Cramer Rosenthal McGlynn LLC Global Public Equity Fund
I Driehaus Capital Management LLC Global Public Equity Fund
J Fairpointe Capital LLC Global Public Equity Fund
K Harris Associates L.P. Global Public Equity Fund
L Kayne Anderson Capital Advisors, L.P. Real Assets Fund
M LSV Asset Management Global Public Equity Fund
N Marsico Capital Management, LLC Global Public Equity Fund
O Parametric Portfolio Associates LLC Global Public Equity Fund
P Phocas Financial Corporation Global Public Equity Fund
Q SteelPath Capital Management, LLC Income Opportunities Fund
R TCW Investment Management Company Global Public Equity Fund
S Thornburg Investment Management Inc Global Public Equity Fund
T Turner Investments, L.P. Global Public Equity Fund
Public Alternatives Fund
|
EXHIBIT A
CORNERSTONE ADVISORS, INC.
IA POLICIES AND PROCEDURES MANUAL
8/6/2012 TO CURRENT
PROXY VOTING
POLICY
Cornerstone Advisors, Inc., as a matter of policy and as a fiduciary to our clients, has responsibility for voting proxies for portfolio securities consistent with the best economic interests of the clients. Our firm maintains written policies and procedures as to the handling, research, voting and reporting of proxy voting and makes appropriate disclosures about our firm's proxy policies and practices. Our policy and practice includes the responsibility to monitor corporate actions, receive and vote client proxies and disclose any potential conflicts of interest as well as making information available to clients about the voting of proxies for their portfolio securities and maintaining relevant and required records.
When proxy voting materials are received at Cornerstone, they will be routed to the investment team, unless the client's name appears on them. If the client's name is on them, the materials are routed to the Client Manager who will take appropriate action. For proxies routed to the investment team, the team will research the proposals, approve the voting plan with a subset of the team (proxy committee), and enter a block vote for all authorized shares in our master account. To date we have performed the necessary research inhouse rather than using an outside proxy voting service.
BACKGROUND
Proxy voting is an important right of shareholders and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised.
Investment advisers registered with the SEC, and which exercise voting authority with respect to client securities, are required by Rule 206(4)-6 of the Advisers Act to (a) adopt and implement written policies and procedures that are reasonably designed to ensure that client securities are voted in the best interests of clients, which must include how an adviser addresses material conflicts that may arise between an adviser's interests and those of its clients; (b) to disclose to clients how they may obtain information from the adviser with respect to the voting of proxies for their securities; (c) to describe to clients a summary of its proxy voting policies and procedures and, upon request, furnish a copy to its clients; and (d) maintain certain records relating to the adviser's proxy voting activities when the adviser does have proxy voting authority.
RESPONSIBILITY
Cornerstone's Chief Investment Officer, or designee(s), has the responsibility for the implementation and monitoring of our proxy voting policy, practices, disclosures and record keeping, including outlining our voting guidelines in our procedures.
PROCEDURE
Cornerstone Advisors, Inc. has adopted procedures to implement the firm's policy and reviews to monitor and insure the firm's policy is observed, implemented properly and amended or updated, as appropriate, which include the following:
VOTING PROCEDURES
o If necessary, the Front Desk Coordinator will forward any proxy materials received on behalf of clients to the Chief Investment Officer, or designee
o Cornerstone's CIO, or designee will determine which client accounts hold the security to which the proxy relates;
o Absent material conflicts, the Chief Investment Officer, or designee(s) will determine how Cornerstone Advisors, Inc. should vote the proxy in accordance with applicable voting guidelines, complete the proxy and vote the proxy in a timely and appropriate manner.
DISCLOSURE
o Cornerstone Advisors, Inc. will provide conspicuously displayed information in its Disclosure Document summarizing this proxy voting policy and procedures, including a statement that clients may request information regarding how Cornerstone Advisors, Inc. voted a client's proxies, and that clients may request a copy of these policies and procedures.
CLIENT REQUESTS FOR INFORMATION
o All client requests for information regarding proxy votes, or policies and procedures, received by any employee should be forwarded to the Chief Investment Officer.
o In response to any request, the Chief Investment Officer will prepare a written response to the client with the information requested, and as applicable will include the name of the issuer, the proposal voted upon, and how Cornerstone Advisors, Inc. voted the client's proxy with respect to each proposal about which client inquired.
VOTING GUIDELINES
o In the absence of specific voting guidelines from the client, Cornerstone Advisors, Inc. will vote proxies in the best interests of each particular client. Cornerstone Advisors, Inc. 's policy is to vote all proxies from a specific issuer the same way for each client absent qualifying restrictions from a client. Clients are permitted to place reasonable restrictions on Cornerstone Advisors, Inc. 's voting authority in the same manner that they may place such restrictions on the actual selection of account securities.
o Cornerstone Advisors, Inc. will generally vote in favor of routine corporate housekeeping proposals such as the election of directors and selection of auditors absent conflicts of interest raised by an auditors non-audit services.
o Cornerstone Advisors, Inc. will generally vote against proposals that cause board members to become entrenched or cause unequal voting rights.
o In reviewing proposals, Cornerstone Advisors, Inc. will further consider the opinion of management and the effect on management, and the effect on shareholder value and the issuer's business practices.
CONFLICTS OF INTEREST
o Cornerstone Advisors, Inc. will identify any conflicts that exist between the interests of the adviser and the client by reviewing the relationship of Cornerstone Advisors, Inc. with the issuer of each security to determine if Cornerstone Advisors, Inc. or any of its employees has any financial, business or personal relationship with the issuer.
o If a material conflict of interest exists, the Chief Investment Officer will determine whether it is appropriate to disclose the conflict to the affected clients, to give the clients an opportunity to vote the proxies themselves, or to address the voting issue through other objective means such as voting in a manner consistent with a predetermined voting policy or receiving an independent third party voting recommendation.
o Cornerstone Advisors, Inc. will maintain a record of the voting resolution of any conflict of interest.
RECORDKEEPING
Cornerstone's Chief Investment Officer shall retain the following proxy records in accordance with the SEC's five-year retention requirement:
o These policies and procedures and any amendments;
o Each proxy statement that Cornerstone Advisors, Inc. receives;
o A record of each vote that Cornerstone Advisors, Inc. casts;
o Any document Cornerstone Advisors, Inc. created that was material to making a decision how to vote proxies, or that memorializes that decision including periodic reports to the Chief Investment Officer, if applicable.
o A copy of each written request from a client for information on how Cornerstone Advisors, Inc. voted such client's proxies, and a copy of any written response.
EXHIBIT B
ACADIAN ASSET MANAGEMENT LLC
PROXY VOTING POLICIES AND PROCEDURES
(NOVEMBER 2011)
POLICY:
Acadian will accept the fiduciary responsibility to vote proxies if directed by a client. Acadian has adopted a proxy voting policy reasonably designed to ensure that it votes proxies in the best interest of clients. Acadian utilizes the services of an unaffiliated proxy firm to help manage the proxy voting process and to research and vote proxies on behalf of Acadian's clients. Unless a client provides a client specific voting criteria to be followed when voting proxies on behalf of holdings in their portfolio, each vote is made according to predetermined guidelines agreed to between the proxy firm and Acadian. Acadian believes that utilizing this proxy service firm helps Acadian vote in the best interest of clients and insulates Acadian's voting decisions from any potential conflicts of interest.
When voting proxies on behalf of our clients, Acadian assumes a fiduciary responsibility to vote in our clients' best interests. In addition, with respect to benefit plans under the Employee Retirement Income Securities Act (ERISA), Acadian acknowledges its responsibility as a fiduciary to vote proxies prudently and solely in the best interest of plan participants and beneficiaries. So that it may fulfill these fiduciary responsibilities to clients, Acadian has adopted and implemented these written policies and procedures reasonably designed to ensure that it votes proxies in the best interest of clients.
PROCEDURES:
PROXY VOTING GUIDELINES
Acadian acknowledges it has a duty of care to its clients that requires it to monitor corporate events and vote client proxies. To assist in this effort, Acadian has retained Institutional Shareholder Services ("ISS") to research and vote its proxies. ISS provides proxy-voting analysis and votes proxies in accordance with predetermined guidelines. Relying on ISS to vote proxies ensures that Acadian votes in the best interest of its clients and insulates Acadian's voting decisions from any potential conflicts of interest. Acadian will also accept specific written proxy voting instructions from a client and communicate those instructions to ISS to implement when voting proxies involving that client's portfolio.
There may be occasions when Acadian determines that not voting a proxy may be in the best interests of clients; for example, when the cost of voting the proxy exceeds the expected benefit to the client or in share blocking markets.
Unless contrary instructions are received from a client, Acadian has instructed ISS to not vote proxies in so-called "share blocking" markets. Share-blocking markets are markets where proxy voters have their securities blocked from trading during the period of the annual meeting. The period of blocking typically lasts anywhere from a few days to two weeks. During the period, any portfolio holdings in these markets cannot be sold without a formal recall. The recall process can take time, and in some cases, cannot be accomplished at all. This makes a client's portfolio vulnerable to a scenario where a stock is dropping in attractiveness but cannot be sold because it has been blocked. Shareholders who do not vote are not subject to the blocking procedure.
Acadian also reserves the right to override ISS vote recommendations under certain circumstances. Acadian will only do so if they believe that voting contrary to the ISS recommendation is in the best interest of clients.
All overrides will be approved by an Officer of Acadian and will be documented with the reasons for voting against the ISS recommendation.
CONFLICTS OF INTEREST
Occasions may arise during the voting process in which the best interest of clients conflicts with Acadian's interests. In these situations ISS will continue to follow the same predetermined guidelines as formally agreed upon between Acadian and ISS before such conflict of interest existed. Conflicts of interest generally include (i) business relationships where Acadian has a substantial business relationship with, or is actively soliciting business from, a company soliciting proxies, or (ii) personal or family relationships whereby an employee of Acadian has a family member or other personal relationship that is affiliated with a company soliciting proxies, such as a spouse who serves as a director of a public company. A conflict could also exist if a substantial business relationship exists with a proponent or opponent of a particular initiative.
If Acadian learns that a conflict of interest exists, the Proxy Coordinator will prepare a report to the Compliance Committee that identifies (i) the details of the conflict of interest, (ii) whether or not the conflict is material, and (iii) procedures to ensure that Acadian makes proxy voting decisions based on the best interests of clients. If Acadian determines that a material conflict exists, it will defer to ISS to vote the proxy in accordance with the predetermined voting policy.
VOTING POLICIES
Acadian has adopted the proxy voting policies developed by ISS, summaries of which can be found at http://www.issgovernance.com/policy and which are deemed to be incorporated herein. The policies have been developed based on ISS' independent, objective analysis of leading corporate governance practices and their support of long-term shareholder value. Acadian may change its proxy voting policy from time to time without providing notice of changes to clients.
VOTING PROCESS
Acadian has appointed the head of Operations to act as Proxy Coordinator. The Proxy Coordinator acts as coordinator with ISS including ensuring proxies Acadian is responsible to vote are forwarded to ISS, overseeing that ISS is voting assigned client accounts and maintaining appropriate authorization and voting records.
After ISS is notified by the custodian of a proxy that requires voting and/or after ISS cross references their database with a routine download of Acadian holdings and determines a proxy requires voting, ISS will review the proxy and make a voting proposal based on the recommendations provided by their research group. Any electronic proxy votes will be communicated to the proxy solicitor by ISS Global Proxy Distribution Service and Broadridge's Proxy Edge Distribution Service, while non-electronic ballots, or paper ballots, will be faxed, telephoned or sent via Internet. ISS assumes responsibility for the proxies to be transmitted for voting in a timely fashion and maintains a record of the vote, which is provided to Acadian on a monthly basis. Proxy voting records are available to all clients upon request.
PROXY VOTING RECORD
Acadian's Proxy Coordinator will maintain a record containing the following information regarding the voting of proxies: (i) the name of the issuer, (ii) the exchange ticker symbol, (iii) the CUSIP number, (iv) the shareholder meeting date, (v) a brief description of the matter brought to vote; (vi) whether the proposal was
submitted by management or a shareholder, (vii) how Acadian/ ISS voted the proxy (for, against, abstained) and (viii) whether the proxy was voted for or against management.
OBTAINING A VOTING PROXY REPORT
Clients may request a copy of this policy, any ISS policies and procedures referenced and adopted herein, and/or a report on how their individual securities were voted by contacting Amy Conklin in Acadian's Client Communications Group at 1-800-946-0166 or aconklin@acadian-asset.com.
ALL DOCUMENTS
MUST BE RETAINED IN ACCORDANCE WITH ACADIAN'S RECORD RETENTION POLICY.
EXHIBIT C
Allianz Global Investors U.S. LLC
I. ABOARD OF DIRECTORS THAT
ELECTION OF DIRECTORS
The purpose of Glass Lewis' proxy research and advice is to facilitate shareholder voting in favor of governance structures that will drive performance, create shareholder value and maintain a proper tone at the top. Glass Lewis looks for talented boards with a record of protecting shareholders and delivering value over the medium- and long-term. We believe that boards working to protect and enhance the best interests of shareholders are independent, have directors with diverse backgrounds, have a record of positive performance, and have members with a breadth and depth of relevant experience.
Independence
The independence of directors, or lack thereof, is ultimately demonstrated through the decisions they make. In assessing the independence of directors, we will take into consideration, when appropriate, whether a director has a track record indicative of making objective decisions. Likewise, when assessing the independence of directors we will also examine when a director's service track record on multiple boards indicates a lack of objective decision-making. Ultimately, we believe the determination of whether a director is independent or not must take into consideration both compliance with the applicable independence listing requirements as well as judgments made by the director.
We look at each director nominee to examine the director's relationships with the company, the company's executives, and other directors. We do this to evaluate whether personal, familial, or financial relationships (not including director compensation) may impact the director's decisions. We believe that such relationships make it difficult for a director to put shareholders' interests above the director's or the related party's interests. We also believe that a director who owns more than 20% of a company can exert disproportionate influence on the board and, in particular, the audit committee.
Thus, we put directors into three categories based on an examination of the type of relationship they have with the company:
Independent Director -- An independent director has no material financial, familial or other current relationships with the company, its executives, or other board members, except for board service and standard fees paid for that service. Relationships that existed within three to five years(1) before the inquiry are usually considered "current" for purposes of this test.
In our view, a director who is currently serving in an interim management position should be considered an insider, while a director who previously served in an interim management position for less than one year and is no longer serving in such capacity is considered independent. Moreover, a director who previously served in an interim management position for over one year and is no longer serving in such capacity is considered an affiliate for five years following the date of his/her resignation or departure from the interim management position. Glass Lewis applies a three-year look-back period to all directors who have an affiliation with the company other than former employment, for which we apply a five-year look-back.
Affiliated Director -- An affiliated director has a material financial, familial or other relationship with the company or its executives, but is not an employee of the company.(2) This includes directors whose employers have a material financial relationship with the company.(3) In addition, we view a director who owns or controls 20% or more of the company's voting stock as an affiliate.(4)
We view 20% shareholders as affiliates because they typically have access to and involvement with the management of a company that is fundamentally different from that of ordinary shareholders. More importantly, 20% holders may have interests that diverge from those of ordinary holders, for reasons such as the liquidity (or lack thereof) of their holdings, personal tax issues, etc.
Definition of "Material": A material relationship is one in which the dollar value exceeds:
o $50,000 (or where no amount is disclosed) for directors who are paid for a service they have agreed to perform for the company, outside of their service as a director, including professional or other services; or
o $120,000 (or where no amount is disclosed) for those directors employed by a professional services firm such as a law firm, investment bank, or consulting firm where the company pays the firm, not the individual, for services. This dollar limit
(3) We allow a five-year grace period for former executives of the company or merged companies who have consulting agreements with the surviving company. (We do not automatically recommend voting against directors in such cases for the first five years.) If the consulting agreement persists after this five-year grace period, we apply the materiality thresholds outlined in the definition of "material."
(4) This includes a director who serves on a board as a representative (as part of his or her basic responsibilities) of an investment firm with greater than 20% ownership. However, while we will generally consider him/her to be affiliated, we will not recommend voting against unless (i) the investment firm has disproportionate board representation or (ii) the director serves on the audit committee.
would also apply to charitable contributions to schools where a board member is a professor; or charities where a director serves on the board or is an executive;(5) and any aircraft and real estate dealings between the company and the director's firm; or
o 1% of either company's consolidated gross revenue for other business relationships (e.g., where the director is an executive officer of a company that provides services or products to or receives services or products from the company).
Definition of "Familial": Familial relationships include a person's spouse, parents, children, siblings, grandparents, uncles, aunts, cousins, nieces, nephews, in-laws, and anyone (other than domestic employees) who shares such person's home. A director is an affiliate if the director has a family member who is employed by the company and who receives compensation of $120,000 or more per year or the compensation is not disclosed.
Definition of "Company": A company includes any parent or subsidiary in a group with the company or any entity that merged with, was acquired by, or acquired the company.
Inside Director -- An inside director simultaneously serves as a director and as an employee of the company. This category may include a chairman of the board who acts as an employee of the company or is paid as an employee of the company. In our view, an inside director who derives a greater amount of income as a result of affiliated transactions with the company rather than through compensation paid by the company (i.e., salary, bonus, etc. as a company employee) faces a conflict between making decisions that are in the best interests of the company versus those in the director's own best interests. Therefore, we will recommend voting against such a director.
Voting Recommendations on the Basis of Board Independence
Glass Lewis believes a board will be most effective in protecting shareholders' interests if it is at least two-thirds independent. We note that each of the Business Roundtable, the Conference Board, and the Council of Institutional Investors advocates that two-thirds of the board be independent. Where more than one-third of the members are affiliated or inside directors, we typically(6) recommend voting against some of the inside and/or affiliated directors in order to satisfy the two-thirds threshold.
(6) With a staggered board, if the affiliates or insiders that we believe should not be on the board are not up for election, we will express our concern regarding those directors, but we will not recommend voting against the other affiliates or insiders who are up for election just to achieve two-thirds independence. However, we will consider recommending voting against the directors subject to our concern at their next election if the concerning issue is not resolved.
In the case of a less than two-thirds independent board, Glass Lewis strongly supports the existence of a presiding or lead director with authority to set the meeting agendas and to lead sessions outside the insider chairman's presence.
In addition, we scrutinize avowedly "independent" chairmen and lead directors. We believe that they should be unquestionably independent or the company should not tout them as such.
Committee Independence
We believe that ONLY independent directors should serve on a company's audit, compensation, nominating, and governance committees.(7) We typically recommend that shareholders vote against any affiliated or inside director seeking appointment to an audit, compensation, nominating, or governance committee, or who has served in that capacity in the past year.
Independent Chairman
Glass Lewis believes that separating the roles of CEO (or, more rarely, another executive position) and chairman creates a better governance structure than a combined CEO/chairman position. An executive manages the business according to a course the board charts. Executives should report to the board regarding their performance in achieving goals the board set. This is needlessly complicated when a CEO chairs the board, since a CEO/chairman presumably will have a significant influence over the board.
It can become difficult for a board to fulfill its role of overseer and policy setter when a CEO/chairman controls the agenda and the boardroom discussion. Such control can allow a CEO to have an entrenched position, leading to longer-than-optimal terms, fewer checks on management, less scrutiny of the business operation, and limitations on independent, shareholder-focused goal-setting by the board.
A CEO should set the strategic course for the company, with the board's approval, and the board should enable the CEO to carry out the CEO's vision for accomplishing the board's objectives. Failure to achieve the board's objectives should lead the board to replace that CEO with someone in whom the board has confidence.
Likewise, an independent chairman can better oversee executives and set a pro-shareholder agenda without the management conflicts that a CEO and other executive insiders often face. Such oversight and concern for shareholders allows for a more proactive and effective board of directors that is better able to look out for the interests of shareholders.
Further, it is the board's responsibility to select a chief executive who can best serve a company and its shareholders and to replace this person when his or her duties have not been appropriately fulfilled. Such a replacement becomes more difficult and happens less frequently when the chief executive is also in the position of overseeing the board.
Glass Lewis believes that the installation of an independent chairman is almost always a positive step from a corporate governance perspective and promotes the best interests of shareholders. Further, the presence of an independent chairman fosters the creation of a thoughtful and dynamic board, not dominated by the views of senior management. Encouragingly, many companies appear to be moving in this direction--one study even indicates that less than 12 percent of incoming CEOs in 2009 were awarded the chairman title, versus 48 percent as recently as 2002.(8) Another study finds that 41 percent of S&P 500 boards now separate the CEO and chairman roles, up from 26 percent in 2001, although the same study found that of those companies, only 21 percent have truly independent chairs (9)
We do not recommend that shareholders vote against CEOs who chair the board. However, we typically encourage our clients to support separating the roles of chairman and CEO whenever that question is posed in a proxy (typically in the form of a shareholder proposal), as we believe that it is in the long-term best interests of the company and its shareholders.
Performance
The most crucial test of a board's commitment to the company and its shareholders lies in the actions of the board and its members. We look at the performance of these individuals as directors and executives of the company and of other companies where they have served.
Voting Recommendations on the Basis of Performance
We disfavor directors who have a record of not fulfilling their responsibilities to shareholders at any company where they have held a board or executive position. We typically recommend voting against:
1. A director who fails to attend a minimum of 75% of board and applicable committee meetings, calculated in the aggregate.(10)
(9) Spencer Stuart Board Index, 2011, p. 6.
(10) However, where a director has served for less than one full year, we will typically not recommend voting against for failure to attend 75% of meetings. Rather, we will note the poor attendance with a recommendation to track this issue going forward. We will also refrain from recommending to vote against directors when the proxy discloses that the director missed the meetings due to serious illness or other extenuating circumstances.
2. A director who belatedly filed a significant form(s) 4 or 5, or who has a pattern of late filings if the late filing was the director's fault (we look at these late filing situations on a case-by-case basis).
3. A director who is also the CEO of a company where a serious and material restatement has occurred after the CEO had previously certified the pre-restatement financial statements.
4. A director who has received two against recommendations from Glass Lewis for identical reasons within the prior year at different companies (the same situation must also apply at the company being analyzed).
5. All directors who served on the board if, for the last three years, the company's performance has been in the bottom quartile of the sector and the directors have not taken reasonable steps to address the poor performance.
Audit Committees and Performance
Audit committees play an integral role in overseeing the financial reporting process because "[v]ibrant and stable capital markets depend on, among other things, reliable, transparent, and objective financial information to support an efficient and effective capital market process. The vital oversight role audit committees play in the process of producing financial information has never been more important."(11) When assessing an audit committee's performance, we are aware that an audit committee does not prepare financial statements, is not responsible for making the key judgments and assumptions that affect the financial statements, and does not audit the numbers or the disclosures provided to investors. Rather, an audit committee member monitors and oversees the process and procedures that management and auditors perform. The 1999 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees stated it best:
A proper and well-functioning system exists, therefore, when the three main groups responsible for financial reporting -- the full board including the audit committee, financial management including the internal auditors, and the outside auditors -- form a 'three legged stool' that supports responsible financial disclosure and active participatory oversight. However, in the view of the Committee, the audit committee must be 'first among equals' in this process, since the audit committee is an extension of the full board and hence the ultimate monitor of the process.
Standards for Assessing the Audit Committee
For an audit committee to function effectively on investors' behalf, it must include members with sufficient knowledge to diligently carry out their responsibilities. In its audit and accounting recommendations, the Conference Board Commission on Public Trust and Private Enterprise said "members of the audit committee must be independent and have both knowledge and experience in auditing financial matters."(12)
We are skeptical of audit committees where there are members that lack expertise as a Certified Public Accountant (CPA), Chief Financial Officer (CFO) or corporate controller or similar experience. While we will not necessarily vote against members of an audit committee when such expertise is lacking, we are more likely to vote against committee members when a problem such as a restatement occurs and such expertise is lacking.
Glass Lewis generally assesses audit committees against the decisions they make with respect to their oversight and monitoring role. The quality and integrity of the financial statements and earnings reports, the completeness of disclosures necessary for investors to make informed decisions, and the effectiveness of the internal controls should provide reasonable assurance that the financial statements are materially free from errors. The independence of the external auditors and the results of their work all provide useful information by which to assess the audit committee.
When assessing the decisions and actions of the audit committee, we typically defer to its judgment and would vote in favor of its members, but we would recommend voting against the following members under the following circumstances:(13)
1. All members of the audit committee when options were backdated, there is a lack of adequate controls in place, there was a resulting restatement, and disclosures indicate there was a lack of documentation with respect to the option grants.
2. The audit committee chair, if the audit committee does not have a financial expert or the committee's financial expert does not have a demonstrable financial background sufficient to understand the financial issues unique to public companies.
3. The audit committee chair, if the audit committee did not meet at least 4 times during the year.
4. The audit committee chair, if the committee has less than three members.
5. Any audit committee member who sits on more than three public company audit committees, unless the audit committee member is a retired CPA, CFO, controller or has similar experience, in which case the limit shall be four committees, taking time and
(13) Where the recommendation is to vote against the committee chair but the chair is not up for election because the board is staggered, we do not recommend voting against the members of the committee who are up for election; rather, we will simply express our concern with regard to the committee chair.
availability into consideration including a review of the audit committee member's attendance at all board and committee meetings.(14)
6. All members of an audit committee who are up for election and who served on the committee at the time of the audit, if audit and audit-related fees total one-third or less of the total fees billed by the auditor.
7. The audit committee chair when tax and/or other fees are greater than audit and audit-related fees paid to the auditor for more than one year in a row (in which case we also recommend against ratification of the auditor).
8. All members of an audit committee where non-audit fees include fees for tax services (including, but not limited to, such things as tax avoidance or shelter schemes) for senior executives of the company. Such services are now prohibited by the Public Company Accounting Oversight Board ("PCAOB").
9. All members of an audit committee that reappointed an auditor that we no longer consider to be independent for reasons unrelated to fee proportions.
10. All members of an audit committee when audit fees are excessively low, especially when compared with other companies in the same industry.
11. The audit committee chair(15) if the committee failed to put auditor ratification on the ballot for shareholder approval. However, if the non-audit fees or tax fees exceed audit plus audit-related fees in either the current or the prior year, then Glass Lewis will recommend voting against the entire audit committee.
12. All members of an audit committee where the auditor has resigned and reported that a section 10A(16) letter has been issued.
13. All members of an audit committee at a time when material accounting fraud occurred at the company.(17)
(15) In all cases, if the chair of the committee is not specified, we recommend voting against the director who has been on the committee the longest.
(16) Auditors are required to report all potential illegal acts to management and the audit committee unless they are clearly inconsequential in nature. If the audit committee or the board fails to take appropriate action on an act that has been determined to be a violation of the law, the independent auditor is required to send a section 10A letter to the SEC. Such letters are rare and therefore we believe should be taken seriously.
(17) Recent research indicates that revenue fraud now accounts for over 60% of SEC fraud cases, and that companies that engage in fraud experience significant negative abnormal stock price declines--facing bankruptcy, delisting, and material asset sales at much higher rates than do non-fraud firms (Committee of Sponsoring Organizations of the Treadway Commission. "Fraudulent Financial Reporting: 1998-2007." May 2010).
14. All members of an audit committee at a time when annual and/or multiple quarterly financial statements had to be restated, and any of the following factors apply:
o The restatement involves fraud or manipulation by insiders;
o The restatement is accompanied by an SEC inquiry or investigation;
o The restatement involves revenue recognition;
o The restatement results in a greater than 5% adjustment to costs of goods sold, operating expense, or operating cash flows; or
o The restatement results in a greater than 5% adjustment to net income, 10% adjustment to assets or shareholders equity, or cash flows from financing or investing activities.
15. All members of an audit committee if the company repeatedly fails to file its financial reports in a timely fashion. For example, the company has filed two or more quarterly or annual financial statements late within the last 5 quarters.
16. All members of an audit committee when it has been disclosed that a law enforcement agency has charged the company and/or its employees with a violation of the Foreign Corrupt Practices Act (FCPA).
17. All members of an audit committee when the company has aggressive accounting policies and/or poor disclosure or lack of sufficient transparency in its financial statements.
18. All members of the audit committee when there is a disagreement with the auditor and the auditor resigns or is dismissed.
19. All members of the audit committee if the contract with the auditor specifically limits the auditor's liability to the company for damages.(18)
20. All members of the audit committee who served since the date of the company's last annual meeting, and when, since the last annual meeting, the company has reported a material weakness that has not yet been corrected, or, when the company has an ongoing material weakness from a prior year that has not yet been corrected.
We also take a dim view of audit committee reports that are boilerplate, and which provide little or no information or transparency to investors. When a problem such as a material weakness, restatement or late filings occurs, we take into consideration, in forming our judgment with respect to the audit committee, the transparency of the audit committee report.
Compensation Committee Performance
Compensation committees have the final say in determining the compensation of executives. This includes deciding the basis on which compensation is determined, as well as the amounts and types of compensation to be paid. This process begins with the hiring and initial establishment of employment agreements, including the terms for such items as pay, pensions and severance arrangements. It is important in establishing compensation arrangements that compensation be consistent with, and based on the long-term economic performance of, the business's long-term shareholders returns.
Compensation committees are also responsible for the oversight of the transparency of compensation. This oversight includes disclosure of compensation arrangements, the matrix used in assessing pay for performance, and the use of compensation consultants. In order to ensure the independence of the compensation consultant, we believe the compensation committee should only engage a compensation consultant that is not also providing any services to the company or management apart from their contract with the compensation committee. It is important to investors that they have clear and complete disclosure of all the significant terms of compensation arrangements in order to make informed decisions with respect to the oversight and decisions of the compensation committee.
Finally, compensation committees are responsible for oversight of internal controls over the executive compensation process. This includes controls over gathering information used to determine compensation, establishment of equity award plans, and granting of equity awards. Lax controls can and have contributed to conflicting information being obtained, for example through the use of nonobjective consultants. Lax controls can also contribute to improper awards of compensation such as through granting of backdated or spring-loaded options, or granting of bonuses when triggers for bonus payments have not been met.
Central to understanding the actions of a compensation committee is a careful review of the Compensation Discussion and Analysis (CD&A) report included in each company's proxy. We review the CD&A in our evaluation of the overall compensation practices of a company, as overseen by the compensation committee. The CD&A is also integral to the evaluation of compensation proposals at companies, such as advisory votes on executive compensation, which allow shareholders to vote on the compensation paid to a company's top executives.
When assessing the performance of compensation committees, we will recommend voting against for the following:(19)
1. All members of the compensation committee who are up for election and served at the time of poor pay-for-performance (e.g., a company receives an F grade in our pay-for-performance analysis) when shareholders are not provided with an advisory vote on executive compensation at the annual meeting.(20)
2. Any member of the compensation committee who has served on the compensation committee of at least two other public companies that received F grades in our pay-for-performance model and who is also suspect at the company in question.
3. The compensation committee chair if the company received two D grades in consecutive years in our pay-for-performance analysis, and if during the past year the Company performed the same as or worse than its peers.(21)
4. All members of the compensation committee (during the relevant time period) if the company entered into excessive employment agreements and/or severance agreements.
5. All members of the compensation committee when performance goals were changed (i.e., lowered) when employees failed or were unlikely to meet original goals, or performance-based compensation was paid despite goals not being attained.
6. All members of the compensation committee if excessive employee perquisites and benefits were allowed.
7. The compensation committee chair if the compensation committee did not meet during the year, but should have (e.g., because executive compensation was restructured or a new executive was hired).
(21) In cases where the company received two D grades in consecutive years, but during the past year the company performed better than its peers or improved from an F to a D grade year over year, we refrain from recommending to vote against the compensation chair. In addition, if a company provides shareholders with a Say-on-Pay proposal in this instance, we will consider voting against the advisory vote rather than the compensation committee chair unless the company exhibits unquestionably egregious practices.
8. All members of the compensation committee when the company repriced options or completed a "self tender offer" without shareholder approval within the past two years.
9. All members of the compensation committee when vesting of in-the-money options is accelerated or when fully vested options are granted.
10. All members of the compensation committee when option exercise prices were backdated. Glass Lewis will recommend voting against an executive director who played a role in and participated in option backdating.
11. All members of the compensation committee when option exercise prices were spring-loaded or otherwise timed around the release of material information.
12. All members of the compensation committee when a new employment contract is given to an executive that does not include a clawback provision and the company had a material restatement, especially if the restatement was due to fraud.
13. The chair of the compensation committee where the CD&A provides insufficient or unclear information about performance metrics and goals, where the CD&A indicates that pay is not tied to performance, or where the compensation committee or management has excessive discretion to alter performance terms or increase amounts of awards in contravention of previously defined targets.
14. All members of the compensation committee during whose tenure the committee failed to implement a shareholder proposal regarding a compensation-related issue, where the proposal received the affirmative vote of a majority of the voting shares at a shareholder meeting, and when a reasonable analysis suggests that the compensation committee (rather than the governance committee) should have taken steps to implement the request.(22)
15. All members of a compensation committee during whose tenure the committee failed to address shareholder concerns following majority shareholder rejection of the Say-on-Pay proposal in the previous year. Where the proposal was approved but there was a significant shareholder vote (i.e., greater than 25% of votes cast) against the Say-on-Pay proposal in the prior year, if there is no evidence that the board responded accordingly to the vote including actively engaging shareholders on this issue, we will also consider recommending voting against the chairman of the compensation committee or all members of the compensation committee, depending on the severity and history of the compensation problems and the level of vote against.
Nominating and Governance Committee Performance
The nominating and governance committee, as an agency for the shareholders, is responsible for the governance by the board of the company and its executives. In performing this role, the board is responsible and accountable for selection of objective and competent board members. It is also responsible for providing leadership on governance policies adopted by the company, such as decisions to implement shareholder proposals that have received a majority vote.
Consistent with Glass Lewis' philosophy that boards should have diverse backgrounds and members with a breadth and depth of relevant experience, we believe that nominating and governance committees should consider diversity when making director nominations within the context of each specific company and its industry. In our view, shareholders are best served when boards make an effort to ensure a constituency that is not only reasonably diverse on the basis of age, race, gender and ethnicity, but also on the basis of geographic knowledge, industry experience and culture.
Regarding the nominating and or governance committee, we will recommend voting against the following:(23)
1. All members of the governance committee(24) during whose tenure
the board failed to implement a shareholder proposal with a
direct and substantial impact on shareholders and their rights -
i.e., where the proposal received enough shareholder votes (at
least a majority) to allow the board to implement or begin to
implement that proposal.(25) Examples of these types of
shareholder proposals are majority vote to elect directors and to
declassify the board.
2. The governance committee chair,(26) when the chairman is not independent and an independent lead or presiding director has not been appointed.(27)
(24) If the board does not have a governance committee (or a committee that serves such a purpose), we recommend voting against the entire board on this basis.
(25) Where a compensation-related shareholder proposal should have been implemented, and when a reasonable analysis suggests that the members of the compensation committee (rather than the governance committee) bear the responsibility for failing to implement the request, we recommend that shareholders only vote against members of the compensation committee.
(26) If the committee chair is not specified, we recommend voting against the director who has been on the committee the longest. If the longest-serving committee member cannot be determined, we will recommend voting against the longest-serving board member serving on the committee.
(27) We believe that one independent individual should be appointed to serve as the lead or presiding director. When such a position is rotated among directors from meeting to meeting, we will recommend voting against as if there were no lead or presiding director.
3. In the absence of a nominating committee, the governance committee chair when there are less than five or the whole nominating committee when there are more than 20 members on the board.
4. The governance committee chair, when the committee fails to meet at all during the year.
5. The governance committee chair, when for two consecutive years the company provides what we consider to be "inadequate" related party transaction disclosure (i.e. the nature of such transactions and/or the monetary amounts involved are unclear or excessively vague, thereby preventing an average shareholder from being able to reasonably interpret the independence status of multiple directors above and beyond what the company maintains is compliant with SEC or applicable stock-exchange listing requirements).
6. The governance committee chair, when during the past year the board adopted a forum selection clause (i.e. an exclusive forum provision)(28) without shareholder approval, or, if the board is currently seeking shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal.
Regarding the nominating committee, we will recommend voting against the following:(29)
1. All members of the nominating committee, when the committee nominated or renominated an individual who had a significant conflict of interest or whose past actions demonstrated a lack of integrity or inability to represent shareholder interests.
2. The nominating committee chair, if the nominating committee did not meet during the year, but should have (i.e., because new directors were nominated or appointed since the time of the last annual meeting).
3. In the absence of a governance committee, the nominating committee chair(30) when the chairman is not independent, and an independent lead or presiding director has not been appointed.(31)
(29) Where we would recommend to vote against the committee chair but the chair is not up for election because the board is staggered, we do not recommend voting against any members of the committee who are up for election; rather, we will simply express our concern regarding the committee chair.
(30) If the committee chair is not specified, we will recommend voting against the director who has been on the committee the longest. If the longest-serving committee member cannot be determined, we will recommend voting against the longest-serving board member on the committee.
(31) In the absence of both a governance and a nominating committee, we will recommend voting against the chairman of the board on this basis.
4. The nominating committee chair, when there are less than five or the whole nominating committee when there are more than 20 members on the board.(32)
5. The nominating committee chair, when a director received a greater than 50% against vote the prior year and not only was the director not removed, but the issues that raised shareholder concern were not corrected.(33)
Board-level Risk Management Oversight
Glass Lewis evaluates the risk management function of a public company board on a strictly case-by-case basis. Sound risk management, while necessary at all companies, is particularly important at financial firms which inherently maintain significant exposure to financial risk. We believe such financial firms should have a chief risk officer reporting directly to the board and a dedicated risk committee or a committee of the board charged with risk oversight. Moreover, many non-financial firms maintain strategies which involve a high level of exposure to financial risk. Similarly, since many non-financial firm have significant hedging or trading strategies, including financial and non-financial derivatives, those firms should also have a chief risk officer and a risk committee.
Our views on risk oversight are consistent with those expressed by various regulatory bodies. In its December 2009 Final Rule release on Proxy Disclosure Enhancements, the SEC noted that risk oversight is a key competence of the board and that additional disclosures would improve investor and shareholder understanding of the role of the board in the organization's risk management practices. The final rules, which became effective on February 28, 2010, now explicitly require companies and mutual funds to describe (while allowing for some degree of flexibility) the board's role in the oversight of risk.
When analyzing the risk management practices of public companies, we take note of any significant losses or writedowns on financial assets and/or structured transactions. In cases where a company has disclosed a sizable loss or writedown, and where we find that the company's
(33) Considering that shareholder discontent clearly relates to the director who received a greater than 50% against vote rather than the nominating chair, we review the validity of the issue(s) that initially raised shareholder concern, follow-up on such matters, and only recommend voting against the nominating chair if a reasonable analysis suggests that it would be most appropriate. In rare cases, we will consider recommending against the nominating chair when a director receives a substantial (i.e., 25% or more) vote against based on the same analysis.
board-level risk committee contributed to the loss through poor oversight, we would recommend that shareholders vote against such committee members on that basis. In addition, in cases where a company maintains a significant level of financial risk exposure but fails to disclose any explicit form of board-level risk oversight (committee or otherwise)(34), we will consider recommending to vote against the chairman of the board on that basis. However, we generally would not recommend voting against a combined chairman/CEO except in egregious cases.
Experience
We find that a director's past conduct is often indicative of future conduct and performance. We often find directors with a history of overpaying executives or of serving on boards where avoidable disasters have occurred appearing at companies that follow these same patterns. Glass Lewis has a proprietary database of directors serving at over 8,000 of the most widely held U.S. companies. We use this database to track the performance of directors across companies.
Voting Recommendations on the Basis of Director Experience
We typically recommend that shareholders vote against directors who have served on boards or as executives of companies with records of poor performance, inadequate risk oversight, overcompensation, audit- or accounting-related issues, and/or other indicators of mismanagement or actions against the interests of shareholders.(35)
Likewise, we examine the backgrounds of those who serve on key board committees to ensure that they have the required skills and diverse backgrounds to make informed judgments about the subject matter for which the committee is responsible.
Other Considerations
In addition to the three key characteristics -- independence, performance, experience -- that we use to evaluate board members, we consider conflict-of-interest issues as well as the size of the board of directors when making voting recommendations.
Conflicts of Interest
We believe board members should be wholly free of identifiable and substantial conflicts of interest, regardless of the overall level of independent directors on the board. Accordingly, we recommend that shareholders vote against the following types of affiliated or inside directors:
(35) We typically apply a three-year look-back to such issues and also research to see whether the responsible directors have been up for election since the time of the failure, and if so, we take into account the percentage of support they received from shareholders.
1. A CFO who is on the board: In our view, the CFO holds a unique position relative to financial reporting and disclosure to shareholders. Because of the critical importance of financial disclosure and reporting, we believe the CFO should report to the board and not be a member of it.
2. A director who is on an excessive number of boards: We will typically recommend voting against a director who serves as an executive officer of any public company while serving on more than two other public company boards and any other director who serves on more than six public company boards typically receives an against recommendation from Glass Lewis. Academic literature suggests that one board takes up approximately 200 hours per year of each member's time. We believe this limits the number of boards on which directors can effectively serve, especially executives at other companies.(36) Further, we note a recent study has shown that the average number of outside board seats held by CEOs of S&P 500 companies is 0.6, down from 0.8 in 2006 and 1.2 in 2001.(37)
3. A director, or a director who has an immediate family member, providing material consulting or other material professional services to the company: These services may include legal, consulting, or financial services. We question the need for the company to have consulting relationships with its directors. We view such relationships as creating conflicts for directors, since they may be forced to weigh their own interests against shareholder interests when making board decisions. In addition, a company's decisions regarding where to turn for the best professional services may be compromised when doing business with the professional services firm of one of the company's directors.
4. A director, or a director who has an immediate family member, engaging in airplane, real estate, or similar deals, including perquisite-type grants from the company, amounting to more than $50,000: Directors who receive these sorts of payments from the company will have to make unnecessarily complicated decisions that may pit their interests against shareholder interests.
5. Interlocking directorships: CEOs or other top executives who serve on each other's boards create an interlock that poses conflicts that should be avoided to ensure the promotion of shareholder interests above all else.(38)
(37) Spencer Stuart Board Index, 2011, p. 8.
(38) We do not apply a look-back period for this situation. The interlock policy applies to both public private companies. We will also evaluate multiple board interlocks among non-insiders (i.e. multiple directors serving on the same boards at other companies), for evidence of a pattern of poor oversight.
6. All board members who served at a time when a poison pill was adopted without shareholder approval within the prior twelve months.(39) In the event a board is classified and shareholders are therefore unable to vote against all directors, we will recommend voting against the remaining directors the next year they are up for a shareholder vote.
Size of the Board of Directors
While we do not believe there is a universally applicable optimum board size, we do believe boards should have at least five directors to ensure sufficient diversity in decision-making and to enable the formation of key board committees with independent directors. Conversely, we believe that boards with more than 20 members will typically suffer under the weight of "too many cooks in the kitchen" and have difficulty reaching consensus and making timely decisions. Sometimes the presence of too many voices can make it difficult to draw on the wisdom and experience in the room by virtue of the need to limit the discussion so that each voice may be heard.
To that end, we typically recommend voting against the chairman of the nominating committee at a board with fewer than five directors. With boards consisting of more than 20 directors, we typically recommend voting against all members of the nominating committee (or the governance committee, in the absence of a nominating committee).(40)
Controlled Companies
Controlled companies present an exception to our independence recommendations. The board's function is to protect shareholder interests; however, when an individual or entity owns more than 50% of the voting shares, the interests of the majority of shareholders ARE the interests of that entity or individual. Consequently, Glass Lewis does not apply our usual two-thirds independence rule and therefore we will not recommend voting against boards whose composition reflects the makeup of the shareholder population.
Independence Exceptions
The independence exceptions that we make for controlled companies are as follows:
1. We do not require that controlled companies have boards that are at least two-thirds independent. So long as the insiders and/or affiliates are connected with the controlling entity, we accept the presence of non-independent board members.
(40) The Conference Board, at p. 23 in its May 2003 report "Corporate Governance Best Practices, Id.," quotes one of its roundtable participants as stating, "[w]hen you've got a 20 or 30 person corporate board, it's one way of assuring that nothing is ever going to happen that the CEO doesn't want to happen."
2. The compensation committee and nominating and governance committees do not need to consist solely of independent directors.
a. We believe that standing nominating and corporate governance committees at controlled companies are unnecessary. Although having a committee charged with the duties of searching for, selecting, and nominating independent directors can be beneficial, the unique composition of a controlled company's shareholder base makes such committees weak and irrelevant.
b. Likewise, we believe that independent compensation committees at controlled companies are unnecessary. Although independent directors are the best choice for approving and monitoring senior executives' pay, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests. As such, we believe that having affiliated directors on a controlled company's compensation committee is acceptable. However, given that a controlled company has certain obligations to minority shareholders we feel that an insider should not serve on the compensation committee. Therefore, Glass Lewis will recommend voting against any insider (the CEO or otherwise) serving on the compensation committee.
3. Controlled companies do not need an independent chairman or an independent lead or presiding director. Although an independent director in a position of authority on the board -- such as chairman or presiding director -- can best carry out the board's duties, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests.
Size of the Board of Directors
We have no board size requirements for controlled companies.
Audit Committee Independence
We believe that audit committees should consist solely of independent directors. Regardless of a company's controlled status, the interests of all shareholders must be protected by ensuring the integrity and accuracy of the company's financial statements. Allowing affiliated directors to oversee the preparation of financial reports could create an insurmountable conflict of interest.
Unofficially Controlled Companies and 20-50% Beneficial Owners
Where an individual or entity owns more than 50% of a company's voting power but the company is not a "controlled" company as defined by relevant listing standards, we apply a lower independence requirement of a majority of the board but believe the company should otherwise be treated like another public company; we will therefore apply all other standards as outlined above. Similarly, where an individual or entity holds between 20-50% of a company's voting power, but the company is not "controlled" and there is not a "majority" owner, we believe it is reasonable to allow proportional representation on the board and committees (excluding the audit committee) based on the individual or entity's percentage of ownership.
Exceptions for Recent IPOs
We believe companies that have recently completed an initial public offering ("IPO") should be allowed adequate time to fully comply with marketplace listing requirements as well as to meet basic corporate governance standards. We believe a one-year grace period immediately following the date of a company's IPO is sufficient time for most companies to comply with all relevant regulatory requirements and to meet such corporate governance standards. Except in egregious cases, Glass Lewis refrains from issuing voting recommendations on the basis of corporate governance best practices (eg. board independence, committee membership and structure, meeting attendance, etc.) during the one-year period following an IPO.
However, two specific cases warrant strong shareholder action against the board of a company that completed an IPO within the past year:
1. Adoption of a poison pill: in cases where a board implements a poison pill preceding an IPO, we will consider voting against the members of the board who served during the period of the poison pill's adoption if the board (i) did not also commit to submit the poison pill to a shareholder vote within 12 months of the IPO or (ii) did not provide a sound rationale for adopting the pill and the pill does not expire in three years or less. In our view, adopting such an anti-takeover device unfairly penalizes future shareholders who (except for electing to buy or sell the stock) are unable to weigh in on a matter that could potentially negatively impact their ownership interest. This notion is strengthened when a board adopts a poison pill with a 5-10 year life immediately prior to having a public shareholder base so as to insulate management for a substantial amount of time while postponing and/or avoiding allowing public shareholders the ability to vote on the pill's adoption. Such instances are indicative of boards that may subvert shareholders' best interests following their IPO.
2. Adoption of an exclusive forum provision: consistent with our general approach to boards that adopt exclusive forum provisions without shareholder approval (refer to our discussion of nominating and governance committee performance in Section I of the guidelines), in cases where a board adopts such a provision for inclusion in a company's charter or bylaws before the company's IPO, we will recommend voting against the chairman of the governance committee, or, in the absence of such a committee, the chairman of the board, who served during the period of time when the provision was adopted.
Further, shareholders should also be wary of companies in this category that adopt supermajority voting requirements before their IPO. Absent explicit provisions in the articles or bylaws stipulating that certain policies will be phased out over a certain period of time (e.g. a predetermined declassification of the board, a planned separation of the chairman and CEO, etc.) long-term shareholders could find themselves in the predicament of having to attain a supermajority vote to approve future proposals seeking to eliminate such policies.
Mutual Fund Boards
Mutual funds, or investment companies, are structured differently from regular public companies (i.e., operating companies). Typically, members of a fund's adviser are on the board and management takes on a different role from that of regular public companies. Thus, we focus on a short list of requirements, although many of our guidelines remain the same.
The following mutual fund policies are similar to the policies for regular public companies:
1. Size of the board of directors: The board should be made up of between five and twenty directors.
2. The CFO on the board: Neither the CFO of the fund nor the CFO of the fund's registered investment adviser should serve on the board.
3. Independence of the audit committee: The audit committee should consist solely of independent directors.
4. Audit committee financial expert: At least one member of the audit committee should be designated as the audit committee financial expert.
The following differences from regular public companies apply at mutual funds:
1. Independence of the board: We believe that three-fourths of an investment company's board should be made up of independent directors. This is consistent with a proposed SEC rule on investment company boards. The Investment Company Act requires 40% of the board to be independent, but in 2001, the SEC amended the Exemptive Rules to require that a majority of a mutual fund board be independent. In 2005, the SEC proposed increasing the independence threshold to 75%. In 2006, a federal appeals court ordered that this rule amendment be put back out for public comment, putting it back into "proposed rule" status. Since mutual fund boards play a vital role in overseeing the relationship between the fund and its investment manager, there is greater need for independent oversight than there is for an operating company board.
2. When the auditor is not up for ratification: We do not recommend voting against the audit committee if the auditor is not up for ratification because, due to the different legal structure of an investment company compared to an operating company, the auditor for the investment company (i.e., mutual fund) does not conduct the same level of financial review for each investment company as for an operating company.
3. Non-independent chairman: The SEC has proposed that the chairman of the fund board be independent. We agree that the roles of a mutual fund's chairman and CEO should be separate. Although we believe this would be best at all companies, we recommend voting against the chairman of an investment company's nominating committee as well as the chairman of the board if the chairman and CEO of a mutual fund are the same person and the fund does not have an independent lead or presiding director. Seven former SEC commissioners support the appointment of an independent chairman and we agree with them that "an independent board chairman would be better able to create conditions favoring the long-term interests of fund shareholders than would a chairman who is an executive of the adviser." (See the comment letter sent to the SEC in support of the proposed rule at http://sec.gov/rules/proposed/s70304/s70304-179.pdf)
DECLASSIFIED BOARDS
Glass Lewis favors the repeal of staggered boards and the annual election of directors. We believe staggered boards are less accountable to shareholders than boards that are elected annually. Furthermore, we feel the annual election of directors encourages board members to focus on shareholder interests.
Empirical studies have shown: (i) companies with staggered boards reduce a firm's value; and (ii) in the context of hostile takeovers, staggered boards operate as a takeover defense, which entrenches management, discourages potential acquirers, and delivers a lower return to target shareholders.
In our view, there is no evidence to demonstrate that staggered boards improve shareholder returns in a takeover context. Research shows that shareholders are worse off when a staggered board blocks a transaction. A study by a group of Harvard Law professors concluded that companies whose staggered boards prevented a takeover "reduced shareholder returns for targets ... on the order of eight to ten percent in the nine months after a hostile bid was announced."(41) When a staggered board negotiates a friendly transaction, no statistically significant difference in premiums occurs.(42) Further, one of those same professors found that charter-based staggered boards "reduce the market value of a firm by 4% to 6% of its market capitalization" and that "staggered boards bring about and not merely reflect this reduction in market value."(43) A subsequent study reaffirmed that classified boards reduce shareholder value, finding "that the ongoing process of dismantling staggered boards, encouraged by institutional investors, could well contribute to increasing shareholder wealth."(44)
Shareholders have increasingly come to agree with this view. In 2011 more than 75% of S&P 500 companies had declassified boards, up from approximately 41% a decade ago.(45) Clearly, more shareholders have supported the repeal of classified boards. Resolutions relating to the repeal of staggered boards garnered on average over 70% support among shareholders in 2008, whereas in 1987, only 16.4% of votes cast favored board declassification.(46)
Given the empirical evidence suggesting staggered boards reduce a company's value and the increasing shareholder opposition to such a structure, Glass Lewis supports the declassification of boards and the annual election of directors.
(42) Id. at 2 ("Examining a sample of seventy-three negotiated transactions from 2000 to 2002, we find no systematic benefits in terms of higher premia to boards that have [staggered structures].").
(43) Lucian Bebchuk, Alma Cohen, "The Costs of Entrenched Boards" (2004).
(44) Lucian Bebchuk, Alma Cohen and Charles C.Y. Wang, "Staggered Boards and
the Wealth of Shareholders: Evidence from a Natural Experiment," SSRN:
http://ssrn.com/abstract=1706806 (2010), p. 26.
(45) Spencer Stuart Board Index, 2011, p. 14
(46) Lucian Bebchuk, John Coates IV and Guhan Subramanian, "The Powerful
Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy," 54
STANFORD LAW REVIEW 887-951 (2002).
MANDATORY DIRECTOR TERM AND AGE LIMITS
Glass Lewis believes that director age and term limits typically are not in shareholders' best interests. Too often age and term limits are used by boards as a crutch to remove board members who have served for an extended period of time. When used in that fashion, they are indicative of a board that has a difficult time making "tough decisions."
Academic literature suggests that there is no evidence of a correlation between either length of tenure or age and director performance. On occasion, term limits can be used as a means to remove a director for boards that are unwilling to police their membership and to enforce turnover. Some shareholders support term limits as a way to force change when boards are unwilling to do so.
While we understand that age limits can be a way to force change where boards are unwilling to make changes on their own, the long-term impact of age limits restricts experienced and potentially valuable board members from service through an arbitrary means. Further, age limits unfairly imply that older (or, in rare cases, younger) directors cannot contribute to company oversight.
In our view, a director's experience can be a valuable asset to shareholders because of the complex, critical issues that boards face. However, we support periodic director rotation to ensure a fresh perspective in the boardroom and the generation of new ideas and business strategies. We believe the board should implement such rotation instead of relying on arbitrary limits. When necessary, shareholders can address the issue of director rotation through director elections.
We believe that shareholders are better off monitoring the board's approach to corporate governance and the board's stewardship of company performance rather than imposing inflexible rules that don't necessarily correlate with returns or benefits for shareholders.
However, if a board adopts term/age limits, it should follow through and not waive such limits. If the board waives its term/age limits, Glass Lewis will consider recommending shareholders vote against the nominating and/or governance committees, unless the rule was waived with sufficient explanation, such as consummation of a corporate transaction like a merger.
REQUIRING TWO OR MORE NOMINEES PER BOARD SEAT
In an attempt to address lack of access to the ballot, shareholders sometimes propose that the board give shareholders a choice of directors for each open board seat in every election. However, we feel that policies requiring a selection of multiple nominees for each board seat would discourage prospective directors from accepting nominations. A prospective director could not be confident either that he or she is the board's clear choice or that he or she would be elected. Therefore, Glass Lewis generally will vote against such proposals.
SHAREHOLDER ACCESS
We expect to see a number of shareholder proposals regarding this topic in 2012. For a discussion of recent regulatory events in this area, along with a detailed overview of the Glass Lewis approach to Shareholder Proposals regarding Proxy Access, refer to SECTION V. COMPENSATION, ENVIRONMENTAL, SOCIAL AND GOVERNANCE SHAREHOLDER INITIATIVES.
MAJORITY VOTE FOR THE ELECTION OF DIRECTORS
In stark contrast to the failure of shareholder access to gain acceptance, majority voting for the election of directors is fast becoming the DE FACTO standard in corporate board elections. In our view, the majority voting proposals are an effort to make the case for shareholder impact on director elections on a company-specific basis.
While this proposal would not give shareholders the opportunity to nominate directors or lead to elections where shareholders have a choice among director candidates, if implemented, the proposal would allow shareholders to have a voice in determining whether the nominees proposed by the board should actually serve as the overseer-representatives of shareholders in the boardroom. We believe this would be a favorable outcome for shareholders.
During 2011, Glass Lewis tracked over 40 proposals seeking to require a majority vote to elect directors at annual meetings in the U.S., a slight increase over 2010 when we tracked just under 35 proposals, but a sharp contrast to the 147 proposals tracked during 2006. The large drop in the number of proposals being submitted in recent years compared to 2006 is a result of many companies having already adopted some form of majority voting, including approximately 79% of companies in the S&P 500 index, up from 56% in 2008.(47) During 2009 these proposals received on average 59% shareholder support (based on for and against votes), up from 54% in 2008.
The plurality vote standard
Today, most US companies still elect directors by a plurality vote standard. Under that standard, if one shareholder holding only one share votes in favor of a nominee (including himself, if the director is a shareholder), that nominee "wins" the election and assumes a seat on the board. The common concern among companies with a plurality voting standard was the possibility that one or more directors would not receive a majority of votes, resulting in "failed elections." This was of particular concern during the 1980s, an era of frequent takeovers and contests for control of companies.
Advantages of a majority vote standard
If a majority vote standard were implemented, a nominee would have to receive the support of a majority of the shares voted in order to be elected. Thus, shareholders could collectively vote to reject a director they believe will not pursue their best interests. We think that this minimal amount of protection for shareholders is reasonable and will not upset the corporate structure nor reduce the willingness of qualified shareholder-focused directors to serve in the future.
We believe that a majority vote standard will likely lead to more attentive directors. Occasional use of this power will likely prevent the election of directors with a record of ignoring shareholder interests in favor of other interests that conflict with those of investors. Glass Lewis will generally support proposals calling for the election of directors by a majority vote except for use in contested director elections.
In response to the high level of support majority voting has garnered, many companies have voluntarily taken steps to implement majority voting or modified approaches to majority voting. These steps range from a modified approach requiring directors that receive a majority of withheld votes to resign (e.g., Ashland Inc.) to actually requiring a majority vote of outstanding shares to elect directors (e.g., Intel).
We feel that the modified approach does not go far enough because requiring a director to resign is not the same as requiring a majority vote to elect a director and does not allow shareholders a definitive voice in the election process. Further, under the modified approach, the corporate governance committee could reject a resignation and, even if it accepts the resignation, the corporate governance committee decides on the director's replacement. And since the modified approach is usually adopted as a policy by the board or a board committee, it could be altered by the same board or committee at any time.
II. TRANSPARENCY AND
AUDITOR RATIFICATION
The auditor's role as gatekeeper is crucial in ensuring the integrity and transparency of the financial information necessary for protecting shareholder value. Shareholders rely on the auditor to ask tough questions and to do a thorough analysis of a company's books to ensure that the information provided to shareholders is complete, accurate, fair, and that it is a reasonable representation of a company's financial position. The only way shareholders can make rational investment decisions is if the market is equipped with accurate information about a company's fiscal health. As stated in the October 6, 2008 Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury:
"The auditor is expected to offer critical and objective judgment on the financial matters under consideration, and actual and perceived absence of conflicts is critical to that expectation. The Committee believes that auditors, investors, public companies, and other market participants must understand the independence requirements and their objectives, and that auditors must adopt a mindset of skepticism when facing situations that may compromise their independence."
As such, shareholders should demand an objective, competent and diligent auditor who performs at or above professional standards at every company in which the investors hold an interest. Like directors, auditors should be free from conflicts of interest and should avoid situations requiring a choice between the auditor's interests and the public's interests. Almost without exception, shareholders should be able to annually review an auditor's performance and to annually ratify a board's auditor selection. Moreover, in October 2008, the Advisory Committee on the Auditing Profession went even further, and recommended that "to further enhance audit committee oversight and auditor accountability ... disclosure in the company proxy statement regarding shareholder ratification [should] include the name(s) of the senior auditing partner(s) staffed on the engagement."(48)
Most recently on August 16, 2011, the PCAOB issued a Concept Release seeking public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced, with a specific emphasis on mandatory audit firm rotation. The PCAOB will convene a public roundtable meeting in March 2012 to further discuss such matters. Glass Lewis believes auditor rotation can ensure both the independence of the auditor and the integrity of the audit; we will typically recommend supporting proposals to require auditor rotation when the proposal uses a reasonable period of time (usually not less than 5-7 years) particularly at companies with a history of accounting problems.
Voting Recommendations on Auditor Ratification
We generally support management's choice of auditor except when we believe the auditor's independence or audit integrity has been compromised. Where a board has not allowed shareholders to review and ratify an auditor, we typically recommend voting against the audit committee chairman. When there have been material restatements of annual financial statements or material weakness in internal controls, we usually recommend voting against the entire audit committee.
Reasons why we may not recommend ratification of an auditor include:
1. When audit fees plus audit-related fees total less than the tax fees and/or other non-audit fees.
2. Recent material restatements of annual financial statements, including those resulting in the reporting of material weaknesses in internal controls and including late filings by the company where the auditor bears some responsibility for the restatement or late filing.(49)
(49) An auditor does not audit interim financial statements. Thus, we generally do not believe that an auditor should be opposed due to a restatement of interim financial statements unless the nature of the misstatement is clear from a reading of the incorrect financial statements.
3. When the auditor performs prohibited services such as tax-shelter work, tax services for the CEO or CFO, or contingent-fee work, such as a fee based on a percentage of economic benefit to the company.
4. When audit fees are excessively low, especially when compared with other companies in the same industry.
5. When the company has aggressive accounting policies.
6. When the company has poor disclosure or lack of transparency in its financial statements.
7. Where the auditor limited its liability through its contract with the company or the audit contract requires the corporation to use alternative dispute resolution procedures without adequate justification.
8. We also look for other relationships or concerns with the auditor that might suggest a conflict between the auditor's interests and shareholder interests.
PENSION ACCOUNTING ISSUES
A pension accounting question often raised in proxy proposals is what effect, if any, projected returns on employee pension assets should have on a company's net income. This issue often arises in the executive-compensation context in a discussion of the extent to which pension accounting should be reflected in business performance for purposes of calculating payments to executives.
Glass Lewis believes that pension credits should not be included in measuring income that is used to award performance-based compensation. Because many of the assumptions used in accounting for retirement plans are subject to the company's discretion, management would have an obvious conflict of interest if pay were tied to pension income. In our view, projected income from pensions does not truly reflect a company's performance.
III. THE LINK BETWEEN
Glass Lewis carefully reviews the compensation awarded to senior executives, as we believe that this is an important area in which the board's priorities are revealed. Glass Lewis strongly believes executive compensation should be linked directly with the performance of the business the executive is charged with managing. We believe the most effective compensation arrangements provide for an appropriate mix of performance-based short- and long-term incentives in addition to base salary.
Glass Lewis believes that comprehensive, timely and transparent disclosure of executive pay is critical to allowing shareholders to evaluate the extent to which the pay is keeping pace with company performance. When reviewing proxy materials, Glass Lewis examines whether the company discloses the performance metrics used to determine executive compensation. We recognize performance metrics must necessarily vary depending on the company and industry, among other factors, and may include items such as total shareholder return, earning per share growth, return on equity, return on assets and revenue growth. However, we believe companies should disclose why the specific performance metrics were selected and how the actions they are designed to incentivize will lead to better corporate performance.
Moreover, it is rarely in shareholders' interests to disclose competitive data about individual salaries below the senior executive level. Such disclosure could create internal personnel discord that would be counterproductive for the company and its shareholders. While we favor full disclosure for senior executives and we view pay disclosure at the aggregate level (e.g., the number of employees being paid over a certain amount or in certain categories) as potentially useful, we do not believe shareholders need or will benefit from detailed reports about individual management employees other than the most senior executives.
ADVISORY VOTE ON EXECUTIVE COMPENSATION ("SAY-ON-PAY")
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") required most companies(50) to hold an advisory vote on executive compensation at the first shareholder meeting that occurs six months after enactment of the bill (January 21, 2011).
This practice of allowing shareholders a non-binding vote on a company's compensation report is standard practice in many non-US countries, and has been a requirement for most companies in the United Kingdom since 2003 and in Australia since 2005. Although Say-on-Pay proposals are non-binding, a high level of "against" or "abstain" votes indicate substantial shareholder concern about a company's compensation policies and procedures.
Given the complexity of most companies' compensation programs, Glass Lewis applies a highly nuanced approach when analyzing advisory votes on executive compensation. We review each company's compensation on a case-by-case basis, recognizing that each company must be examined in the context of industry, size, maturity, performance, financial condition, its historic pay for performance practices, and any other relevant internal or external factors.
We believe that each company should design and apply specific compensation policies and practices that are appropriate to the circumstances of the company and, in particular, will attract and retain competent executives and other staff, while motivating them to grow the company's long-term shareholder value.
Where we find those specific policies and practices serve to reasonably align compensation with performance, and such practices are adequately disclosed, Glass Lewis will recommend supporting the company's approach. If, however, those specific policies and practices fail to demonstrably link compensation with performance, Glass Lewis will generally recommend voting against the say-on-pay proposal.
Glass Lewis focuses on four main areas when reviewing Say-on-Pay proposals:
o The overall design and structure of the Company's executive compensation program including performance metrics;
o The quality and content of the Company's disclosure;
o The quantum paid to executives; and
o The link between compensation and performance as indicated by the Company's current and past pay-for-performance grades
We also review any significant changes or modifications, and rationale for such changes, made to the Company's compensation structure or award amounts, including base salaries.
Say-on-Pay Voting Recommendations
In cases where we find deficiencies in a company's compensation program's design, implementation or management, we will recommend that shareholders vote against the Say-on-Pay proposal. Generally such instances include evidence of a pattern of poor pay-for-performance practices (i.e., deficient or failing pay for performance grades), unclear or questionable disclosure regarding the overall compensation structure (e.g., limited information regarding benchmarking processes, limited rationale for bonus performance metrics and targets, etc.), questionable adjustments to certain aspects of the overall compensation structure (e.g., limited rationale for significant changes to performance targets or metrics, the payout of guaranteed bonuses or sizable retention grants, etc.), and/or other egregious compensation practices.
Although not an exhaustive list, the following issues when weighed together may cause Glass Lewis to recommend voting against a say-on-pay vote:
o Inappropriate peer group and/or benchmarking issues
o Inadequate or no rationale for changes to peer groups
o Egregious or excessive bonuses, equity awards or severance payments, including golden handshakes and golden parachutes
o Guaranteed bonuses
o Targeting overall levels of compensation at higher than median without adequate justification
o Bonus or long-term plan targets set at less than mean or negative performance levels
o Performance targets not sufficiently challenging, and/or providing for high potential payouts
o Performance targets lowered, without justification
o Discretionary bonuses paid when short- or long-term incentive plan targets were not met
o Executive pay high relative to peers not justified by outstanding company performance
o The terms of the long-term incentive plans are inappropriate (please see "Long-Term Incentives" below)
In the instance that a company has simply failed to provide sufficient disclosure of its policies, we may recommend shareholders vote against this proposal solely on this basis, regardless of the appropriateness of compensation levels.
Additional Scrutiny for Companies with Significant Opposition in 2011
At companies that received a significant shareholder vote (anything greater than 25%) against their say on pay proposal in 2011, we believe the board should demonstrate some level of engagement and responsiveness to the shareholder concerns behind the discontent. While we recognize that sweeping
changes cannot be made to a compensation program without due consideration and that a majority of shareholders voted in favor of the proposal, we will look for disclosure in the proxy statement and other publicly-disclosed filings that indicates the compensation committee is responding to the prior year's vote results including engaging with large shareholders to identify the concerns causing the substantial vote against. In the absence of any evidence that the board is actively engaging shareholders on this issue and responding accordingly, we will recommend holding compensation committee members accountable for a failure to respond in consideration of the level of the vote against and the severity and history of the compensation problems.
Where we identify egregious compensation practices, we may also recommend voting against the compensation committee based on the practices or actions of its members during the year, such as approving large one-off payments, the inappropriate, unjustified use of discretion, or sustained poor pay for performance practices.
Short-Term Incentives
A short-term bonus or incentive ("STI") should be demonstrably tied to performance. Whenever possible, we believe a mix of corporate and individual performance measures is appropriate. We would normally expect performance measures for STIs to be based on internal financial measures such as net profit after tax, EPS growth and divisional profitability as well as non-financial factors such as those related to safety, environmental issues, and customer satisfaction. However, we accept variations from these metrics if they are tied to the Company's business drivers.
Further, the target and potential maximum awards that can be achieved under STI awards should be disclosed. Shareholders should expect stretching performance targets for the maximum award to be achieved. Any increase in the potential maximum award should be clearly justified to shareholders.
Glass Lewis recognizes that disclosure of some measures may include commercially confidential information. Therefore, we believe it may be reasonable to exclude such information in some cases as long as the company provides sufficient justification for non-disclosure. However, where a short-term bonus has been paid, companies should disclose the extent to which performance has been achieved against relevant targets, including disclosure of the actual target achieved.
Where management has received significant STIs but short-term performance as measured by such indicators as increase in profit and/or EPS growth over the previous year PRIMA FACIE appears to be poor or negative, we believe the company should provide a clear explanation why these significant short-term payments were made.
Long-Term Incentives
Glass Lewis recognizes the value of equity-based incentive programs. When used appropriately, they can provide a vehicle for linking an executive's pay to company performance, thereby aligning their interests with those of shareholders. In addition, equity-based compensation can be an effective way to attract, retain and motivate key employees.
There are certain elements that Glass Lewis believes are common to most well-structured long-term incentive ("LTI") plans. These include:
o No re-testing or lowering of performance conditions
o Performance metrics that cannot be easily manipulated by management
o Two or more performance metrics
o At least one relative performance metric that compares the company's performance to a relevant peer group or index
o Performance periods of at least three years
o Stretching metrics that incentivize executives to strive for outstanding performance
o Individual limits expressed as a percentage of base salary
Performance measures should be carefully selected and should relate to the specific business/industry in which the company operates and, especially, the key value drivers of the company's business.
Glass Lewis believes that measuring a company's performance with multiple metrics serves to provide a more complete picture of the company's performance than a single metric, which may focus too much management attention on a single target and is therefore more susceptible to manipulation. External benchmarks should be disclosed and transparent, such as total shareholder return ("TSR") against a well-selected sector index, peer group or other performance hurdle. The rationale behind the selection of a specific index or peer group should be disclosed. Internal benchmarks (e.g. earnings per share growth) should also be disclosed and transparent, unless a cogent case for confidentiality is made and fully explained.
We also believe shareholders should evaluate the relative success of a company's compensation programs, particularly existing equity-based incentive plans, in linking pay and performance in evaluating new LTI plans to determine the impact of additional stock awards. We will therefore review the company's pay-for-performance grade, see below for more information, and specifically the proportion of total compensation that is stock-based.
Pay for Performance
Glass Lewis believes an integral part of a well-structured compensation package is a successful link between pay and performance. Therefore, Glass Lewis developed a proprietary pay-for-performance model to evaluate the link between pay and performance of the top five executives at US companies. Our model benchmarks these executives' pay and company performance against four peer groups and across seven performance metrics. Using a forced curve and a school letter-grade system, we grade companies from A-F according to their pay-for-performance linkage. The grades guide our evaluation of compensation committee effectiveness and we generally recommend voting against compensation committee of companies with a pattern of failing our pay-for-performance analysis.
We also use this analysis to inform our voting decisions on say-on-pay proposals. As such, if a company receives a failing grade from our proprietary model, we are likely to recommend shareholders to vote against the say-on-pay proposal. However, there may be exceptions to this rule such as when a company makes significant enhancements to its compensation programs.
Recoupment ("Clawback") Provisions
Section 954 of the Dodd-Frank Act requires the SEC to create a rule requiring listed companies to adopt policies for recouping certain compensation during a three-year look-back period. The rule applies to incentive-based compensation paid to current or former executives if the company is required to prepare an accounting restatement due to erroneous data resulting from material non-compliance with any financial reporting requirements under the securities laws.
These recoupment provisions are more stringent than under Section 304 of the
Sarbanes-Oxley Act in three respects: (i) the provisions extend to current or
former executive officers rather than only to the CEO and CFO; (ii) it has a
three-year look-back period (rather than a twelve-month look-back period); and
(iii) it allows for recovery of compensation based upon a financial restatement
due to erroneous data, and therefore does not require misconduct on the part of
the executive or other employees.
Frequency of Say-on-Pay
The Dodd-Frank Act also requires companies to allow shareholders a non-binding vote on the frequency of say-on-pay votes, i.e. every one, two or three years. Additionally, Dodd-Frank requires companies to hold such votes on the frequency of say-on-pay votes at least once every six years.
We believe companies should submit say-on-pay votes to shareholders every year. We believe that the time and financial burdens to a company with regard to an annual vote are relatively small and incremental and are outweighed by the benefits to shareholders through more frequent accountability. Implementing biannual or triennial votes on executive compensation limits shareholders' ability to hold the board accountable for its compensation practices through means other than voting against the compensation committee. Unless a company provides a compelling rationale or unique circumstances for say-on-pay votes less frequent than annually, we will generally recommend that shareholders support annual votes on compensation.
Vote on Golden Parachute Arrangements
The Dodd-Frank Act also requires companies to provide shareholders with a separate non-binding vote on approval of golden parachute compensation arrangements in connection with certain change-in-control transactions. However, if the golden parachute arrangements have previously been subject to a say-on-pay vote which shareholders approved, then this required vote is waived.
Glass Lewis believes the narrative and tabular disclosure of golden parachute arrangements will benefit all shareholders. Glass Lewis will analyze each golden parachute arrangement on a case-by-case basis, taking into account, among other items: the ultimate value of the payments particularly compared to the value of the transaction, the tenure and position of the executives in question, and the type of triggers involved (single vs double).
EQUITY-BASED COMPENSATION PLAN PROPOSALS
We believe that equity compensation awards are useful, when not abused, for retaining employees and providing an incentive for them to act in a way that will improve company performance. Glass Lewis evaluates equity-based compensation plans using a detailed model and analytical review.
Equity-based compensation programs have important differences from cash compensation plans and bonus programs. Accordingly, our model and analysis takes into account factors such as plan administration, the method and terms of exercise, repricing history, express or implied rights to reprice, and the presence of evergreen provisions.
Our analysis is primarily quantitative and focused on the plan's cost as compared with the business's operating metrics. We run twenty different analyses, comparing the program with absolute limits we believe are key to equity value creation and with a carefully chosen peer group. In general, our model seeks to determine whether the proposed plan is either absolutely excessive or is more than one standard deviation away from the average plan for the peer group on a range of criteria, including dilution to shareholders and the projected annual cost relative to the company's financial performance. Each of the twenty analyses (and their constituent parts) is weighted and the plan is scored in accordance with that weight.
In our analysis, we compare the program's expected annual expense with the business's operating metrics to help determine whether the plan is excessive in light of company performance. We also compare the option plan's expected annual cost to the enterprise value of the firm rather than to market capitalization because the employees, managers and directors of the firm contribute to the creation of enterprise value but not necessarily market capitalization (the biggest difference is seen where cash represents the vast majority of market capitalization). Finally, we do not rely exclusively on relative comparisons with
averages because, in addition to creeping averages serving to inflate compensation, we believe that some absolute limits are warranted.
We evaluate equity plans based on certain overarching principles:
1. Companies should seek more shares only when needed.
2. Requested share amounts should be small enough that companies seek shareholder approval every three to four years (or more frequently).
3. If a plan is relatively expensive, it should not grant options solely to senior executives and board members.
4. Annual net share count and voting power dilution should be limited.
5. Annual cost of the plan (especially if not shown on the income statement) should be reasonable as a percentage of financial results and should be in line with the peer group.
6. The expected annual cost of the plan should be proportional to the business's value.
7. The intrinsic value that option grantees received in the past should be reasonable compared with the business's financial results.
8. Plans should deliver value on a per-employee basis when compared with programs at peer companies.
9. Plans should not permit re-pricing of stock options.
10. Plans should not contain excessively liberal administrative or payment terms.
11. Selected performance metrics should be challenging and appropriate, and should be subject to relative performance measurements.
12. Stock grants should be subject to minimum vesting and/or holding periods sufficient to ensure sustainable performance and promote retention.
Option Exchanges
Glass Lewis views option repricing plans and option exchange programs with great skepticism. Shareholders have substantial risk in owning stock and we believe that the employees, officers, and directors who receive stock options should be similarly situated to align their interests with shareholder interests.
We are concerned that option grantees who believe they will be "rescued" from underwater options will be more inclined to take unjustifiable risks. Moreover, a predictable pattern of repricing or exchanges substantially alters a stock option's value because options that will practically never expire deeply out of the money are worth far more than options that carry a risk of expiration.
In short, repricings and option exchange programs change the bargain between shareholders and employees after the bargain has been struck.
There is one circumstance in which a repricing or option exchange program is acceptable: if macroeconomic or industry trends, rather than specific company issues, cause a stock's value to decline dramatically and the repricing is necessary to motivate and retain employees. In this circumstance, we think it fair to conclude that option grantees may be suffering from a risk that was not foreseeable when
the original "bargain" was struck. In such a circumstance, we will recommend supporting a repricing only if the following conditions are true:
1. Officers and board members cannot participate in the program;
2. The stock decline mirrors the market or industry price decline in terms of timing and approximates the decline in magnitude;
3. The exchange is value-neutral or value-creative to shareholders using very conservative assumptions and with a recognition of the adverse selection problems inherent in voluntary programs; and
4. Management and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market.
Option Backdating, Spring-Loading, and Bullet-Dodging
Glass Lewis views option backdating, and the related practices of spring-loading and bullet-dodging, as egregious actions that warrant holding the appropriate management and board members responsible. These practices are similar to re-pricing options and eliminate much of the downside risk inherent in an option grant that is designed to induce recipients to maximize shareholder return.
Backdating an option is the act of changing an option's grant date from the actual grant date to an earlier date when the market price of the underlying stock was lower, resulting in a lower exercise price for the option. Since 2006, Glass Lewis has identified over 270 companies that have disclosed internal or government investigations into their past stock-option grants.
Spring-loading is granting stock options while in possession of material, positive information that has not been disclosed publicly. Bullet-dodging is delaying the grants of stock options until after the release of material, negative information. This can allow option grants to be made at a lower price either before the release of positive news or following the release of negative news, assuming the stock's price will move up or down in response to the information. This raises a concern similar to that of insider trading, or the trading on material non-public information.
The exercise price for an option is determined on the day of grant, providing the recipient with the same market risk as an investor who bought shares on that date. However, where options were backdated, the executive or the board (or the compensation committee) changed the grant date retroactively. The new date may be at or near the lowest price for the year or period. This would be like allowing an investor to look back and select the lowest price of the year at which to buy shares.
A 2006 study of option grants made between 1996 and 2005 at 8,000 companies found that option backdating can be an indication of poor internal controls. The study found that option backdating was more likely to occur at companies without a majority independent board and with a long-serving CEO; both factors, the study concluded, were associated with greater CEO influence on the company's compensation and governance practices.(51)
Where a company granted backdated options to an executive who is also a director, Glass Lewis will recommend voting against that executive/director, regardless of who decided to make the award. In addition, Glass Lewis will recommend voting against those directors who either approved or allowed the backdating. Glass Lewis feels that executives and directors who either benefited from backdated options or authorized the practice have breached their fiduciary responsibility to shareholders.
Given the severe tax and legal liabilities to the company from backdating, Glass Lewis will consider recommending voting against members of the audit committee who served when options were backdated, a restatement occurs, material weaknesses in internal controls exist and disclosures indicate there was a lack of documentation. These committee members failed in their responsibility to ensure the integrity of the company's financial reports.
When a company has engaged in spring-loading or bullet-dodging, Glass Lewis will consider recommending voting against the compensation committee members where there has been a pattern of granting options at or near historic lows. Glass Lewis will also recommend voting against executives serving on the board who benefited from the spring-loading or bullet-dodging.
162(m) Plans
Section 162(m) of the Internal Revenue Code allows companies to deduct compensation in excess of $1 million for the CEO and the next three most highly compensated executive officers, excluding the CFO, upon shareholder approval of the excess compensation. Glass Lewis recognizes the value of executive incentive programs and the tax benefit of shareholder-approved incentive plans.
We believe the best practice for companies is to provide robust disclosure to shareholders so that they can make fully-informed judgments about the reasonableness of the proposed compensation plan. To allow for meaningful shareholder review, we prefer that disclosure should include specific performance metrics, a maximum award pool, and a maximum award amount per employee. We also believe it is important to analyze the estimated grants to see if they are reasonable and in line with the company's peers.
We typically recommend voting against a 162(m) plan where: a company fails to provide at least a list of performance targets; a company fails to provide one of either a total pool or an individual maximum; or the proposed plan is excessive when compared with the plans of the company's peers.
The company's record of aligning pay with performance (as evaluated using our proprietary pay-for-performance model) also plays a role in our recommendation. Where a company has a record of setting reasonable pay relative to business performance, we generally recommend voting in favor of a plan even if the plan caps seem large relative to peers because we recognize the value in special pay arrangements for continued exceptional performance.
As with all other issues we review, our goal is to provide consistent but contextual advice given the specifics of the company and ongoing performance. Overall, we recognize that it is generally not in shareholders' best interests to vote against such a plan and forgo the potential tax benefit since shareholder rejection of such plans will not curtail the awards; it will only prevent the tax deduction associated with them.
Director Compensation Plans
Glass Lewis believes that non-employee directors should receive reasonable and appropriate compensation for the time and effort they spend serving on the board and its committees. Director fees should be competitive in order to retain and attract qualified individuals. But excessive fees represent a financial cost to the company and threaten to compromise the objectivity and independence of non-employee directors. Therefore, a balance is required. We will consider recommending supporting compensation plans that include option grants or other equity-based awards that help to align the interests of outside directors with those of shareholders. However, equity grants to directors should not be performance-based to ensure directors are not incentivized in the same manner as executives but rather serve as a check on imprudent risk-taking in executive compensation plan design.
Glass Lewis uses a proprietary model and analyst review to evaluate the costs of equity plans compared to the plans of peer companies with similar market capitalizations. We use the results of this model to guide our voting recommendations on stock-based director compensation plans.
IV. GOVERNANCE STRUCTURE
ANTI-TAKEOVER MEASURES
Poison Pills (Shareholder Rights Plans)
Glass Lewis believes that poison pill plans are not generally in shareholders' best interests. They can reduce management accountability by substantially limiting opportunities for corporate takeovers. Rights plans can thus prevent shareholders from receiving a buy-out premium for their stock. Typically we recommend that shareholders vote against these plans to protect their financial interests and ensure that they have an opportunity to consider any offer for their shares, especially those at a premium.
We believe boards should be given wide latitude in directing company activities and in charting the company's course. However, on an issue such as this, where the link between the shareholders' financial interests and their right to consider and accept buyout offers is substantial, we believe that shareholders should be allowed to vote on whether they support such a plan's implementation. This issue is different from other matters that are typically left to board discretion. Its potential impact on and relation to shareholders is direct and substantial. It is also an issue in which management interests may be different from those of shareholders; thus, ensuring that shareholders have a voice is the only way to safeguard their interests.
In certain circumstances, we will support a poison pill that is limited in scope to accomplish a particular objective, such as the closing of an important merger, or a pill that contains what we believe to be a reasonable qualifying offer clause. We will consider supporting a poison pill plan if the qualifying offer clause includes each of the following attributes:
1. The form of offer is not required to be an all-cash transaction;
2. The offer is not required to remain open for more than 90 business days;
3. The offeror is permitted to amend the offer, reduce the offer, or otherwise change the terms;
4. There is no fairness opinion requirement; and
5. There is a low to no premium requirement.
Where these requirements are met, we typically feel comfortable that shareholders will have the opportunity to voice their opinion on any legitimate offer.
NOL Poison Pills
Similarly, Glass Lewis may consider supporting a limited poison pill in the
unique event that a company seeks shareholder approval of a rights plan for the
express purpose of preserving Net Operating Losses (NOLs). While companies with
NOLs can generally carry these losses forward to offset future taxable income,
Section 382 of the Internal Revenue Code limits companies' ability to use NOLs
in the event of a "change of ownership."(52) In this case, a company may adopt
or amend a poison pill ("NOL pill") in order
to prevent an inadvertent change of ownership by multiple investors purchasing small chunks of stock at the same time, and thereby preserve the ability to carry the NOLs forward. Often such NOL pills have trigger thresholds much lower than the common 15% or 20% thresholds, with some NOL pill triggers as low as 5%.
Glass Lewis evaluates NOL pills on a strictly case-by-case basis taking into consideration, among other factors, the value of the NOLs to the company, the likelihood of a change of ownership based on the size of the holding and the nature of the larger shareholders, the trigger threshold and whether the term of the plan is limited in duration (i.e., whether it contains a reasonable "sunset" provision) or is subject to periodic board review and/or shareholder ratification. However, we will recommend that shareholders vote against a proposal to adopt or amend a pill to include NOL protective provisions if the company has adopted a more narrowly tailored means of preventing a change in control to preserve its NOLs. For example, a company may limit share transfers in its charter to prevent a change of ownership from occurring.
Furthermore, we believe that shareholders should be offered the opportunity to vote on any adoption or renewal of a NOL pill regardless of any potential tax benefit that it offers a company. As such, we will consider recommending voting against those members of the board who served at the time when an NOL pill was adopted without shareholder approval within the prior twelve months and where the NOL pill is not subject to shareholder ratification.
Fair Price Provisions
Fair price provisions, which are rare, require that certain minimum price and procedural requirements be observed by any party that acquires more than a specified percentage of a corporation's common stock. The provision is intended to protect minority shareholder value when an acquirer seeks to accomplish a merger or other transaction which would eliminate or change the interests of the minority stockholders. The provision is generally applied against the acquirer unless the takeover is approved by a majority of "continuing directors" and holders of a majority, in some cases a supermajority as high as 80%, of the combined voting power of all stock entitled to vote to alter, amend, or repeal the above provisions.
The effect of a fair price provision is to require approval of any merger or business combination with an "interested stockholder" by 51% of the voting stock of the company, excluding the shares held by the interested stockholder. An interested stockholder is generally considered to be a holder of 10% or more of the company's outstanding stock, but the trigger can vary.
Generally, provisions are put in place for the ostensible purpose of preventing a back-end merger where the interested stockholder would be able to pay a lower price for the remaining shares of the company than he or she paid to gain control. The effect of a fair price provision on shareholders, however, is to limit their ability to gain a premium for their shares through a partial tender offer or open market acquisition which typically raise the share price, often significantly. A fair price provision discourages such transactions because of the potential costs of seeking shareholder approval and because of the restrictions on purchase price for completing a merger or other transaction at a later time.
Glass Lewis believes that fair price provisions, while sometimes protecting shareholders from abuse in a takeover situation, more often act as an impediment to takeovers, potentially limiting gains to shareholders from a variety of transactions that could significantly increase share price. In some cases, even the independent directors of the board cannot make exceptions when such exceptions may be in the best interests of shareholders. Given the existence of state law protections for minority shareholders such as Section 203 of the Delaware Corporations Code, we believe it is in the best interests of shareholders to remove fair price provisions.
REINCORPORATION
In general, Glass Lewis believes that the board is in the best position to determine the appropriate jurisdiction of incorporation for the company. When examining a management proposal to reincorporate to a different state or country, we review the relevant financial benefits, generally related to improved corporate tax treatment, as well as changes in corporate governance provisions, especially those relating to shareholder rights, resulting from the change in domicile. Where the financial benefits are DE MINIMIS and there is a decrease in shareholder rights, we will recommend voting against the transaction.
However, costly, shareholder-initiated reincorporations are typically not the best route to achieve the furtherance of shareholder rights. We believe shareholders are generally better served by proposing specific shareholder resolutions addressing pertinent issues which may be implemented at a lower cost, and perhaps even with board approval. However, when shareholders propose a shift into a jurisdiction with enhanced shareholder rights, Glass Lewis examines the significant ways would the Company benefit from shifting jurisdictions including the following:
1. Is the board sufficiently independent?
2. Does the Company have anti-takeover protections such as a poison pill or classified board in place?
3. Has the board been previously unresponsive to shareholders (such as failing to implement a shareholder proposal that received majority shareholder support)?
4. Do shareholders have the right to call special meetings of shareholders?
5. Are there other material governance issues at the Company?
6. Has the Company's performance matched or exceeded its peers in the past one and three years?
7. How has the Company ranked in Glass Lewis' pay-for-performance analysis during the last three years?
8. Does the company have an independent chairman?
We note, however, that we will only support shareholder proposals to change a company's place of incorporation in exceptional circumstances.
EXCLUSIVE FORUM PROVISIONS
Glass Lewis believes that charter or bylaw provisions limiting a shareholder's choice of legal venue are not in the best interests of shareholders. Such clauses may effectively discourage the use of shareholder derivative claims by increasing their associated costs and making them more difficult to pursue. As such, shareholders should be wary about approving any limitation on their legal recourse including limiting themselves to a single jurisdiction (e.g. Delaware) without compelling evidence that it will benefit shareholders.
For this reason, we recommend that shareholders vote against any bylaw or charter amendment seeking to adopt an exclusive forum provision. Moreover, in the event a board seeks shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal, we will weigh the importance of the other bundled provisions when determining the vote recommendation on the proposal. We will nonetheless recommend voting against the chairman of the governance committee for bundling disparate proposals into a single proposal (refer to our discussion of nominating and governance committee performance in Section I of the guidelines).
AUTHORIZED SHARES
Glass Lewis believes that adequate capital stock is important to a company's operation. When analyzing a request for additional shares, we typically review four common reasons why a company might need additional capital stock:
1. Stock Split -- We typically consider three metrics when evaluating whether we think a stock split is likely or necessary: The historical stock pre-split price, if any; the current price relative to the company's most common trading price over the past 52 weeks; and some absolute limits on stock price that, in our view, either always make a stock split appropriate if desired by management or would almost never be a reasonable price at which to split a stock.
2. Shareholder Defenses -- Additional authorized shares could be used to bolster takeover defenses such as a poison pill. Proxy filings often discuss the usefulness of additional shares in defending against or discouraging a hostile takeover as a reason for a requested increase. Glass Lewis is typically against such defenses and will oppose actions intended to bolster such defenses.
3. Financing for Acquisitions -- We look at whether the company has a history of using stock for acquisitions and attempt to determine what levels of stock have typically been required to accomplish such transactions. Likewise, we look to see whether this is discussed as a reason for additional shares in the proxy.
4. Financing for Operations -- We review the company's cash position and its ability to secure financing through borrowing or other means. We look at the company's history of capitalization and whether the company has had to use stock in the recent past as a means of raising capital.
Issuing additional shares can dilute existing holders in limited circumstances. Further, the availability of additional shares, where the board has discretion to implement a poison pill, can often serve as a deterrent to interested suitors. Accordingly, where we find that the company has not detailed a plan for use of the proposed shares, or where the number of shares far exceeds those needed to accomplish a detailed plan, we typically recommend against the authorization of additional shares.
While we think that having adequate shares to allow management to make quick decisions and effectively operate the business is critical, we prefer that, for significant transactions, management come to shareholders to justify their use of additional shares rather than providing a blank check in the form of a large pool of unallocated shares available for any purpose.
ADVANCE NOTICE REQUIREMENTS
We typically recommend that shareholders vote against proposals that would require advance notice of shareholder proposals or of director nominees.
These proposals typically attempt to require a certain amount of notice before shareholders are allowed to place proposals on the ballot. Notice requirements typically range between three to six months prior to the annual meeting. Advance notice requirements typically make it impossible for a shareholder who misses the deadline to present a shareholder proposal or a director nominee that might be in the best interests of the company and its shareholders.
We believe shareholders should be able to review and vote on all proposals and director nominees. Shareholders can always vote against proposals that appear with little prior notice. Shareholders, as owners of a business, are capable of identifying issues on which they have sufficient information and ignoring issues on which they have insufficient information. Setting arbitrary notice restrictions limits the opportunity for shareholders to raise issues that may come up after the window closes.
VOTING STRUCTURE
Cumulative Voting
Cumulative voting increases the ability of minority shareholders to elect a director by allowing shareholders to cast as many shares of the stock they own multiplied by the number of directors to be elected. As companies generally have multiple nominees up for election, cumulative voting allows shareholders to cast all of their votes for a single nominee, or a smaller number of nominees than up for election, thereby raising the likelihood of electing one or more of their preferred nominees to the board. It can be important when a board is controlled by insiders or affiliates and where the company's ownership structure includes one or more shareholders who control a majority-voting block of company stock.
Glass Lewis believes that cumulative voting generally acts as a safeguard for shareholders by ensuring that those who hold a significant minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive to the interests of all shareholders rather than just a small group of large holders.
However, academic literature indicates that where a highly independent board is in place and the company has a shareholder-friendly governance structure, shareholders may be better off without cumulative voting. The analysis underlying this literature indicates that shareholder returns at firms with good governance structures are lower and that boards can become factionalized and prone to evaluating the needs of special interests over the general interests of shareholders collectively.
We review cumulative voting proposals on a case-by-case basis, factoring in the independence of the board and the status of the company's governance structure. But we typically find these proposals on ballots at companies where independence is lacking and where the appropriate checks and balances favoring shareholders are not in place. In those instances we typically recommend in favor of cumulative voting.
Where a company has adopted a true majority vote standard (i.e., where a director must receive a majority of votes cast to be elected, as opposed to a modified policy indicated by a resignation policy only), Glass Lewis will recommend voting against cumulative voting proposals due to the incompatibility of the two election methods. For companies that have not adopted a true majority voting standard but have adopted some form of majority voting, Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted antitakeover protections and has been responsive to shareholders.
Where a company has not adopted a majority voting standard and is facing both a shareholder proposal to adopt majority voting and a shareholder proposal to adopt cumulative voting, Glass Lewis will support only the majority voting proposal. When a company has both majority voting and cumulative voting in place, there is a higher likelihood of one or more directors not being elected as a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally cause the failed election of one or more directors for whom shareholders do not cumulate votes.
Supermajority Vote Requirements
Glass Lewis believes that supermajority vote requirements impede shareholder action on ballot items critical to shareholder interests. An example is in the takeover context, where supermajority vote requirements can strongly limit the voice of shareholders in making decisions on such crucial matters as selling the business. This in turn degrades share value and can limit the possibility of buyout premiums to
shareholders. Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will of the majority shareholders. We believe that a simple majority is appropriate to approve all matters presented to shareholders.
TRANSACTION OF OTHER BUSINESS
We typically recommend that shareholders not give their proxy to management to vote on any other business items that may properly come before an annual or special meeting. In our opinion, granting unfettered discretion is unwise.
ANTI-GREENMAIL PROPOSALS
Glass Lewis will support proposals to adopt a provision preventing the payment of greenmail, which would serve to prevent companies from buying back company stock at significant premiums from a certain shareholder. Since a large or majority shareholder could attempt to compel a board into purchasing its shares at a large premium, the anti-greenmail provision would generally require that a majority of shareholders other than the majority shareholder approve the buyback.
MUTUAL FUNDS: INVESTMENT POLICIES AND ADVISORY AGREEMENTS
Glass Lewis believes that decisions about a fund's structure and/or a fund's relationship with its investment advisor or sub-advisors are generally best left to management and the members of the board, absent a showing of egregious or illegal conduct that might threaten shareholder value. As such, we focus our analyses of such proposals on the following main areas:
o The terms of any amended advisory or sub-advisory agreement;
o Any changes in the fee structure paid to the investment advisor; and
o Any material changes to the fund's investment objective or strategy.
We generally support amendments to a fund's investment advisory agreement absent a material change that is not in the best interests of shareholders. A significant increase in the fees paid to an investment advisor would be reason for us to consider recommending voting against a proposed amendment to an investment advisory agreement. However, in certain cases, we are more inclined to support an increase in advisory fees if such increases result from being performance-based rather than asset-based. Furthermore, we generally support sub-advisory agreements between a fund's advisor and sub-advisor, primarily because the fees received by the sub-advisor are paid by the advisor, and not by the fund.
In matters pertaining to a fund's investment objective or strategy, we believe shareholders are best served when a fund's objective or strategy closely resembles the investment discipline shareholders understood and selected when they initially bought into the fund. As such, we generally recommend voting against amendments to a fund's investment objective or strategy when the proposed changes would leave shareholders with stakes in a fund that is noticeably different than when originally contemplated, and which could therefore potentially negatively impact some investors' diversification strategies.
V. COMPENSATION, ENVIRONMENTAL, SOCIAL AND
Glass Lewis typically prefers to leave decisions regarding day-to-day management and policy decisions, including those related to social, environmental or political issues, to management and the board, except
when there is a clear link between the proposal and value enhancement or risk mitigation. We feel strongly that shareholders should not attempt to micromanage the company, its businesses or its executives through the shareholder initiative process. Rather, we believe shareholders should use their influence to push for governance structures that protect shareholders and promote director accountability. Shareholders should then put in place a board they can trust to make informed decisions that are in the best interests of the business and its owners, and then hold directors accountable for management and policy decisions through board elections. However, we recognize that support of appropriately crafted shareholder initiatives may at times serve to promote or protect shareholder value.
To this end, Glass Lewis evaluates shareholder proposals on a case-by-case basis. We generally recommend supporting shareholder proposals calling for the elimination of, as well as to require shareholder approval of, antitakeover devices such as poison pills and classified boards. We generally recommend supporting proposals likely to increase and/or protect shareholder value and also those that promote the furtherance of shareholder rights. In addition, we also generally recommend supporting proposals that promote director accountability and those that seek to improve compensation practices, especially those promoting a closer link between compensation and performance.
The following is a discussion of Glass Lewis' approach to certain common shareholder resolutions. We note that the following is not an exhaustive list of all shareholder proposals.
COMPENSATION
Glass Lewis carefully reviews executive compensation since we believe that this is an important area in which the board's priorities and effectiveness are revealed. Executives should be compensated with appropriate base salaries and incentivized with additional awards in cash and equity only when their performance and that of the company warrants such rewards. Compensation, especially when also in line with the compensation paid by the company's peers, should lead to positive results for shareholders and ensure the use of appropriate incentives that drives those results over time.
However, as a general rule, Glass Lewis does not believe shareholders should be involved in the approval and negotiation of compensation packages. Such matters should be left to the board's compensation committee, which can be held accountable for its decisions through the election of directors. Therefore, Glass Lewis closely scrutinizes shareholder proposals relating to compensation to determine if the requested action or disclosure has already accomplished or mandated and whether it allows sufficient, appropriate discretion to the board to design and implement reasonable compensation programs.
Disclosure of Individual Compensation
Glass Lewis believes that disclosure of information regarding compensation is critical to allowing shareholders to evaluate the extent to which a company's pay is based on performance. However, we recognize that the SEC currently mandates significant executive compensation disclosure. In some cases, providing information beyond that which is required by the SEC, such as the details of individual employment agreements of employees below the senior level, could create internal personnel tension or put the company at a competitive disadvantage, prompting employee poaching by competitors. Further, it is difficult to see how this information would be beneficial to shareholders. Given these concerns, Glass Lewis typically does not believe that shareholders would benefit from additional disclosure of individual compensation packages beyond the significant level that is already required; we therefore typically recommend voting against shareholder proposals seeking such detailed disclosure. We will, however, review each proposal on a case by basis, taking into account the company's history of aligning executive compensation and the creation of shareholder value.
Linking Pay with Performance
Glass Lewis views performance-based compensation as an effective means of motivating executives to act in the best interests of shareholders. In our view, an executive's compensation should be specific to the company and its performance, as well as tied to the executive's achievements within the company.
However, when firms have inadequately linked executive compensation and company performance we will consider recommending supporting reasonable proposals seeking that a percentage of equity awards be tied to performance criteria. We will also consider supporting appropriately crafted proposals requesting that the compensation committee include multiple performance metrics when setting executive compensation, provided that the terms of the shareholder proposal are not overly prescriptive. Though boards often argue that these types of restrictions unduly hinder their ability to attract talent we believe boards can develop an effective, consistent and reliable approach to remuneration utilizing a wide range (and an appropriate mix) of fixed and performance-based compensation.
Retirement Benefits & Severance
As a general rule, Glass Lewis believes that shareholders should not be involved in the approval of individual severance plans. Such matters should be left to the board's compensation committee, which can be held accountable for its decisions through the election of its director members.
However, when proposals are crafted to only require approval if the benefit exceeds 2.99 times the amount of the executive's base salary plus bonus, Glass Lewis typically supports such requests. Above this threshold, based on the executive's average annual compensation for the most recent five years, the company can no longer deduct severance payments as an expense, and thus shareholders are deprived of a valuable benefit without an offsetting incentive to the executive. We believe that shareholders should be consulted before relinquishing such a right, and we believe implementing such policies would still leave companies with sufficient freedom to enter into appropriate severance arrangements.
Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), the SEC proposed rules that would require that public companies hold advisory shareholder votes on compensation arrangements and understandings in connection with merger transactions, also known as "golden parachute" transactions. Effective April 4, 2011, the SEC requires that companies seeking shareholder approval of a merger or acquisition transaction must also provide disclosure of certain "golden parachute" compensation arrangements and, in certain circumstances, conduct a separate shareholder advisory vote to approve golden parachute compensation arrangements.
Bonus Recoupments ("Clawbacks")
We believe it is prudent for boards to adopt detailed and stringent policies whereby, in the event of a restatement of financial results, the board will review all performance related bonuses and awards made to senior executives during the period covered by a restatement and will, to the extent feasible, recoup such bonuses to the extent that performance goals were not achieved. While the Dodd-Frank Act mandates that all companies adopt clawback policies that will require companies to develop a policy to recover compensation paid to current and former executives erroneously paid during the three year prior to a restatement, the SEC has yet to finalize the relevant rules. As a result, we expect to see shareholder proposals regarding clawbacks in the upcoming proxy season.
When examining proposals requesting that companies adopt recoupment policies, Glass Lewis will first review any relevant policies currently in place. When the board has already committed to a proper course, and the current policy covers the major tenets of the proposal, we see no need for further action. Further, in some instances, shareholder proposals may call for board action that contravenes legal obligations under existing employment agreements. In other cases proposals may excessively limit the board's ability to exercise judgment and reasonable discretion, which may or may not be warranted, depending on the specific situation of the company in question. We believe it is reasonable that a mandatory recoupment
policy should only affect senior executives and those directly responsible for the company's accounting errors.
We note that where a company is entering into a new executive employment contract that does not include a clawback provision and the company has had a material restatement in the recent past, Glass Lewis will recommend voting against the responsible members of the compensation committee. The compensation committee has an obligation to shareholders to include reasonable controls in executive contracts to prevent payments in the case of inappropriate behavior.
Golden Coffins
Glass Lewis does not believe that the payment of substantial, unearned posthumous compensation provides an effective incentive to executives or aligns the interests of executives with those of shareholders. Glass Lewis firmly believes that compensation paid to executives should be clearly linked to the creation of shareholder value. As such, Glass Lewis favors compensation plans centered on the payment of awards contingent upon the satisfaction of sufficiently stretching and appropriate performance metrics. The payment of posthumous unearned and unvested awards should be subject to shareholder approval, if not removed from compensation policies entirely. Shareholders should be skeptical regarding any positive benefit they derive from costly payments made to executives who are no longer in any position to affect company performance.
To that end, we will consider supporting a reasonably crafted shareholder proposal seeking to prohibit, or require shareholder approval of, the making or promising of any survivor benefit payments to senior executives' estates or beneficiaries. We will not recommend supporting proposals that would, upon passage, violate existing contractual obligations or the terms of compensation plans currently in effect.
Retention of Shares until Retirement
We strongly support the linking of executive pay to the creation of long-term sustainable shareholder value and therefore believe shareholders should encourage executives to retain some level of shares acquired through equity compensation programs to provide continued alignment with shareholders. However, generally we do not believe that requiring senior executives to retain all or an unduly high percentage of shares acquired through equity compensation programs following the termination of their employment is the most effective or desirable way to accomplish this goal. Rather, we believe that restricting executives' ability to exercise all or a supermajority of otherwise vested equity awards until they leave the company may hinder the ability of the compensation committee to both attract and retain executive talent. In our view, otherwise qualified and willing candidates could be dissuaded from accepting employment if he/she believes that his/her compensation could be dramatically affected by financial results unrelated to their own personal performance or tenure at the company. Alternatively, an overly strict policy could encourage existing employees to quit in order to realize the value locked in their incentive awards. As such, we will not typically recommend supporting proposals requiring the retention of significant amounts of equity compensation following termination of employment at target firms.
Tax Gross-Ups
Tax gross-ups can act as an anti-takeover measure, as larger payouts to executives result in larger gross-ups, which could artificially inflate the ultimate purchase price under a takeover or merger scenario. Additionally, gross-ups can result in opaque compensation packages where shareholders are unlikely to be aware of the total compensation an executive may receive. Further, we believe that in instances where companies have severance agreements in place for executives, payments made pursuant to such arrangements are often large enough to soften the blow of any additional excise taxes. Finally, such payments are not performance based, providing no incentive to recipients and, if large, can be a significant cost to companies.
Given the above, we will typically recommend supporting proposals requesting that a compensation committee adopt a policy that it will not make or promise to make to its senior executives any tax gross-up payments, except those applicable to management employees of the company generally, such as a relocation or expatriate tax equalization policy.
Linking Executive Pay to Environmental and Social Criteria
We recognize that a company's involvement in environmentally sensitive and labor-intensive industries influences the degree to which a firm's overall strategy must weigh environmental and social concerns. However, we also understand that the value generated by incentivizing executives to prioritize environmental and social issues is difficult to quantify and therefore measure, and necessarily varies among industries and companies.
When reviewing such proposals seeking to tie executive compensation to environmental or social practices, we will review the target firm's compliance with (or contravention of) applicable laws and regulations, and examine any history of environmental and social related concerns including those resulting in material investigations, lawsuits, fines and settlements. We will also review the firm's current compensation policies and practice. However, with respect to executive compensation, Glass Lewis generally believes that such policies should be left to the compensation committee.
GOVERNANCE
Declassification of the Board
Glass Lewis believes that classified boards (or "staggered boards") do not
serve the best interests of shareholders. Empirical studies have shown that:
(i) companies with classified boards may show a reduction in firm value; (ii)
in the context of hostile takeovers, classified boards operate as a takeover
defense, which entrenches management, discourages potential acquirers and
delivers less return to shareholders; and (iii) companies with classified
boards are less likely to receive takeover bids than those with single class
boards. Annual election of directors provides increased accountability and
requires directors to focus on the interests of shareholders. When companies
have classified boards shareholders are deprived of the right to voice annual
opinions on the quality of oversight exercised by their representatives.
Given the above, Glass Lewis believes that classified boards are not in the best interests of shareholders and will continue to recommend shareholders support proposals seeking their repeal.
Right of Shareholders to Call a Special Meeting
Glass Lewis strongly believes that shareholders should have the ability to call meetings of shareholders between annual meetings to consider matters that require prompt attention. However, in order to prevent abuse and waste of corporate resources by a small minority of shareholders, we believe that shareholders representing at least a sizable minority of shares must support such a meeting prior to its calling. Should the threshold be set too low, companies might frequently be subjected to meetings whose effect could be the disruption of normal business operations in order to focus on the interests of only a small minority of owners. Typically we believe this threshold should not fall below 10-15% of shares, depending on company size.
In our case-by-case evaluations, we consider the following:
o Company size
o Shareholder base in both percentage of ownership and type of shareholder (e.g., hedge fund, activist investor, mutual fund, pension fund, etc.)
o Responsiveness of board and management to shareholders evidenced by progressive shareholder rights policies (e.g., majority voting, declassifying boards, etc.) and reaction to shareholder proposals
o Company performance and steps taken to improve bad performance (e.g., new executives/directors, spin-offs, etc.)
o Existence of anti-takeover protections or other entrenchment devices
o Opportunities for shareholder action (e.g., ability to act by written consent)
o Existing ability for shareholders to call a special meeting
Right of Shareholders to Act by Written Consent
Glass Lewis strongly supports shareholders' right to act by written consent. The right to act by written consent enables shareholders to take action on important issues that arise between annual meetings. However, we believe such rights should be limited to at least the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote were present and voting.
In addition to evaluating the threshold for which written consent may be used (e.g. majority of votes cast or outstanding), we will consider the following when evaluating such shareholder proposals:
o Company size
o Shareholder base in both percentage of ownership and type of shareholder (e.g., hedge fund, activist investor, mutual fund, pension fund, etc.)
o Responsiveness of board and management to shareholders evidenced by progressive shareholder rights policies (e.g., majority voting, declassifying boards, etc.) and reaction to shareholder proposals
o Company performance and steps taken to improve bad performance (e.g., new executives/directors, spin offs, etc.)
o Existence of anti-takeover protections or other entrenchment devices
o Opportunities for shareholder action (e.g., ability and threshold to call a special meeting)
o Existing ability for shareholders to act by written consent
Board Composition
Glass Lewis believes the selection and screening process for identifying suitably qualified candidates for a company's board of directors is one which requires the judgment of many factors, including the balance of skills and talents, the breadth of experience and diversity of candidates and existing board members. Diversity of skills, abilities and points of view can foster the development of a more creative, effective and dynamic board. In general, however, we do not believe that it is in the best interests of shareholders for firms to be beholden to arbitrary rules regarding its board, or committee, composition. We believe such matters should be left to a board's nominating committee, which is generally responsible for
establishing and implementing policies regarding the composition of the board. Members of this committee may be held accountable through the director election process. However, we will consider supporting reasonable, well-crafted proposals to increase board diversity where there is evidence a board's lack of diversity lead to a decline in shareholder value.
Reimbursement of Solicitation Expenses
Where a dissident shareholder is seeking reimbursement for expenses incurred in waging a contest or submitting a shareholder proposal and has received the support of a majority of shareholders, Glass Lewis generally will recommend in favor of reimbursing the dissident for reasonable expenses. In those rare cases where a shareholder has put his or her own time and money into organizing a successful campaign to unseat a poorly performing director (or directors) or sought support for a shareholder proposal, we feel that the shareholder should be entitled to reimbursement of expenses by other shareholders, via the company. We believe that, in such cases, shareholders express their agreement by virtue of their majority vote for the dissident (or the shareholder proposal) and will share in the expected improvement in company performance.
Majority Vote for the Election of Directors
If a majority vote standard were implemented, shareholders could collectively vote to reject a director they believe will not pursue their best interests. We think that this minimal amount of protection for shareholders is reasonable and will not upset the corporate structure nor reduce the willingness of qualified shareholder-focused directors to serve in the future.
We believe that a majority vote standard will likely lead to more attentive directors. Further, occasional use of this power will likely prevent the election of directors with a record of ignoring shareholder interests. Glass Lewis will generally support shareholder proposals calling for the election of directors by a majority vote, except for use in contested director elections.
Cumulative Vote for the Election of Directors
Glass Lewis believes that cumulative voting generally acts as a safeguard for shareholders by ensuring that those who hold a significant minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive to the interests of all shareholders rather than just a small group of large holders. However, when a company has both majority voting and cumulative voting in place, there is a higher likelihood of one or more directors not being elected as a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally cause the failed election of one or more directors for whom shareholders do not cumulate votes.
Given the above, where a company (i) has adopted a true majority vote standard;
(ii) has simultaneously proposed a management-initiated true majority vote
standard; or (iii) is simultaneously the target of a true majority vote
standard shareholder proposal, Glass Lewis will recommend voting against
cumulative voting proposals due to the potential incompatibility of the two
election methods.
For companies that have not adopted a true majority voting standard but have adopted some form of majority voting, Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted antitakeover protections and has been responsive to shareholders.
Supermajority Vote Requirements
We believe that a simple majority is appropriate to approve all matters presented to shareholders, and will recommend that shareholders vote accordingly. Glass Lewis believes that supermajority vote requirements impede shareholder action on ballot items critical to shareholder interests. In a takeover
context supermajority vote requirements can strongly limit the voice of shareholders in making decisions on crucial matters such as selling the business. These limitations in turn may degrade share value and can reduce the possibility of buyout premiums for shareholders. Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will of the majority of shareholders.
Independent Chairman
Glass Lewis views an independent chairman as better able to oversee the executives and set a pro-shareholder agenda in the absence of the conflicts that a CEO, executive insider, or close company affiliate may face. Separating the roles of CEO and chairman may lead to a more proactive and effective board of directors. The presence of an independent chairman fosters the creation of a thoughtful and dynamic board, not dominated by the views of senior management. We believe that the separation of these two key roles eliminates the conflict of interest that inevitably occurs when a CEO, or other executive, is responsible for self-oversight. As such, we will typically support reasonably crafted shareholder proposals seeking the installation of an independent chairman at a target company. However, we will not support proposals that include overly prescriptive definitions of "independent."
Proxy Access
Shareholders have consistently sought mechanisms through which they could secure a meaningful voice in director elections in recent years. While many of these efforts have centered on regulatory changes at the SEC, the United States Congress and the Obama Administration have placed "Proxy Access" in the spotlight of the U.S. Government's most recent corporate governance-related financial reforms. Regulations allowing or mandating the reimbursement of solicitation expenses for successful board candidates exist and further regulation is pending. A 2009 amendment to the Delaware Corporate Code allows companies to adopt bylaw provisions providing shareholders proxy access.
Further, in July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform And Consumer Protection Act, (the "Dodd-Frank Act"). This Act provides the SEC with the authority to adopt rules permitting shareholders to use issuer proxy solicitation materials to nominate director candidates. The SEC received over 500 comments regarding proposed proxy access, some of which questioned the agency's authority to adopt such a rule. Nonetheless, in August 2010, the SEC adopted final Rule 14A-11, which under certain circumstances, gives shareholders (and shareholder groups) who have collectively held at least 3% of the voting power of a company's securities continuously for at least three years, the right to nominate up to 25% of a board's directors and have such nominees included on a company's ballot and described in its proxy statement. While final Rule 14a-11 was originally scheduled to take effect on November 15, 2010, on October 4, 2010, the SEC announced that it would delay the rule's implementation following the filing of a lawsuit by the U.S. Chamber Of Commerce and the Business Roundtable. In July 2011, the United States Court of Appeals for the District of Columbia ruled against the SEC based on what it perceived to be the SEC's failure to fully consider the costs and the benefits of the proxy access rules. On September 6, 2011, the SEC announced that it would not be seeking rehearing of the decision. However, while rule 14a-11 was vacated, the U.S. Court of Appeals issued a stay on the "private ordering" amendments to Rule 14a-8, meaning that companies are no longer able to exclude shareholder proposals requesting that they adopt procedures to allow for shareholder nominees to be included in proxy statements ("Statement by SEC Chairman Mary L. Schapiro on Proxy Access Ligation." SEC PRESS RELEASE. September 6, 2011).
Glass Lewis will consider supporting well-crafted and reasonable proposals requesting proxy access, as we believe that in some cases, adoption of this provision allows for improved shareholder rights and ensures that shareholders who maintain a long-term interest in the target company have an ability to nominate candidates for the board. Glass Lewis reviews proposals requesting proxy access on a case-by-case basis, and will consider the following in our analysis:
o Company size;
o The shareholder proponent and their reasoning for putting forth the proposal at the target company;
o The percentage ownership requested and holding period requirement;
o Shareholder base in both percentage of ownership and type of shareholder (e.g., hedge fund, activist investor, mutual fund, pension fund, etc.);
o Responsiveness of board and management to shareholders evidenced by progressive shareholder rights policies (e.g., majority voting, declassifying boards, etc.) and reaction to shareholder proposals;
o Company performance and steps taken to improve bad performance (e.g., new executives/directors, spin-offs, etc.);
o Existence of anti-takeover protections or other entrenchment devices; and
o Opportunities for shareholder action (e.g., ability to act by written consent or right to call a special meeting).
ENVIRONMENT
There are significant financial, legal and reputational risks to companies resulting from poor environmental practices or negligent oversight thereof. We believe part of the board's role is to ensure that management conducts a complete risk analysis of company operations, including those that have environmental implications. Directors should monitor management's performance in mitigating environmental risks attendant with operations in order to eliminate or minimize the risks to the company and shareholders.
When management and the board have displayed disregard for environmental risks, have engaged in egregious or illegal conduct, or have failed to adequately respond to current or imminent environmental risks that threaten shareholder value, we believe shareholders should hold directors accountable. When a substantial environmental risk has been ignored or inadequately addressed, we may recommend voting against responsible members of the governance committee, or members of a committee specifically charged with sustainability oversight.
With respect to environmental risk, Glass Lewis believes companies should actively consider their exposure to:
Direct environmental risk: Companies should evaluate financial exposure to direct environmental risks associated with their operations. Examples of direct environmental risks are those associated with spills, contamination, hazardous leakages, explosions, or reduced water or air quality, among others. Further, firms should consider their exposure to environmental risks emanating from systemic change over which they may have only limited control, such as insurance companies affected by increased storm severity and frequency resulting from climate change.
Risk due to legislation/regulation: Companies should evaluate their exposure to shifts or potential shifts in environmental regulation that affect current and planned operations. Regulation should be carefully monitored in all jurisdictions within which the company operates. We look closely at relevant and proposed legislation and evaluate whether the company has responded appropriately.
Legal and reputational risk: Failure to take action on important issues may carry the risk of damaging negative publicity and potentially costly litigation. While the effect of high-profile campaigns on shareholder value may not be directly measurable, in general we believe it is prudent for firms to evaluate social and environmental risk as a necessary part in assessing overall portfolio risk.
If there is a clear showing that a company has inadequately addressed these risks, Glass Lewis may consider supporting appropriately crafted shareholder proposals requesting increased disclosure, board attention or, in limited circumstances, specific actions. In general, however, we believe that boards and management are in the best position to address these important issues, and will only rarely recommend that shareholders supplant their judgment regarding operations.
Climate Change and Green House Gas Emission Disclosure
Glass Lewis will consider recommending a vote in favor of a reasonably crafted proposal to disclose a company's climate change and/or greenhouse gas emission strategies when (i) a company has suffered financial impact from reputational damage, lawsuits and/or government investigations, (ii) there is a strong link between climate change and its resultant regulation and shareholder value at the firm, and/or (iii) the company has inadequately disclosed how it has addressed climate change risks. Further, we will typically recommend supporting proposals seeking disclosure of greenhouse gas emissions at companies operating in carbon- or energy- intensive industries, such basic materials, integrated oil and gas, iron and steel, transportation, utilities, and construction. We are not inclined, however, to support proposals seeking emissions reductions, or proposals seeking the implementation of prescriptive policies relating to climate change.
Sustainability and other Environmentally-Related Reports
When evaluating requests that a firm produce an environmentally-related report, such as a sustainability report or a report on coal combustion waste or hydraulic fracturing, we will consider, among other things:
o The financial risk to the company from the firm's environmental practices and/or regulation;
o The relevant company's current level of disclosure;
o The level of sustainability information disclosed by the firm's peers;
o The industry in which the firm operates;
o The level and type of sustainability concerns/controversies at the relevant firm, if any;
o The time frame within which the relevant report is to be produced; and
o The level of flexibility granted to the board in the implementation of the proposal.
In general, we believe that firms operating in extractive industries should produce reports regarding the risks presented by their environmental activities, and will consider recommending a vote for reasonably crafted proposals requesting that such a report be produced; however, as with all shareholder proposals, we will evaluate these report requests on a case by case basis.
Oil Sands
The procedure required to extract usable crude from oil sands emits significantly more greenhouse gases than do conventional extraction methods. In addition, development of the oil sands has a deleterious effect on the local environment, such as Canada's boreal forests which sequester significant levels of carbon. We believe firms should strongly consider and evaluate exposure to financial, legal and reputational risks associated with investment in oil sands.
We believe firms should adequately disclose their involvement in the oil sands, including a discussion of exposure to sensitive political and environmental areas. Firms should broadly outline the scope of oil sands operations, describe the commercial methods for producing oil, and discuss the management of greenhouse gas emissions. However, we believe that detailed disclosure of investment assumptions could unintentionally reveal sensitive information regarding operations and business strategy, which would not serve shareholders' interest. We will review all proposals seeking increased disclosure of oil sands operations in the above context, but will typically not support proposals seeking cessation or curtailment of operations.
Sustainable Forestry
Sustainable forestry provides for the long-term sustainable management and use of trees and other non-timber forest products. Retaining the economic viability of forests is one of the tenets of sustainable forestry, along with encouraging more responsible corporate use of forests. Sustainable land use and the effective management of land are viewed by some shareholders as important in light of the impact of climate change. Forestry certification has emerged as a way that corporations can address prudent forest management. There are currently several primary certification schemes such as the Sustainable Forestry Initiative ("SFI") and the Forest Stewardship Council ("FSC").
There are nine main principles that comprise the SFI: (i) sustainable forestry;
(ii) responsible practices; (iii) reforestation and productive capacity; (iv)
forest health and productivity; (v) long-term forest and soil productivity;
(vi) protection of water resources; (vii) protection of special sites and
biodiversity; (viii) legal compliance; and (ix) continual improvement.
The FSC adheres to ten basic principles: (i) compliance with laws and FSC principles; (ii) tenure and use rights and responsibilities; (iii) indigenous peoples' rights; (iv) community relations and workers' rights; (v) benefits from the forest; (vi) environmental impact; (vii) management plan; (viii) monitoring and assessment; (ix) maintenance of high conservation value forests; and (x) plantations.
Shareholder proposals regarding sustainable forestry have typically requested that the firm comply with the above SFI or FSC principles as well as to assess the feasibility of phasing out the use of uncertified fiber and increasing the use of certified fiber. We will evaluate target firms' current mix of certified and uncertified paper and the firms' general approach to sustainable forestry practices, both absolutely and relative to its peers but will only support proposals of this nature when we believe that the proponent has clearly demonstrated that the implementation of this proposal is clearly linked to an increase in shareholder value.
SOCIAL ISSUES
Non-Discrimination Policies
Companies with records of poor labor relations may face lawsuits, efficiency-draining turnover, poor employee performance, and/or distracting, costly investigations. Moreover, as an increasing number of companies adopt inclusive EEO policies, companies without comprehensive policies may face damaging recruitment, reputational and legal risks. We believe that a pattern of making financial settlements as a result of lawsuits based on discrimination could indicate investor exposure to ongoing financial risk. Where there is clear evidence of employment practices resulting in negative economic exposure, Glass Lewis may support shareholder proposals addressing such risks.
MacBride Principles
To promote peace, justice and equality regarding employment in Northern Ireland, Dr. Sean MacBride, founder of Amnesty International and Nobel Peace laureate, proposed the following equal opportunity employment principles:
1. Increasing the representation of individuals from underrepresented religious groups in the workforce including managerial, supervisory, administrative, clerical and technical jobs;
2. Adequate security for the protection of minority employees both at the workplace and while traveling to and from work;
3. The banning of provocative religious or political emblems from the workplace;
4. All job openings should be publicly advertised and special recruitment efforts should be made to attract applicants from underrepresented religious groups;
5. Layoff, recall, and termination procedures should not, in practice, favor particular religious groupings;
6. The abolition of job reservations, apprenticeship restrictions, and differential employment criteria, which discriminate on the basis of religion or ethnic origin;
7. The development of training programs that will prepare substantial numbers of current minority employees for skilled jobs, including the expansion of existing programs and the creation of new programs to train, upgrade, and improve the skills of minority employees;
8. The establishment of procedures to assess, identify and actively recruit minority employees with potential for further advancement; and
9. The appointment of senior management staff member to oversee the company's affirmative action efforts and setting up of timetables to carry out affirmative action principles.
Proposals requesting the implementation of the above principles are typically proposed at firms that operate, or maintain subsidiaries that operate, in Northern Ireland. In each case, we will examine the company's current equal employment opportunity policy and the extent to which the company has been subject to protests, fines, or litigation regarding discrimination in the workplace, if any. Further, we will examine any evidence of the firm's specific record of labor concerns in Northern Ireland.
Human Rights
Glass Lewis believes explicit policies set out by companies' boards of directors on human rights provides shareholders with the means to evaluate whether the company has taken steps to mitigate risks from its human rights practices. As such, we believe that it is prudent for firms to actively evaluate risks to shareholder value stemming from global activities and human rights practices along entire supply chains. Findings and investigations of human rights abuses can inflict, at a minimum, reputational damage on targeted companies and have the potential to dramatically reduce shareholder value. This is particularly true for companies operating in emerging market countries in extractive industries and in politically unstable regions. As such, while we typically rely on the expertise of the board on these important policy issues, we recognize that, in some instances, shareholders could benefit from increased reporting or further codification of human rights policies.
Military and US Government Business Policies
Glass Lewis believes that disclosure to shareholders of information on key company endeavors is important. However, we generally do not support resolutions that call for shareholder approval of policy statements for or against government programs, most of which are subject to thorough review by the federal government and elected officials at the national level. We also do not support proposals favoring disclosure of information where similar disclosure is already mandated by law, unless circumstances exist that warrant the additional disclosure.
Foreign Government Business Policies
Where a corporation operates in a foreign country, Glass Lewis believes that the company and board should maintain sufficient controls to prevent illegal or egregious conduct with the potential to decrease shareholder value, examples of which include bribery, money laundering, severe environmental violations or proven human rights violations. We believe that shareholders should hold board members, and in particular members of the audit committee and CEO, accountable for these issues when they face reelection, as these concerns may subject the company to financial risk. In some instances, we will support appropriately crafted shareholder proposals specifically addressing concerns with the target firm's actions outside its home jurisdiction.
Health Care Reform Principles
Health care reform in the United States has long been a contentious political issue and Glass Lewis therefore believes firms must evaluate and mitigate the level of risk to which they may be exposed regarding potential changes in health care legislation. Over the last several years, Glass Lewis has reviewed multiple shareholder proposals requesting that boards adopt principles for comprehensive health reform, such as the following based upon principles reported by the Institute of Medicine:
o Health care coverage should be universal;
o Health care coverage should be continuous;
o Health care coverage should be affordable to individuals and families;
o The health insurance strategy should be affordable and sustainable for society; and
o Health insurance should enhance health and well-being by promoting access to high-quality care that is effective, efficient, safe, timely, patient-centered and equitable.
In general, Glass Lewis believes that individual corporate board rooms are not the appropriate forum in which to address evolving and contentious national policy issues. The adoption of a narrow set of principles could limit the board's ability to comply with new regulation or to appropriately and flexibly respond to health care issues as they arise. As such, barring a compelling reason to the contrary, we typically do not support the implementation of national health care reform principles at the company level.
Tobacco
Glass Lewis recognizes the contentious nature of the production, procurement, marketing and selling of tobacco products. We also recognize that tobacco companies are particularly susceptible to reputational and regulatory risk due to the nature of its operations. As such, we will consider supporting uniquely tailored and appropriately crafted shareholder proposals requesting increased information or the implementation of suitably broad policies at target firms on a case-by-case basis. However, we typically do not support proposals requesting that firms shift away from, or significantly alter, the legal production or marketing of core products.
Reporting Contributions and Political Spending
While corporate contributions to national political parties and committees controlled by federal officeholders are prohibited under federal law, corporations can legally donate to state and local candidates, organizations registered under 26 USC Sec. 527 of the Internal Revenue Code and state-level political committees. There is, however, no standardized manner in which companies must disclose this information. As such, shareholders often must search through numerous campaign finance reports and detailed tax documents to ascertain even limited information. Corporations also frequently use trade associations, which are not required to report funds they receive for or spend on political activity, as a means for corporate political action.
Further, in 2010 the Citizens United v. Federal Election Commission decision by the Supreme Court affirmed that corporations are entitled to the same free speech laws as individuals and that it is legal for a corporation to donate to political causes without monetary limit. While the decision did not remove bans on direct contributions to candidates, companies are now able to contribute indirectly, and substantially, to candidates through political organizations. Therefore, it appears companies will enjoy greater latitude in their political actions by this recent decision.
When evaluating whether a requested report would benefit shareholders, Glass Lewis seeks answers to the following three key questions:
o Is the Company's disclosure comprehensive and readily accessible?
o How does the Company's political expenditure policy and disclosure compare to its peers?
o What is the Company's current level of oversight?
Glass Lewis will consider supporting a proposal seeking increased disclosure of corporate political expenditure and contributions if the firm's current disclosure is insufficient, or if the firm's disclosure is significantly lacking compared to its peers. Further, we will typically recommend voting for proposals requesting reports on lobbying or political contributions and expenditures when there is no explicit board oversight or there is evidence of inadequate board oversight. Given that political donations are strategic decisions intended to increase shareholder value and have the potential to negatively affect the company, we believe the board should either implement processes and procedures to ensure the proper use of the funds or closely evaluate the process and procedures used by management. We will also consider supporting such proposals when there is verification, or credible allegations, that the company is mismanaging corporate funds through political donations. If Glass Lewis discovers particularly egregious actions by the company, we will consider recommending voting against the governance committee members or other responsible directors.
Animal Welfare
Glass Lewis believes that it is prudent for management to assess potential exposure to regulatory, legal and reputational risks associated with all business practices, including those related to animal welfare. A high-profile campaign launched against a company could result in shareholder action, a reduced customer base, protests and potentially costly litigation. However, in general, we believe that the board and management are in the best position to determine policies relating to the care and use of animals. As such, we will typically vote against proposals seeking to eliminate or limit board discretion regarding animal welfare unless there is a clear and documented link between the board's policies and the degradation of shareholder value.
Internet Censorship
Legal and ethical questions regarding the use and management of the Internet and the worldwide web have been present since access was first made available to the public almost twenty years ago. Prominent among these debates are the issues of privacy, censorship, freedom of expression and freedom of access. Glass Lewis believes that it is prudent for management to assess its potential exposure to risks relating to the internet management and censorship policies. As has been seen at other firms, perceived violation of user privacy or censorship of Internet access can lead to high-profile campaigns that could potentially result in decreased customer bases or potentially costly litigation. In general, however, we believe that management and boards are best equipped to deal with the evolving nature of this issue in various jurisdictions of operation.
EXHIBIT D
AlphaSimplex Group, LLC
APPENDIX M
PROXY VOTING POLICY AND PROCEDURES
Adopted October 5, 2004
Revised as of December 15, 2009
I. POLICY
The Adviser understands that proxy voting is an important right of shareholders and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised. However, the Adviser provides advice to clients primarily on financial instruments such as futures and forwards, which generally do not have voting rights, and therefore, the Adviser does not expect to vote the proxies of its clients. If the Adviser does vote proxies with respect to the clients' investments, it will vote in a manner that is consistent with what it believes to be the best interests of such clients and in accordance with these policies and procedures.
II. PROXY VOTING PROCEDURES
All proxies received by the Adviser will be sent to the Chief Compliance Officer of the Adviser. The Chief Compliance Officer will:
(1) Keep a record of each proxy received; and
(2) Notify the President of any unusual or extraordinary items noted.
III. VOTING GUIDELINES
As mentioned above, since the Adviser does not expect to invest in securities that have voting rights, the Adviser does not expect to vote proxies on behalf of its clients. If the Adviser does receive proxies with respect to its clients' investments, it will further develop this Proxy Voting Policy and Procedures and implement additional policies and procedures, as needed, and vote in a manner that consistent with what it believes to be the best interests of such clients.
IV. DISCLOSURE
(a) The Adviser will disclose in its Form ADV Part II that clients may contact the Chief Compliance Officer, via e-mail or telephone, in order to obtain information on how to request a copy of this policy and procedures. If a client requests this information, the Chief Compliance Officer will prepare a written response to the client along with a copy of this policy and procedures.
(b) A concise summary of this Proxy Voting Policy and Procedures will be included in the Adviser's Form ADV Part II, and will be updated whenever this policy and procedures are updated.
V. RECORDKEEPING
The Chief Compliance Officer will maintain files relating to the Adviser's proxy voting procedures in an easily accessible place. Records will be maintained and preserved for five years from the end of the fiscal year during which the last entry was made on a record, with records for the first two years kept in the offices of the Adviser. Records of the following will be included in the files:
(1) Copies of this proxy voting policy and procedures, and any amendments thereto.
(2) A copy of each proxy statement that the Adviser receives, provided however that the Adviser may rely on obtaining a copy of proxy statements from the SEC's EDGAR system for those proxy statements that are so available.
(3) A copy of each written client request for information on how the Adviser voted such client's proxies, and a copy of any written response to any (written or oral) client request for information on how the Adviser voted its proxies.
EXHIBIT E
AQR CAPITAL MANAGEMENT, LLC ("AQR")
PROXY POLICY
(DATE MODIFIED: 3/26/2012)
1. GENERAL
Investment Advisers Act of 1940 Rule 206(4)-6 imposes a number of requirements on investment advisers that have voting authority with respect to securities held in their clients' accounts. The SEC states that the duty of care requires an adviser with proxy voting authority to monitor corporate actions and to vote the proxies. To satisfy its duty of loyalty, an adviser must cast the proxy votes in a manner consistent with the best interests of its clients, and must never put the adviser's own interests above those of its clients.
These written policies and procedures are designed to reasonably ensure that AQR votes proxies in the best interest of clients over whom AQR has voting authority; and describes how AQR addresses material conflicts between its interests and those of its clients with respect to proxy voting.
2. PROXY GUIDELINES
Generally, AQR will vote based upon the recommendations of ISS Governance Services ("ISS"), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. AQR has adopted the Proxy Voting Guidelines employed by ISS for voting proxies. Although ISS' analyses are reviewed and considered in making a final voting decision, AQR will make the ultimate decision. As a matter of policy, the employees, officers, or principals of AQR will not be influenced by outside sources whose interests conflict with the interests of its Clients.
In addition, unless prior approval is obtained from AQR's CCO the following must be adhered to:
(a) AQR shall not engage in conduct that involves an attempt to change or influence the control of a public company. In addition, all communications regarding proxy issues or corporate actions between companies or their agents, or with fellow shareholders shall be for the sole purpose of expressing and discussing AQR's concerns for its advisory clients' interests and not for an attempt to influence or control management.
(b) AQR will not announce its voting intentions and the reasons therefore.
(c) AQR shall not participate in a proxy solicitation or otherwise seek proxy-voting authority from any other public company shareholder.
AQR has the responsibility to process proxies and maintain proxy records pursuant to SEC rules and regulations. Therefore, AQR will attempt to process every vote it receives for all domestic and foreign proxies. However, there may be situations in which AQR cannot vote proxies. For example:
o If the cost of voting a proxy outweighs the benefit of voting, AQR may refrain from processing that vote.
o AQR may not be given enough time to process the vote. For example ISS through no fault of its own, may receive a meeting notice from the company too late, or may be unable to obtain a timely translation of the agenda.
o If AQR has outstanding sell orders or intends to sell, the proxies for those meetings may not be voted in order to facilitate the sale of those securities. Although AQR may hold shares on a company's record date, should it sell them prior to the company's meeting date, AQR ultimately may decide not to vote those shares.
o AQR will generally refrain from voting proxies on foreign securities that are subject to share blocking restrictions.
AQR may vote against an agenda item where no further information is provided, particularly in non-U.S. markets. AQR may also enter an "abstain" vote on the election of certain directors from time to time based on individual situations, particularly where AQR is not in favor of electing a director and there is no provision for voting against such director.
If an AQR portfolio manager determines that the interests of clients are best
served by voting differently from the ISS recommended vote, approval must be
obtained from the CCO or designee. AQR will adhere to the Conflict of Interest
(below) section of this policy in all instances where the recommended vote is
not taken.
AQR will periodically review the outside party's voting standards and guidelines to make certain that proxy issues are voted in accordance with the adopted proxy voting guidelines and the avoidance of conflicts of interest.
3. PROXY PROCEDURES
AQR has engaged ISS to assist in the administrative aspects for the voting of proxies. ISS is responsible for coordinating with Clients' custodians to ensure that all proxy materials received by the custodians relating to the Clients' portfolio securities are processed in a timely fashion. To the extent applicable, ISS votes all proxies in accordance with its own proxy voting guidelines (please see Proxy Guidelines above), which have been reviewed and adopted by AQR. The CCO shall supervise the proxy voting process.
Upon request, AQR will furnish a copy of the policies and procedures to the requesting client and information on how the client's proxies were voted.
4. CONFLICTS OF INTEREST
Occasions may arise where a person or organization involved in the proxy voting process may have a conflict of interest. A conflict of interest may exist, for example, if AQR has a business relationship with (or is actively soliciting business from) either the company soliciting the proxy or a third party that has a material interest in the outcome of a proxy vote or that is actively lobbying for a particular outcome of a proxy vote. Any individual with knowledge of a personal conflict of interest (e.g., familial relationship with company management) relating to a particular referral item shall disclose that conflict to the CCO and otherwise remove him or herself from the proxy voting process. The CCO will
review each item referred to by AQR's investment professionals to determine if a conflict of interest exists and will draft a Conflicts Report for each referral item that (1) describes any conflict of interest; (2) discusses the procedures used to address such conflict of interest; and (3) discloses any contacts from parties outside AQR (other than routine communications from proxy solicitors) with respect to the referral item not otherwise reported in an investment professional's recommendation. The Conflicts Report will also include written confirmation that any recommendation from an investment professional provided under circumstances where a conflict of interest exists was made solely on the investment merits and without regard to any other consideration.
EXHIBIT F
BLACKROCK
Proxy Voting Guidelines for U.S. Securities
March 20,2011
CONTENTS
Introduction 2 Voting guidelines 2 - Boards and directors 2 - Auditors and audit-related issues 7 - Capital structure proposals 7 - Mergers, asset sales, and other special transactions 8 - Remuneration and benefits 10 - Social, ethical and environmental issues 12 - General corporate governance matters 12 1 2011 Proxy voting guidelines for U.S. securities BlackRock |
THESE GUIDELINES SHOULD BE READ IN CONJUNCTION WITH BLACKROCK'S GLOBAL CORPORATE GOVERNANCE AND ENGAGEMENT PRINCIPLES -- 2011.
INTRODUCTION
BlackRock, Inc. and its subsidiaries (collectively, "BlackRock") seek to make proxy voting decisions in the manner most likely to protect and promote the economic value of the securities held in client accounts. The following issue-specific proxy voting guidelines (the "Guidelines") are intended to summarize BlackRock's general philosophy and approach to issues that may commonly arise in the proxy voting context for U.S. Securities. These Guidelines are not intended to limit the analysis of individual issues at specific companies and are not intended to provide a guide to how BlackRock will vote in every instance. Rather, they share our view about corporate governance issues generally, and provide insight into how we typically approach issues that commonly arise on corporate ballots. They are applied with discretion, taking into consideration the range of issues and facts specific to the company and the individual ballot item.
VOTING GUIDELINES
These guidelines are divided into six key themes which group together the issues that frequently appear on the agenda of annual and extraordinary meetings of shareholders.
The six key themes are:
* Boards and directors
* Auditors and audit-related issues
* Capital structure, mergers, asset sales and other special transactions
* Remuneration and benefits
* Social, ethical and environmental issues
* General corporate governance matters
BOARDS AND DIRECTORS
DIRECTOR ELECTIONS
BlackRock generally supports board nominees in most uncontested elections. BlackRock may withhold votes from certain directors on the board or members of particular board committees (or prior members, as the case may be) in certain situations, including, but not limited to:
* The independent chair or lead independent director and members of the governance committee, where a board fails to implement shareholder proposals that receive a majority of votes cast at a prior shareholder meeting, and the
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proposals, in our view, have a direct and substantial impact on shareholders' fundamental rights or long-term economic interests.
* The independent chair or lead independent director and members of the governance committee, where a board implements or renews a poison pill without seeking shareholder approval beforehand or within a reasonable period of time after implementation.
* An insider or affiliated outsider who sits on any of the board's key committees (i.e., audit, compensation, nominating and governance), which we believe generally should be entirely independent. However, BlackRock will examine a board's complete profile when questions of independence arise prior to casting a withhold vote for any director. For controlled companies, as defined by the U. S. stock exchanges, we will only vote against insiders or affiliates who sit on the audit committee, but not other key committees.
* Members of the audit committee during a period when the board failed to facilitate quality, independent auditing, for example, if substantial accounting irregularities suggest insufficient oversight by that committee.
* Members of the audit committee during a period in which we believe the company has aggressively accounted for its equity compensation plans.
* Members of the compensation committee during a period in which executive compensation appears excessive relative to performance and peers, and where we believe the compensation committee has not already substantially addressed this issue.
* Members of the compensation committee where the company has repriced options without contemporaneous shareholder approval.
* The chair of the nominating committee, or where no chair exists, the nominating committee member with the longest tenure, where board member(s) at the most recent election of directors have received withhold votes from more than 30% of shares voting and the board has not taken appropriate action to respond to shareholder concerns. This may not apply in cases where BlackRock did not support the initial withhold vote.
* The chair of the nominating committee, or where no chair exists, the nominating committee member with the longest tenure, where the board is not composed of a majority of independent directors. However, this would not apply in the case of a controlled company.
* Where BlackRock obtains evidence that casts significant doubt on a director's qualifications or ability to represent shareholders.
* Where it appears the director has acted (at the company or at other companies) in a manner that compromises his or her reliability in representing the best long-term economic interests of shareholders.
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* Where a director has a pattern over a period of years of attending less than 75% of combined board and applicable key committee meetings.
* Where a director has committed himself or herself to service on a large number of boards, such that we deem it unlikely that the director will be able to commit sufficient focus and time to a particular company (commonly referred to as "over-boarding") . While each situation will be reviewed on a case-by-case basis, BlackRock is most likely to withhold votes for over-boarding where a director is: 1) serving on more than four public company boards; or 2) is a chief executive officer at a public company and is serving on more than two public company boards in addition to the board of the company where they serve as chief executive officer.
If a board maintains a classified structure, it is possible that the director(s) with whom we have a particular concern may not be subject to election in the year that the concern arises. In such situations, if we have a concern regarding a committee or committee chair, we generally register our concern by withholding votes from all members of the relevant committee who are subject to election that year.
DIRECTOR INDEPENDENCE
We expect that a board should be majority independent. We believe that an independent board faces fewer conflicts and is best prepared to protect shareholder interests. Common impediments to independence in the U.S. include but are not limited to:
* Employment by the company or a subsidiary as a senior executive within the previous five years
* Status as a founder of the company
* Substantial business or personal relationships with the company or the company's senior executives within the past three years
* Family relationships with senior executives of the company
* An equity ownership in the company in excess of 20%
AGE LIMITS / TERM LIMITS
We typically oppose limits on the pool of directors from which shareholders can choose their representatives, especially where those limits are arbitrary or unrelated to the specific performance or experience of the director in question.
BOARD SIZE
We generally defer to the board in setting the appropriate size. We believe directors are generally in the best position to assess what size is optimal to ensure a board's effectiveness. However, we may oppose boards that appear too small to allow for effective shareholder representation or too large to function efficiently.
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CLASSIFIED BOARD OF DIRECTORS/STAGGERED TERMS
A classified board of directors is one that is divided into classes (generally three), each of which is elected on a staggered schedule (generally for three years). At each annual meeting, only a single class of directors is subject to reelection (generally one-third of the entire board).
We believe that classification of the board dilutes shareholders' right to evaluate promptly a board's performance and limits shareholder selection of their representatives. By not having the mechanism to immediately address concerns we may have with any specific director, we may be required to register our concerns through our vote on the directors who are subject to election that year (see "Director elections" for additional detail). Furthermore, where boards are classified, director entrenchment is more likely, because review of board service generally only occurs every three years. Therefore, we typically vote against classification and for proposals to eliminate board classification.
CONTESTED DIRECTOR ELECTIONS
Most director elections are not competitive, but shareholders are sometimes presented with competing slates of director candidates. Generally, such proxy contests are the result of a shareholder (or group of shareholders) seeking to change the company's strategy or address failures in the board's oversight of management. The details of proxy contests are assessed on a case-by-case basis. We evaluate a number of factors, which may include, but are not limited to: the qualifications of the dissident and management candidates; the validity of the concerns identified by the dissident; the viability of both the dissident's and management's plans; the likelihood that the dissident's solutions will produce the desired change; and whether the dissidents represent the best option for enhancing long term shareholder value.
CUMULATIVE VOTING FOR DIRECTORS
Cumulative voting allocates one vote for each share of stock held, times the number of directors subject to election. A shareholder may cumulate his/her votes and cast all of them in favor of a single candidate, or split them among any combination of candidates. By making it possible to use their cumulated votes to elect at least one board member, cumulative voting is typically a mechanism through which minority shareholders attempt to secure board representation.
We typically oppose proposals that further the candidacy of minority shareholders whose interests do not coincide with our fiduciary responsibility. We may support cumulative voting proposals at companies where the board is not majority independent.
DIRECTOR COMPENSATION AND EQUITY PROGRAMS
We believe that compensation for independent directors should be structured to align the interests of the directors with those of shareholders, whom the directors have been elected to represent. We believe that independent director compensation packages based on the company's long-term performance and that include some form of long-term equity compensation are more likely to meet this goal; therefore, we typically support proposals to provide such compensation packages. However, we will generally oppose shareholder proposals requiring directors to own a minimum amount of
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company stock, as we believe that companies should maintain flexibility in administering compensation and equity programs for independent directors, given each company's and director's unique circumstances. As discussed in further detail under the heading "Equity compensation plans" below, we believe that companies should prohibit directors from engaging in transactions with respect to their long term compensation that might disrupt the intended economic alignment between equity plan beneficiaries and shareholders.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We generally support reasonable but balanced protection of directors and officers. We believe that failure to provide protection to directors and officers might severely limit a company's ability to attract and retain competent leadership. We generally support proposals to provide indemnification that is limited to coverage of legal expenses. However, we may oppose proposals that provide indemnity for: breaches of the duty of loyalty; transactions from which a director derives an improper personal benefit; and actions or omissions not in good faith or those that involve intentional misconduct.
MAJORITY VOTE REQUIREMENTS
BlackRock generally supports proposals seeking to require director election by majority vote. Majority voting standards assist in ensuring that directors who are not broadly supported by shareholders are not elected to serve as their representatives. We note that majority voting is not appropriate in all circumstances, for example, in the context of a contested election. We also recognize that some companies with a plurality voting standard have adopted a resignation policy for directors who do not receive support from at least a majority of votes cast, and we believe that such a requirement can be generally equivalent to a majority voting regime. Where we believe that the company already has a sufficiently robust majority voting process in place, we may not support a shareholder proposal seeking an alternative mechanism.
SEPARATION OF CHAIRMAN AND CEO POSITIONS
We believe that independent leadership is important in the board room. In the
US there are two commonly accepted structures for independent board leadership:
1) an independent chairman; or 2) a lead independent director. We generally
consider the designation of a lead independent director as an acceptable
alternative to an independent chair if the lead independent director has a term
of at least one year and has powers to: 1) set board meeting agendas; 2) call
meetings of the independent directors; and 3) preside at meetings of
independent directors. Where a company does not have a lead independent
director that meets these criteria, we generally support the separation of
chairman and CEO.
SHAREHOLDER ACCESS TO THE PROXY
We believe that shareholders should have the opportunity, when necessary and under reasonable conditions, to nominate individuals to stand for election to the boards of the companies they own. In our view, securing a right of shareholders to nominate directors without engaging in a control contest can enhance shareholders' ability to participate meaningfully in
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the director election process, stimulate board attention to shareholder interests, and provide shareholders an effective means of directing that attention where it is lacking.
AUDITORS AND AUDIT-RELATED ISSUES
BlackRock recognizes the critical importance of financial statements that provide a complete and accurate portrayal of a company's financial condition. Consistent with our approach to voting on boards of directors, we seek to hold the audit committee of the board responsible for overseeing the management of the audit function at a company, and may withhold votes from the audit committee's members where the board has failed to facilitate quality, independent auditing. We take particular note of cases involving significant financial restatements or material weakness disclosures.
The integrity of financial statements depends on the auditor effectively fulfilling its role. To that end, we favor an independent auditor. In addition, to the extent that an auditor fails to reasonably identify and address issues that eventually lead to a significant financial restatement, or the audit firm has violated standards of practice that protect the interests of shareholders, we may also vote against ratification.
From time to time, shareholder proposals may be presented to promote auditor independence or the rotation of audit firms. We may support these proposals when they are consistent with our views as described above.
CAPITAL STRUCTURE PROPOSALS
BLANK CHECK PREFERRED
We frequently oppose proposals requesting authorization of a class of preferred stock with unspecified voting, conversion, dividend distribution and other rights ("blank check" preferred stock) because they may serve as a transfer of authority from shareholders to the board and a possible entrenchment device. We generally view the board's discretion to establish voting rights on a when-issued basis as a potential anti-takeover device, as it affords the board the ability to place a block of stock with an investor sympathetic to management, thereby foiling a takeover bid without a shareholder vote. Nonetheless, where the company appears to have a legitimate financing motive for requesting blank check authority, has committed publicly that blank check preferred shares will not be used for anti-takeover purposes, has a history of using blank check preferred stock for financings, or has blank check preferred stock previously outstanding such that an increase would not necessarily provide further anti-takeover protection but may provide greater financing flexibility, we may support the proposal.
EQUAL VOTING RIGHTS
BlackRock supports the concept of equal voting rights for all shareholders. Some management proposals request authorization to allow a class of common stock to have superior voting rights over the existing common or to allow a class of common to elect a majority of the board. We oppose such differential voting power as it may have the effect of denying shareholders the opportunity to vote on matters of critical economic importance to them.
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However, when a shareholder proposal requests to eliminate an existing dual-class voting structure, we seek to determine whether this action is warranted at that company at that time, and whether the cost of restructuring will have a clear economic benefit to shareholders. We evaluate these proposals on a case-by-case basis, and we consider the level and nature of control associated with the dual-class voting structure as well as the company's history of responsiveness to shareholders in determining whether support of such a measure is appropriate.
INCREASE IN AUTHORIZED COMMON SHARES
BlackRock considers industry specific norms in our analysis of these proposals, as well as a company's history with respect to the use of its common shares. Generally, we are predisposed to support a company if the board believes additional common shares are necessary to carry out the firm's business. The most substantial concern we might have with an increase is the possibility of use of common shares to fund a poison pill plan that is not in the economic interests of shareholders.
INCREASE OR ISSUANCE OF PREFERRED STOCK
These proposals generally request either authorization of a class of preferred stock or an increase in previously authorized preferred stock. Preferred stock may be used to provide management with the flexibility to consummate beneficial acquisitions, combinations or financings on terms not necessarily available via other means of financing. We generally support these proposals in cases where the company specifies the voting, dividend, conversion and other rights of such stock where the terms of the preferred stock appear reasonable.
STOCK SPLITS AND REVERSE STOCK SPLITS
We generally support stock splits that are not likely to negatively affect the ability to trade shares or the economic value of a share. We generally support reverse splits that are designed to avoid delisting or to facilitate trading in the stock, where the reverse split will not have a negative impact on share value (E.G. one class is reduced while others remain at pre-split levels). In the event of a proposal to reverse split that would not also proportionately reduce the company's authorized stock, we apply the same analysis we would use for a proposal to increase authorized stock.
MERGERS, ASSET SALES, AND OTHER SPECIAL TRANSACTIONS
In reviewing merger and asset sale proposals, BlackRock's primary concern is the best long-term economic interests of shareholders. While these proposals vary widely in scope and substance, we closely examine certain salient features in our analyses. The varied nature of these proposals ensures that the following list will be incomplete. However, the key factors that we typically evaluate in considering these proposals include:
* For mergers and asset sales, we assess the degree to which the proposed transaction represents a premium to the company's trading price. In order to filter out the effects of pre-merger news leaks on the parties' share prices, we consider a share price from multiple time periods prior to the date of the merger announcement. In most cases, business combinations should provide a premium. We may consider comparable transaction analyses provided by the
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parties' financial advisors and our own valuation assessments. For companies facing insolvency or bankruptcy, a premium may not apply.
* There should be a favorable business reason for the combination.
* Unanimous board approval and arm's-length negotiations are preferred. We will consider whether the transaction involves a dissenting board or does not appear to be the result of an arm's-length bidding process. We may also consider whether executive and/or board members' financial interests in a given transaction appear likely to affect their ability to place shareholders' interests before their own.
* We prefer transaction proposals that include the fairness opinion of a reputable financial advisor assessing the value of the transaction to shareholders in comparison to recent similar transactions.
POISON PILL PLANS
Also known as Shareholder Rights Plans, these plans generally involve issuance of call options to purchase securities in a target firm on favorable terms. The options are exercisable only under certain circumstances, usually accumulation of a specified percentage of shares in a relevant company or launch of a hostile tender offer. These plans are often adopted by the board without being subject to shareholder vote.
Poison pill proposals generally appear on the proxy as shareholder proposals requesting that existing plans be put to a vote. This vote is typically advisory and therefore non-binding. We generally vote in favor of shareholder proposals to rescind poison pills.
Where a poison pill is put to a shareholder vote, our policy is to examine these plans individually. Although we oppose most plans, we may support plans that include a reasonable 'qualifying offer clause.' Such clauses typically require shareholder ratification of the pill, and stipulate a sunset provision whereby the pill expires unless it is renewed. These clauses also tend to specify that an all cash bid for all shares that includes a fairness opinion and evidence of financing does not trigger the pill, but forces either a special meeting at which the offer is put to a shareholder vote, or the board to seek the written consent of shareholders where shareholders could rescind the pill in their discretion. We may also support a pill where it is the only effective method for protecting tax or other economic benefits that may be associated with limiting the ownership changes of individual shareholders.
REIMBURSEMENT OF EXPENSES FOR SUCCESSFUL SHAREHOLDER CAMPAIGNS
Proxy contests and other public campaigns can be valuable mechanisms for holding boards of underperforming companies accountable to their shareholders. However, these campaigns can also lead to unwarranted cost and distraction for boards and management teams, and may be imposed by investors whose interests are not aligned with other investors. Therefore, we generally do not support proposals seeking the reimbursement of proxy contest expenses, even in situations where we support the shareholder campaign, as we believe that introducing the possibility of such reimbursement may incentivize disruptive and unnecessary shareholder campaigns.
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REMUNERATION AND BENEFITS
We note that there are both management and shareholder proposals related to executive compensation that appear on corporate ballots. We generally vote on these proposals as described below, except that we typically oppose shareholder proposals on issues where the company already has a reasonable policy in place that we believe is sufficient to address the issue. We may also oppose a shareholder proposal regarding executive compensation if the company's history suggests that the issue raised is not likely to present a problem for that company.
ADVISORY RESOLUTIONS ON EXECUTIVE COMPENSATION ("SAY ON PAY")
In cases where there is a Say on Pay vote, BlackRock will respond to the proposal as informed by our evaluation of compensation practices at that particular company, and in a manner that appropriately addresses the specific question posed to shareholders. We believe that compensation committees are in the best position to make compensation decisions and should maintain significant flexibility in administering compensation programs, given their knowledge of the wealth profiles of the executives they seek to incentivize, the appropriate performance measures for the company, and other issues internal and/or unique to the company. We also believe that shareholders can express concern regarding executive compensation practices through their vote on directors, and our preferred approach to managing pay-for-performance disconnects is via a withhold vote for the compensation committee. As a result, our Say on Pay vote is likely to correspond with our vote on the directors who are compensation committee members responsible for making compensation decisions.
ADVISORY VOTES ON THE FREQUENCY OF SAY ON PAY RESOLUTIONS ("SAY WHEN ON PAY")
BlackRock will generally opt for a triennial vote on Say on Pay. We believe that shareholders should undertake an annual review of executive compensation and express their concerns through their vote on the members of the compensation committee. As a result, it is not necessary to hold a Say on Pay vote on an annual basis, as the Say on Pay vote merely supplements the shareholder's vote on Compensation Committee members.
CLAW BACK PROPOSALS
Claw back proposals are generally shareholder sponsored and seek recoupment of bonuses paid to senior executives if those bonuses were based on financial results that are later restated. We generally favor recoupment from any senior executive whose compensation was based on faulty financial reporting, regardless of that particular executive's role in the faulty reporting. We typically support these proposals unless the company already has a robust claw back policy that sufficiently addresses our concerns.
EMPLOYEE STOCK PURCHASE PLANS
An employee stock purchase plan ("ESPP") gives the issuer's employees the opportunity to purchase stock in the issuer, typically at a discount to market value. We believe these plans can provide performance incentives and help align employees' interests with those of shareholders. The most common form of ESPP qualifies for favorable tax treatment
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under Section 423 of the Internal Revenue Code. Section 423 plans must permit all full-time employees to participate, carry restrictions on the maximum number of shares that can be purchased, carry an exercise price of at least 85 percent of fair market value on grant date with offering periods of 27 months or less, and be approved by shareholders. We will typically support qualified ESPP proposals.
EQUITY COMPENSATION PLANS
BlackRock supports equity plans that align the economic interests of directors,
managers and other employees with those of shareholders. We believe that boards
should establish policies prohibiting use of equity awards in a manner that
could disrupt the intended alignment with shareholder interests, for example:
use of the stock as collateral for a loan; use of the stock in a margin
account; use of the stock (or an unvested award) in hedging or derivative
transactions. We may support shareholder proposals requesting the board to
establish such policies.
Our evaluation of equity compensation plans in a post-expensing environment is based on a company's executive pay and performance relative to peers and whether the plan plays a significant role in a pay-for-performance disconnect. We generally oppose plans that contain "evergreen" provisions allowing for the ongoing increase of shares reserved without shareholder approval. We also generally oppose plans that allow for repricing without shareholder approval. We may also oppose plans that provide for the acceleration of vesting of equity awards even in situations where an actual change of control may not occur. Finally, we may oppose plans where we believe that the company is aggressively accounting for the equity delivered through their stock plans.
GOLDEN PARACHUTES
Golden parachutes provide for compensation to management in the event of a change in control.
We may support shareholder proposals requesting that implementation of such arrangements require shareholder approval. In particular, we generally support proposals requiring shareholder approval of plans that exceed 2.99 times an executive's current compensation.
We generally view golden parachutes as encouragement to management to consider proposals that might be beneficial to shareholders. When determining whether to support or oppose an advisory vote on a golden parachute plan ("Say on Golden Parachutes"), we normally support the plan unless there is clear evidence of excess or abuse.
OPTION EXCHANGES
BlackRock may support a request to exchange underwater options under the following circumstances: the company has experienced significant stock price decline as a result of macroeconomic trends, not individual company performance; directors and executive officers are excluded; the exchange is value neutral or value creative to shareholders; and there is clear evidence that absent repricing the company will suffer serious employee incentive or retention and recruiting problems.
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PAY-FOR-PERFORMANCE PLANS
In order for executive compensation exceeding $1 million to qualify for federal tax deductions, the Omnibus Budget Reconciliation Act (OBRA) requires companies to link that compensation, for the Company's top five executives, to disclosed performance goals and submit the plans for shareholder approval. The law further requires that a compensation committee comprised solely of outside directors administer these plans. Because the primary objective of these proposals is to preserve the deductibility of such compensation, we generally favor approval in order to preserve net income.
PAY-FOR-SUPERIOR-PERFORMANCE
These are typically shareholder proposals requesting that compensation committees adopt policies under which a portion of equity compensation requires the achievement of performance goals as a prerequisite to vesting. We generally believe these matters are best left to the compensation committee of the board and that shareholders should not set executive compensation or dictate the terms thereof. We may support these proposals if we have a substantial concern regarding the company's compensation practices over a significant period of time, the proposals are not overly prescriptive, and we believe the proposed approach is likely to lead to substantial improvement.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
BlackRock may support shareholder proposals requesting to put extraordinary benefits contained in Supplemental Executive Retirement Plans ("SERP") agreements to a shareholder vote unless the company's executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
SOCIAL, ETHICAL AND ENVIRONMENTAL ISSUES
See "Global Corporate Governance and Engagement Principles."
GENERAL CORPORATE GOVERNANCE MATTERS
ADJOURN MEETING TO SOLICIT ADDITIONAL VOTES
We generally support such proposals when the agenda contains items that we judge to be in shareholders' best long-term economic interests.
BUNDLED PROPOSALS
We believe that shareholders should have the opportunity to review substantial governance changes individually without having to accept bundled proposals. Where several measures are grouped into one proposal, BlackRock may reject certain positive changes when linked with proposals that generally contradict or impede the rights and economic interests of shareholders.
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CONFIDENTIAL VOTING
Shareholders most often propose confidential voting as a means of eliminating undue management pressure on shareholders regarding their vote on proxy issues. We generally support proposals to allow confidential voting. However, we will usually support suspension of confidential voting during proxy contests where dissidents have access to vote information and management may face an unfair disadvantage.
OTHER BUSINESS
We oppose giving companies our proxy to vote on matters where we are not given the opportunity to review and understand those measures and carry out an appropriate level of shareholder oversight.
REINCORPORATION
Proposals to reincorporate from one state or country to another are most frequently motivated by considerations of anti-takeover protections or cost savings. Where cost savings are the sole issue, we will typically favor reincorporating. In all instances, we will evaluate the changes to shareholder protection under the new charter/articles/by-laws to assess whether the move increases or decreases shareholder protections. Where we find that shareholder protections are diminished, we will support reincorporation if we determine that the overall benefits outweigh the diminished rights.
SHAREHOLDERS' RIGHT TO ACT BY WRITTEN CONSENT
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to solicit votes by written consent in cases where a reasonably high proportion of shareholders (typically a minimum of 15%) are required to initiate the consent solicitation process, and support from a minimum of 50% of outstanding shares is required to effectuate the action by written consent. We believe that such thresholds are necessary in order to avoid the waste of corporate resources in addressing narrowly supported interests. We may oppose shareholder proposals requesting the right to act by written consent in cases where the proposal is structured for the benefit of a dominant shareholder to the exclusion of others, or recommends thresholds for action that we believe are too low.
SHAREHOLDERS' RIGHT TO CALL A SPECIAL MEETING
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to call a special meeting in cases where a reasonably high proportion of shareholders (typically a minimum of 15%) are required to agree to such a meeting before it is called, in order to avoid the waste of corporate resources in addressing narrowly supported interests. However, we may oppose this right in cases where the proposal is structured for the benefit of a dominant shareholder to the exclusion of others.
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SIMPLE MAJORITY VOTING
We generally favor a simple majority voting requirement to pass proposals. Therefore we will support the reduction or the elimination of supermajority voting requirements to the extent that we determine shareholders' ability to protect their economic interests is improved. Nonetheless, in situations where there is a substantial or dominant shareholder, supermajority voting may be protective of public shareholder interests and we may therefore support supermajority requirements in those situations.
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EXHIBIT G
ClariVest Asset Management LLC
A. PROXY VOTING
ISSUE
Rule 206(4)-6 under the Advisers Act requires every investment adviser who exercises voting authority with respect to Client securities to adopt and implement written policies and procedures, reasonably designed to ensure that the adviser votes proxies in the best interest of its Clients. The procedures must address material conflicts that may arise in connection with proxy voting. The Rule further requires the adviser to provide a concise summary of the adviser's proxy voting process and offer to provide copies of the complete proxy voting policy and procedures to Clients upon request. Lastly, the Rule requires that the adviser disclose to Clients how they may obtain information on how the adviser voted their proxies.
ClariVest votes proxies for its Clients unless requested otherwise, and therefore has adopted and implemented this Proxy Voting Policy and Procedures.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered numerous risks associated with its voting of client proxies. This analysis includes risks such as:
o ClariVest does not maintain a written proxy voting policy as required by Rule 206(4)-6.
o Proxies are not voted in Clients' best interests.
o Proxies are not identified and voted in a timely manner.
o Conflicts between ClariVest's interests and the Client are not identified; therefore, proxies are not voted appropriately.
o The third-party proxy voting service utilized by ClariVest is not independent.
o Proxy voting records and Client requests to review proxy votes are not maintained.
ClariVest has established the following guidelines to effectuate and monitor its proxy voting policy and procedures.
POLICY
It is the policy of ClariVest to vote proxies in the interest of maximizing value for ClariVest's Clients. Proxies are an asset of a Client, which should be treated by ClariVest with the same care, diligence, and loyalty as any asset belonging to a Client. To that end, ClariVest will vote in a way that it believes, consistent with its fiduciary duty, will cause the value of the issue to increase the most or decline the
least. Consideration will be given to both the short and long term implications of the proposal to be voted on when considering the optimal vote.
Any general or specific proxy voting guidelines provided by an advisory Client or its designated agent in writing will supersede this policy. Clients may wish to have their proxies voted by an independent third party or other named fiduciary or agent, at the Client's cost.
The staff of the Securities and Exchange Commission has issued interpretive guidance on investment advisers that use the recommendations of independent third parties to vote Client proxies in its letter to Egan-Jones Proxy Services (pub. Avail. May 27, 2004). The interpretive letter addresses what is meant by "independent third party." The letter states that a third party generally would be independent of an investment adviser if that person is free from influence or any incentive to recommend that the proxies should be voted in anyone's interest other than the adviser's Clients. ClariVest has retained RiskMetrics Group ("RMG"), and generally follows their recommendation when voting proxies. ClariVest determined that it is appropriate to follow the voting recommendations of RMG because ClariVest believes that RMG (a) has the capacity and competency to adequately analyze proxy issues, and (b) can make such recommendations in an impartial manner and in the best interests of ClariVest's Clients.
The interpretive letter also discusses conflicts of interest that can arise from the proxy voting firm's relationships with issuers. When the proxy voting firm has a relationship with an issuer of voting securities (e.g., to provide advice on corporate governance issues), the adviser's proxy voting procedures should require a proxy voting firm to disclose to the adviser any relevant facts concerning the firm's relationship with the issuer, such as the amount of the compensation that the firm has received or will receive. That information will enable the investment adviser to determine whether the proxy voting firm can make voting recommendations in an impartial manner and in the best interests of the Clients, or whether the adviser needs to take other steps to vote the proxies.
PROCEDURES FOR IDENTIFICATION AND VOTING OF PROXIES
These proxy voting procedures are designed to enable ClariVest to resolve material conflicts of interests with Clients before voting their proxies.
1. ClariVest shall maintain a list of all Clients for which it votes proxies. The list will be maintained either in hard copy or electronically and updated by the Operations Manager who will obtain proxy voting information from Client agreements.
2. ClariVest shall work with the Client to ensure that RMG is the designated party to receive proxy voting materials from companies or intermediaries. To that end, new account forms (including a letter of authorization) of broker-dealers/custodians will state that RMG should receive this documentation.
3. ClariVest subscribes to the RMG proxy voting service. This browser-based proxy voting system automates the physical paper handling and detailed recordkeeping needs of ClariVest's proxy voting function. RMG also provides independent recommendations with respect to each proxy vote.
4. As a default, proxies are generally voted by RMG in accordance with RMG recommendations. However, ClariVest retains ultimate decision making authority with respect to the voting of Client proxies and reserves the right to override RMG recommendations.
5. For any Client who has provided specific voting instruction, the Operations Manager shall vote that Client's proxy in accordance with the Client's written instructions.
6. The Operations Manager will provide any proxy solicitation information and materials that he may receive to the appropriate personnel of RMG for their review and consideration.
7. As noted by the SEC in Release 2106, the fiduciary duty that ClariVest owes its Clients prohibits the adoption of a policy to enter default proxy votes in favor of management. Thus, ClariVest shall review all Client proxies in accordance with the general principles outlined above.
8. ClariVest's investment personnel shall be responsible for making voting decisions with respect to all Client proxies, where a proxy is not voted in accordance with RMG recommendations. Such decisions shall then be provided to the Operations Manager who will then ensure that such proxy votes are submitted in a timely manner.
9. The Operations Manager may delegate the actual voting of Client proxies to any of ClariVest's employees who are familiar with RMG's service.
10. ClariVest is not required to vote every Client proxy and refraining from voting should not necessarily be construed as a violation of ClariVest's fiduciary obligations. ClariVest shall at no time ignore or neglect its proxy voting responsibilities. However, there may be times when refraining from voting is in the Client's best interest, such as when an adviser's analysis of a particular Client proxy reveals that the cost of voting the proxy may exceed the expected benefit to the Client (i.e., casting a vote on a foreign security may require that the adviser engage a translator or travel to a foreign country to vote in person). Such position also complies with Interpretive Bulletin 94-2 of the DOL.
11. The Operations Manager shall be responsible for conducting the proxy voting cost-benefit analysis in those certain situations in which ClariVest believe it may be in its Clients' best interest for ClariVest not to vote a particular proxy. The Operations Manager shall maintain documentation of any cost-benefit analysis with respect to Client proxies that are NOT voted by ClariVest.
12. The Operations Manager will report any attempts by any of ClariVest personnel to influence the voting of Client proxies in a manner that is inconsistent with ClariVest's Policy. Such report shall be made to the CCO, or if the CCO is the person attempting to influence the voting, then to the CEO.
13. Proxies received after the termination date of a Client relationship will not be voted. Such proxies should be delivered to the last known address of the Client or to the intermediary who distributed the proxy with a written or oral statement indicating that the advisory relationship has been terminated and that future proxies for the named Client should not be delivered to ClariVest.
14. The Operations Manager, with the assistance of the CCO, will reasonably try to assess any material conflicts between ClariVest's interests and those of its Clients with respect to proxy voting (where a proxy is not voted in accordance with RMG recommendations) by considering the situations identified in the CONFLICTS OF INTEREST section of this document.
CONFLICTS OF INTEREST
1. GENERAL: As noted previously, ClariVest will vote its Clients' proxies in the best interest of its Clients and not its own. In voting Client proxies, ClariVest shall avoid material conflicts of interest between the interests of ClariVest on the one hand and the interests of its Clients on the other.
2. POTENTIAL MATERIAL CONFLICTS OF INTEREST: ClariVest is aware of the following potential material conflicts that could affect ClariVest's proxy voting process in the future. It should be noted that these potential conflicts have been listed for informational purposes only and do not include all of the potential conflicts of interest that an adviser might face in voting Client proxies. ClariVest acknowledges that the existence of a relationship of the types discussed below, even in the absence of any active efforts to solicit or influence ClariVest, with respect to a proxy vote related to such relationship is sufficient for a material conflict to exist.
o EXAMPLE CONFLICT: ClariVest retains an institutional Client, or is in the process of retaining an institutional Client that is affiliated with an issuer that is held in ClariVest's Client portfolios. For example, ClariVest may be retained to manage Company A's pension fund. Company A is a public company and ClariVest Client accounts hold shares of Company A. This type of relationship may influence ClariVest to vote with management on proxies to gain favor with management. Such favor may influence Company A's decision to continue its advisory relationship with ClariVest.
o EXAMPLE CONFLICT: ClariVest retains a Client, or is in the process of retaining a Client that is an officer or director of an issuer that is held in ClariVest's Client portfolios. The similar conflicts of interest exist in this relationship as discussed above.
o EXAMPLE CONFLICT: ClariVest's Employees maintain a personal and/or business relationship (not an advisory relationship) with issuers or individuals that serve as officers or directors of issuers. For example, the spouse of an Employee may be a high-level executive of an issuer that is held in ClariVest's Client portfolios. The spouse could attempt to influence ClariVest to vote in favor of management.
o EXAMPLE CONFLICT: ClariVest or an Employee(s) personally owns a significant number of an issuer's securities that are also held in ClariVest's Client portfolios. For any number of reasons, an Employee(s) may seek to vote proxies in a different direction for his/her personal holdings than would otherwise be warranted by the proxy voting policy. The Employee(s) could oppose voting the proxies according to the policy and successfully influence ClariVest to vote proxies in contradiction to the policy.
o CONFLICT: ClariVest or its affiliate has a financial interest in the outcome of a vote, such as when ClariVest receives distribution fees (i.e., Rule 12b-1 fees) from registered mutual funds that are maintained in Client accounts and the proxy relates to an increase in 12b-1 fees.
3. DETERMINING THE MATERIALITY OF CONFLICTS OF INTEREST: Determinations as to whether a conflict of interest is material will be made after internal discussion among the CCO, the Portfolio Manager(s) for the affected Clients and the Operations Manager. Among the factors to be considered in determining the materiality of a conflict include whether the relevant Client relationship accounts for a significant percentage of ClariVest's annual revenues, or the percentage of ClariVest's assets that is invested with a particular issuer. Materiality determinations are fact based, and will depend on the details of a particular situation. Whether a particular conflict of interest is deemed material will be based on the likelihood that the conflict
might cause a proxy to be voted in a manner that was not in the best interests of ClariVest's Clients. All materiality deliberations will be memorialized in writing by the Operations Manager.
If the committee determines that the conflict in question is not material, ClariVest will vote the proxy in accordance with the policies stated herein. If a conflict is judged material, ClariVest will consider RMG's recommendation or, at its expense, engage the services of legal counsel who will provide an independent recommendation on the direction in which ClariVest should vote on the proposal. The proxy voting service's or consultant's determination will be binding on ClariVest.
PROCEDURES FOR CLARIVEST'S RECEIPT OF CLASS ACTIONS
ClariVest recognizes that as a fiduciary it has a duty to act with the highest obligation of good faith, loyalty, fair dealing and due care. When a recovery is achieved in a class action, clients who owned shares in the company subject to the action have the option to either: (1) opt out of the class action and pursue their own remedy; or (2) participate in the recovery achieved via the class action. Collecting the recovery involves the completion of a Proof of Claim form which is submitted to the Claims Administrator. After the Claims Administrator receives all Proof of Claims, it dispenses the money from the settlement fund to those persons and entities with valid claims.
Unless otherwise agreed with a Client, if "Class Action" documents are received by ClariVest for its Clients, ClariVest will gather the materials it has and forward to the Client, to enable the Client to file the "Class Action" at the Client's discretion. The decision of whether to participate in the recovery or opt-out may be a legal one that ClariVest may not be qualified to make for the Client. Therefore, unless otherwise agreed with a Client, ClariVest will not file "Class Actions" on behalf of a Client.
RECORDKEEPING
ClariVest will maintain the documentation described in the following section for a period of not less than five (5) years, the first two (2) years at its principal place of business. The Operations Manager will be responsible for the following procedures and for ensuring that the required documentation is retained.
CLIENT REQUEST TO REVIEW PROXY VOTES:
o Any request, whether written (including e-mail) or oral, received by any Employee of ClariVest, must be promptly reported to the CCO and/or Operations Manager. All written requests must be retained in the permanent file.
o The Operations Manager will record the identity of the Client, the date of the request, and the action taken as a result of the request, in a suitable place.
o Furnish the information requested, free of charge, to the Client within a reasonable time period (within 10 business days). Maintain a copy of the written record provided in response to Client's written (including e-mail) or oral request. Unless maintained electronically, a copy of the written response should be attached and maintained with the Client's written request, if applicable and maintained in the permanent file.
o Clients are permitted to request the proxy voting record for the 5 year period prior to their request.
PROXY STATEMENTS RECEIVED REGARDING CLIENT SECURITIES:
o Upon receipt of a proxy, copy or print a sample of the proxy statement or card and maintain the copy in a central file along with a sample of the proxy solicitation instructions.
NOTE: ClariVest is permitted to rely on proxy statements filed on the SEC's EDGAR system instead of keeping its own copies.
PROXY VOTING RECORDS:
o A record of how ClariVest voted client Proxies.
o Documents prepared or created by ClariVest that were material to making a decision on how to vote, or that memorialized the basis for the decision.
o Documentation or notes or any communications received from third parties, other industry analysts, third party service providers, company's management discussions, etc. that were material in the basis for the decision.
DISCLOSURE
ClariVest will ensure that Part 2A of Form ADV is updated as necessary to reflect: (i) all material changes to the Proxy Voting Policy and Procedures; and (ii) information about how Clients may obtain information on how ClariVest voted their securities.
PROXY SOLICITATION
As a matter of practice, it is ClariVest's policy to not reveal or disclose to any Client how ClariVest may have voted (or intends to vote) on a particular proxy until after such proxies have been counted at a shareholder's meeting. ClariVest will never disclose such information to unrelated third parties.
The CCO is to be promptly informed of the receipt of any solicitation from any person to vote proxies on behalf of Clients. At no time may any Employee accept any remuneration in the solicitation of proxies. The CCO shall handle all responses to such solicitations.
RESPONSIBILITY
The Operations Manager is responsible for supervising the proxy voting process and maintaining the records, in each case as described above.
EXHIBIT H
CRAMER ROSENTHAL MCGLYNN LLC
PROXY VOTING POLICY AND PROCEDURES
(Updated May 2012)
In most cases, CRM clients have delegated to the Firm the authority to vote proxies relating to equity securities on their behalf. In exercising its voting obligations, CRM is guided by general fiduciary principles. It must act prudently, solely in the interest of clients, and for the purpose of providing benefits to such clients. The CRM Compliance Committee (the "Compliance Committee") has determined that these Policies and Procedures for Proxy Voting (these "Policies") are reasonably designed to assure that CRM votes client proxies in the best interest of clients and to provide clients with information about how their proxies are voted. In addition, these Policies are designed to satisfy CRM's obligations under Rule 206(4)-7 under the Advisers Act.
PROXY VOTING PROCESS
CRM's policy seeks to monitor corporate actions, analyze proxy solicitation materials, and vote client proxies for stocks which are held in client accounts in a timely and appropriate manner. CRM will consider the factors that could affect the value of a Fund's investment in its determination on a vote. CRM has identified certain significant contributors to shareholder value with respect to a number of common or routine matters that are often the subject of proxy solicitations for shareholder meetings. CRM's proxy voting procedures address these considerations and establish a framework for its consideration of a vote that would be appropriate for a Fund. In particular, the proxy voting procedures outline principles and factors to be considered in the exercise of voting authority for proposals addressing many common or routine matters.
THE VOTING PROCESS
REVIEW OF PROXY SOLICITATION MATERIALS/INDEPENDENT RECOMMENDATIONS
CRM receives proxy materials through an independent third party, Institutional Shareholder Services ("ISS"). ISS provides analyses and voting recommendations based on empirical research measuring the impact of proxy issues on shareholder value. ISS's voting recommendations cover three categories: (i) voting recommendations for social and environmental shareholder proposals; (ii) voting recommendations for "Taft-Hartley" accounts that are in the best long-term economic interest of plan participants and beneficiaries conforming to AFL-CIO voting guidelines;(1) and (iii) voting recommendations intended to generally maximize shareholder value.
In determining how to vote on a proxy issue, CRM will consider ISS analysis and recommendations, as well as the portfolio manager's own knowledge of the company (including its management, operations, industry and the particular proxy issue) in rendering a decision, with the exception of separately-managed Taft-Hartley or accounts where the client specifically directs CRM to vote in a "socially responsible" manner; in these cases CRM would generally follow the particular ISS recommendations for that category.
ISS STANDARD PROXY VOTING GUIDELINES SUMMARY
The following is a summary of the ISS Standard Proxy Voting Guidelines (the "Guidelines), which form the substantive basis of CRM's Policy on Proxy Voting.(2) As described above, CRM may diverge from the Guidelines and a related ISS recommendation on any particular proxy vote or in connection with any individual investment decision.
AUDITORS
Vote for proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the company, and is therefore not independent.
o Fees for non-audit services are excessive, or
o There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company's financial position.
BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be made on a case-by-case basis, examining:
independence of the board and key board committees, attendance at board
meetings, corporate governance provisions and takeover activity, long-term
company performance, responsiveness to shareholder proposals, any egregious
board actions, and any excessive non-audit fees or other potential auditor
conflicts.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote against proposals to classify the board. Vote for proposals to repeal classified boards and to elect all directors annually.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Vote on a case-by-case basis shareholder proposals requiring that the positions of chairman and CEO be held separately. Because some companies have governance structures in place that counterbalance a combined position, certain factors should be considered in determining whether the proposal warrants support. These factors include the presence of a lead director, board and committee independence, governance guidelines, company performance, and annual review by outside directors of CRO pay.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote for shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS's definition of independence.
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard.
SHAREHOLDER RIGHTS
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote against proposals to restrict or prohibit shareholder ability to take action by written consent.
Vote for proposals to allow or make shareholder action by written consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETING
Vote against proposals to restrict or prohibit shareholder ability to call special meetings.
Vote for proposals that remove restrictions on the right of shareholder to act independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote against proposals to require a supermajority shareholder vote.
Vote for proposals to lower supermajority vote requirements.
CUMULATIVE VOTING
Vote for proposals to eliminate cumulative voting.
Vote against proposals that require cumulative voting.
CONFIDENTIAL VOTING
Vote for shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators and use independent inspector of election, as long as the proposal includes a provision for proxy contents as follows: IN the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived.
Vote for management proposals to adopt confidential voting.
PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a case-by-case basis, considering the factors that include the long-term financial performance, management's track record, qualification of director nominees (both slates), and an evaluation of what each side is offering shareholders.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote case-by-case. Where ISS recommends in favor of the dissidents, ISS also recommends voting for reimbursing proxy solicitation expenses.
POISON PILLS
Vote for shareholder proposals that ask a company to submit its poison pill for shareholder ratification. Review on a case-by-case basis shareholder proposals to redeem a company's poison pill and management proposals to ratify a poison pill.
MERGERS AND CORPORATE RESTRUCTURINGS
Vote case-by-case on mergers and corporate restructurings based on such features as the fairness opinion, pricing, strategic rationale, and the negotiating process.
REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated on a case-by-case basis, giving consideration to both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions, and a comparison of the jurisdictional laws. Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
CAPITAL STRUCTURE
COMMON STOCK AUTHORIZATION
Votes on proposals to increase the number of shares of common stock authorized for issuance are determined on a case-by-case basis using a model developed by ISS. Vote against proposals at companies with dual-class capital structures to increase the number of authorized shares of the class of stock that has superior voting rights. Vote for proposals to approve increases beyond the allowable increase when a company's shares are in danger of being de-listed or if a company's ability to continue to operate as a going concern is uncertain.
PREFERRED STOCK
Vote against proposals authorizing the creation of new classes of preferred stock with unspecified voting, conversion, dividend distribution and other rights ("blank check" preferred stock). Vote for proposals to create "declawed" blank check preferred stock (stock that cannot be used as a takeover defense).
MANAGEMENT COMPENSATION
DIRECTOR COMPENSATION
Votes on compensation plans for directors are determined on a case-by-case basis, using a proprietary, quantitative model developed by ISS.
EMPLOYEE, STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be determined on a case-by-case basis.
SHAREHOLDER PROPOSALS
Generally, vote for shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders' needs, and would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company. Vote on a case-by-case basis for all other shareholder proposals regarding executive and
director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long term corporate outlook.
ADVISORY VOTE ON SAY ON PAY FREQUENCY
Vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO RE-PRICE OPTIONS
Votes on management proposals seeking to re-price options are evaluated on a case-by-case basis giving consideration to: historic trading patterns rationale for re-pricing, value-for-value exchange, options vesting, term of the options, exercise price, and participation.
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be determined on a case-by-case basis.
SHAREHOLDER PROPOSALS ON COMPENSATION
Vote on a case-by-case basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook.
SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics, including consumer and public safety, environment and energy, general corporate issues, labor standards and human rights, military business and workplace diversity. In general, vote case-by-case. While a wide variety of factors are considered, the primary focus is on how the proposal will enhance the economic value of the company.
SECURITIES ON LOAN
Securities over which CRM has voting authority in certain accounts are subject to being lent to other parties, including securities in private investment partnerships, registered mutual funds and certain other accounts. CRM has no role in the lending process; securities lending decisions are made by the custodian with the consent of and on behalf of the client. As a general matter, when a security is on "loan" as of the record date, CRM has no authority to vote, and shall not vote, a proxy for the security.
CLIENTS WHO VOTE THEIR OWN PROXIES
CRM clients may retain the authority to vote their own proxies in their discretion.
CONFLICTS AND POTENTIAL CONFLICTS OF INTEREST
CRM's proxy voting procedures establish a protocol for voting of proxies in cases in which it may have a potential conflict of interest arising from, among other things, a direct business relationship or financial interest in a company soliciting proxies. When a conflict or potential conflict has been identified, CRM will generally vote the proxy as recommended by ISS, subject to a review by the CRM Compliance Committee indicating the nature of the potential conflict of interest and how the determination of such vote was achieved.
DISCLOSURE
CRM, in its written brochure required under Rule 204-3 (the "Form ADV") shall describe: (i) these Policies; (ii) how a client can obtain information from CRM on how it voted the client's proxies; and (iii) how a client can obtain a copy of these Policies and/or the ISS Proxy Voting Guidelines.
RECORDKEEPING
CRM shall retain the following books and records in, as appropriate, electronic or hard copy form: (i) a copy of each proxy statement received regarding client securities (which may be kept by relying on obtaining copies through the EDGAR system maintained by the Securities and Exchange Commission), (ii) a record of each vote cast on behalf of clients, (iii) internal documents created that were material to the decision on how to vote any proxies or that memorialize the basis for such a decision, including any documentation relating to decisions to vote proxies other than in accordance with ISS recommendations, (iv) copies of written client requests for proxy voting records and of the Firm's written responses to either a written or oral request for information on how the Firm voted proxies on behalf of the requesting client, and (v) with respect to votes cast for securities held in any registered investment company, records of CUSIP numbers.
Records for the CRM Mutual Fund Trust shall be recorded and maintained by the Trust.
The above records shall be retained in an easily accessible place for a period of at least five (5) years from the end for the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of CRM.
EXHIBIT I
DRIEHAUS CAPITAL MANAGEMENT LLC
PROXY VOTING POLICY
For those clients for whom Driehaus Capital Management LLC ("DCM") has undertaken to vote proxies, DCM retains the final authority and responsibility for such voting. On behalf of our valued clients, DCM:
1) provides the client with a written summary of its proxy voting policy, and the complete proxy voting policy upon request;
2) discloses to the client how to obtain voting information;
3) applies the proxy voting policy consistently;
4) documents the reasons for voting;
5) maintains records of voting activities for clients and regulating authorities; and
6) votes securities based on a pre-determined voting policy, based on the recommendations of an independent third-party to avoid conflicts of interest with DCM..
VOTING POLICY
As an investment adviser, DCM is a fiduciary that owes each client the duties of care and loyalty with respect to all services undertaken on the client's behalf, including proxy voting. The duty of care requires an investment adviser with proxy voting authority to monitor corporate events and to vote the proxies. To satisfy its duty of loyalty, the investment adviser must cast the proxy votes in a manner consistent with the best interests of its clients and must not subrogate client interests to its own. Under the Employee Retirement Income Security Act ("ERISA"), an investment manager to whom the named plan fiduciary has delegated the authority to manage plan assets and to vote proxies: (i) must consider those factors that may affect the value of the plan's investment; (ii) must act solely in the interest of plan participants and beneficiaries; and (iii) must discharge its duties with "care, skill, prudence and diligence." Thus, the investment manager's proxy voting decisions must be based on the economic impact of the proposal on the value of the plan's investment and the best interests of the plan.
ISS GOVERNANCE SERVICES GROUP
In order to facilitate the proxy voting process, DCM has retained ISS Governance Services, a direct wholly-owned subsidiary of RiskMetrics Group ("ISS"), to provide DCM with in-depth proxy research, vote recommendations and execution, and the record keeping required as part of the management of a client account. ISS is an investment adviser that specializes in providing a variety of fiduciary-level services related to proxy voting. DCM has ascertained that ISS has the capacity and competency to analyze proxy issues and to make vote recommendations in an impartial manner and in the best interests of DCM's clients. In addition to analyses, ISS delivers to DCM voting reports that reflect voting activities for DCM's clients, enabling the clients to monitor voting activities performed by DCM.
ISS' PROXY VOTING PROCEDURES AND GUIDELINES
ISS' process of voting and maintaining records first involves the coding of every company proxy ballot voted. Coding entails the identification of each issue on the ballot. ISS uses a proprietary coding system of individually identified issues. ISS performs company by company analysis, which means that all votes are reviewed on a case-by-case basis and no issues are considered routine. Each issue will be considered in the context of the company under review.
The following are the general voting parameters that ISS follows on various types of issues when there are no company-specific reasons for voting to the contrary. DCM generally follows ISS' recommendations in accordance with these guidelines and does not use its discretion in the proxy voting decision. This allows client proxies to be voted in the clients' best interests and in accordance with a predetermined policy based upon recommendations of an independent third party, and is not affected by any potential or actual conflict of interest of DCM. DCM annually, and more frequently if necessary, reviews ISS' policies and procedures regarding any potential conflicts of interest when making vote recommendations to determine that ISS is acting impartially.
I. GUIDELINES FOR DOMESTIC SECURITIES (securities traded in the U.S., including American Depositary Receipts and U.S. traded foreign stocks)
A. OPERATIONAL ITEMS
ADJOURN MEETING
Generally vote AGAINST proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
Vote FOR proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote AGAINST proposals if the wording is too vague or if the proposal includes "other business."
AMEND QUORUM REQUIREMENTS
Vote AGAINST proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to support the proposal.
AMEND MINOR BYLAWS
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or corrections).
AUDITOR INDEMNIFICATION AND LIMITATION OF LIABILITY
Consider the issue of auditor indemnification and limitation of liability on a CASE-BY-CASE basis. Factors to be assessed include, but are not limited to, the terms of the auditor agreement, the degree to which these agreements impact shareholders' rights, motivation and rationale for establishing the agreements, quality of disclosure and historical practices in the audit area.
WITHHOLD or vote AGAINST members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply: an auditor has a financial interest in or association with the company, and is therefore not independent; poor accounting practices are identified that rise to a serious level of concern, such as fraud, misapplication of GAAP, material weaknesses identified in Section 404 disclosures; fees for non-audit services are excessive; or there is reason to believe that the independent auditor has rendered an inaccurate opinion.
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation, taking into account the tenure of the audit firm, the length of rotation specified in the proposal, any significant audit-related issues at the company, the number of Audit Committee meetings held each year, the number of financial experts serving on the committee and whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price.
CHANGE COMPANY NAME
Vote FOR proposals to change the corporate name.
CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING
Vote FOR management proposals to change the date, time, and/or location of the annual meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date, time, and/or location of the annual meeting unless the current scheduling or location is unreasonable.
TRANSACT OTHER BUSINESS
Vote AGAINST proposals to approve other business when it appears as voting item.
B. BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be made on a CASE-BY-CASE basis.
Vote AGAINST or WITHHOLD from individual directors who attend less than 75 percent of the board and committee meetings without a valid excuse (such as illness, service to the nation, work on behalf of the company), sit on more than six public company boards or are CEOs of public companies who sit on the boards of more than two public companies besides their own-- withhold only at their outside boards.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except from new nominees, who should be considered on a CASE-BY-CASE basis) if:
o The company's proxy indicates that not all directors attended 75% of the aggregate of their board and committee meetings, but fails to provide the required disclosure of the names of the directors involved. If this information cannot be obtained, vote against/withhold from all incumbent directors;
o The company's poison pill has a dead-hand or modified dead-hand feature. Vote against/withhold every year until this feature is removed;
o The board adopts or renews a poison pill without shareholder approval, does not commit to putting it to shareholder vote within 12 months of adoption (or in the case of an newly public company, does not commit to put the pill to a shareholder vote within 12 months following the IPO), or reneges on a commitment to put the pill to a vote, and has not yet received a withhold/against recommendation for this issue;
o The board failed to act on a shareholder proposal that received approval by a majority of the shares outstanding the previous year (a management proposal with other than a FOR recommendation by management will not be considered as sufficient action taken);
o The board failed to act on a shareholder proposal that received approval of the majority of shares cast for the previous two consecutive years (a management proposal with other than a FOR recommendation by management will not be considered as sufficient action taken);
o The board failed to act on takeover offers where the majority of the shareholders tendered their shares;
o At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the underlying issue(s) that caused the high withhold/against vote;
o The board lacks accountability and oversight, coupled with a sustained performance relative to its peers.
o The company is a Russell 3000 company sustained poor performance as measured by one- and three-year total shareholder returns in the bottom half of a company's industry group (GICS group);
o The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election- any or all appropriate nominees (except new) may be held accountable.
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors when:
o The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
o The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
o The company lacks a formal nominating committee, even if board attests that the independent directors fulfill the functions of such a committee;
o The full board is less than majority independent.
Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
o The non-audit fees paid to the auditor are excessive;
o The company receives an adverse opinion on the company's financial statements from its auditors; or
o There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and/or the full board if poor accounting practices are identified which rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee if there is a negative correlation between the chief executive's pay and company performance, if the company reprices underwater options for stock, cash or other consideration without prior shareholder approval, even if allowed in their equity plan, the company fails to submit one-time transfers of stock options to a shareholder vote or to fulfill the terms of a burn rate commitment they made to shareholders, the company has backdated options or poor compensation practices.
Vote AGAINST or WITHHOLD from directors, individually or the entire board, for egregious actions or failure to replace management as appropriate.
AGE LIMITS
Vote AGAINST shareholder or management proposals to limit the tenure of outside directors through mandatory retirement ages.
BOARD SIZE
Vote FOR proposals seeking to fix the board size or designate a range for the board size.
Vote AGAINST proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify the board. Vote FOR proposals to repeal classified boards and to elect all directors annually.
CUMULATIVE VOTING
Generally vote AGAINST proposals to eliminate cumulative voting.
Generally vote FOR proposals to restore or provide for cumulative voting unless:
o The company has proxy access or a similar structure to allow shareholders to nominate directors to the company's ballot; and
o The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections.
Vote FOR proposals for cumulative voting at controlled companies (insider voting power greater than 50%).
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Vote CASE-BY-CASE on proposals on director and officer indemnification and liability protection using Delaware law as the standard.
Vote AGAINST proposals to eliminate entirely directors' and officers' liability for monetary damages for violating the duty of care.
Vote AGAINST indemnification proposals that would expand coverage beyond just legal expenses to liability for acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness.
Vote AGAINST proposals that would expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for at the discretion of the company's board (i.e., "permissive indemnification") but that previously the company was not required to indemnify.
Vote FOR only those proposals providing such expanded coverage in cases when a director's or officer's legal defense was unsuccessful if both of the following apply:
o If the director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company; and
o If only the director's legal expenses would be covered.
ESTABLISH/AMEND NOMINEE QUALIFICATIONS
Vote CASE-BY-CASE on proposals that establish or amend director qualifications. Votes should be based on how reasonable the criteria are and to what degree they may preclude dissident nominees from joining the board.
Vote AGAINST shareholder proposals requiring two candidates per board seat.
ESTABLISHMENT OF BOARD COMMITTEES SHAREHOLDER PROPOSALS
Generally vote AGAINST shareholder proposals to establish a new standing board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company's flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
o Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought;
o Level of disclosure regarding the issue for which board oversight is sought;
o Company performance related to the issue for which board oversight is sought;
o Board committee structure compared to that of other companies in its industry sector; and/or
o The scope and structure of the proposal.
ESTABLISHMENT OF BOARD POLICY ON SHAREHOLDER ENGAGEMENT
Generally vote FOR shareholders proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
o Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board;
o Effectively disclosed information with respect to this structure to its shareholders;
o Company has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee; and
o The company has an independent chairman or a lead director, according to ISS' definition. This individual must be made available for periodic consultation and direct communication with major shareholders.
FILLING VACANCIES/REMOVAL OF DIRECTORS
Vote AGAINST proposals that provide that directors may be removed only for cause.
Vote FOR proposals to restore shareholders' ability to remove directors with or without cause.
Vote AGAINST proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote FOR proposals that permit shareholders to elect directors to fill board vacancies.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Generally vote FOR shareholder proposals requiring that the position of chairman be filled by an independent director unless the company maintains the following counterbalancing governance structure:
o Designated lead director elected by and from the
independent board members with clearly delineated and
comprehensive duties. (The role may alternatively
reside with a presiding director, vice chairman, or
rotating lead director; however the director must serve
a minimum of one year in order to qualify as a lead
director.) At a minimum these duties should include:
preside at all meetings of the board at which the
chairman is not present; serve as liaison between the
chairman and the independent directors; approve
information sent to the board; approve meeting agendas
for the board; approve meeting schedules; has the
authority to call meetings of the independent
directors; if requested by major shareholders, ensure
that he is available for consultations and direct
communication;
o Two-thirds independent board;
o All-independent key committees;
o Established governance guidelines;
o The company does not under perform its peers; and
o The company does not have any problematic governance issues.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS' definition of independent outsider.
Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard.
MAJORITY VOTE SHAREHOLDER PROPOSALS
Generally vote FOR reasonable shareholder proposals calling for directors to be elected with an affirmative majority of votes cast (including precatory and binding resolutions requesting that the board amend the company's bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections). Companies are strongly encouraged to also adopt a director resignation policy that will provide guidelines to address the situation of a holdover director.
OPEN ACCESS
Vote shareholder proposals asking for open or proxy access on a CASE-BY-CASE basis, taking into account:
o The ownership threshold proposed in the resolution;
o The proponent's rationale for the proposal at the targeted company in terms of board and director conduct.
PERFORMANCE EVALUATION FOR DIRECTORS
Vote AGAINST or WITHHOLD from directors nominees of Russell 3000 companies if board lacks accountability and oversight coupled with underperformed relative to their industry peers. The criterion used to measure such underperformance is the one- and three-year total shareholder returns in the bottom half of a company's GICS industry group.
STOCK OWNERSHIP REQUIREMENTS
Generally vote AGAINST shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. While stock ownership on the part of directors is desired, the company should determine the appropriate ownership requirement.
Vote CASE-BY-CASE on shareholder proposals asking that the company adopt a holding or retention period for its executives (for holding stock after the vesting or exercise of equity awards), taking into account any stock ownership requirements or holding period/retention ratio already in place and the actual ownership level of executives.
VOTE NO CAMPAIGNS
In cases when companies are targeted in connection with public "vote no" campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. In issuing vote recommendations, consider arguments submitted by shareholders and other publicly-available information.
TERM LIMITS
Vote AGAINST shareholder or management proposals to limit the tenure of outside directors through term limits. However, scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board.
C. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a
CASE-BY-CASE basis, considering: the long-term financial
performance; management's track record: qualifications of
director nominees (both slates): background to the proxy contest:
strategic plan of dissident slate and quality of critique against
management: likelihood that the proposed goals and objectives can
be achieved (both slates); and stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. Where ISS recommends in favor of the dissidents, it also recommends voting FOR reimbursing proxy solicitation expenses associated with the election.
Generally vote FOR shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:
o The election of fewer than 50% of the directors to be elected is contested in the election;
o One or more of the dissident's candidates is elected;
o Shareholders are not permitted to cumulate their votes for directors; and
o The election occurred, and the expenses were incurred, after the adoption of this bylaw.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators, and use independent inspectors of election, as long as the proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived.
Vote FOR management proposals to adopt confidential voting.
D. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Vote CASE-BY-CASE on advance notice proposals, supporting those proposals which allow shareholders to submit proposals as close to the meeting date as reasonably possible and within the broadest window possible.
AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
o Vote FOR proposals giving the board the ability to amend the bylaws in addition to shareholders.
POISON PILLS
Vote FOR shareholder proposals that ask a company to submit its
poison pill for shareholder ratification or redeem it UNLESS the
company has: (1) A shareholder approved poison pill in place; or
(2) The company has adopted a policy concerning the adoption of a
pill in the future specifying that the board will only adopt a
shareholder rights plan if either:
o Shareholders have approved the adoption of the plan; or
o The board determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay of seeking shareholder approval (i.e. the "fiduciary out" provision). A poison pill adopted under the fiduciary out will require a shareholder ratification vote within twelve months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote less than one year after adoption. If the company has no non-shareholder approved poison pill in place and has adopted a policy with the provisions outlined above, vote AGAINST the proposal. If these conditions are not met, vote FOR the proposal, but with the caveat that a vote within twelve months would be considered sufficient.
Vote CASE-BY-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan, including no lower than a 20% trigger, flip-in or flip-over, a term of no more than three years, no dead-hand, slow-hand, no-hand or similar feature that limits the ability of a future board to redeem the pill, and shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10% of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.
In addition, vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who should be considered on a CASE-BY-CASE basis) if the board adopts or renews a poison pill with out shareholder approval, does not commit to putting it to a shareholder vote within twelve months of adoption, or reneges on a commitment to put the pill to a vote, and has not yet received a withhold recommendation for that issue.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST proposals to restrict or prohibit shareholder ability to call special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR proposals to lower supermajority vote requirements.
E. MERGERS AND CORPORATE RESTRUCTURINGS
OVERALL APPROACH
For mergers and acquisitions, review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:
o VALUATION - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable?
While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale.
o MARKET REACTION - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
o STRATEGIC RATIONALE - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable.
Management should also have a favorable track record of successful integration of historical acquisitions.
o NEGOTIATIONS AND PROCESS - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value.
o CONFLICTS OF INTEREST - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
o GOVERNANCE - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
APPRAISAL RIGHTS
Vote FOR proposals to restore, or provide shareholders with rights of appraisal.
ASSET PURCHASES
Vote CASE-BY-CASE on asset purchase proposals, considering the following factors:
o Purchase price;
o Fairness opinion;
o Financial and strategic benefits;
o How the deal was negotiated;
o Conflicts of interest;
o Other alternatives for the business;
o Non-completion risk.
ASSET SALES
Vote CASE-BY-CASE on asset sales, considering the following factors:
o Impact on the balance sheet/working capital;
o Potential elimination of diseconomies;
o Anticipated financial and operating benefits;
o Anticipated use of funds;
o Value received for the asset;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest.
BUNDLED PROPOSALS
Vote CASE-BY-CASE on bundled or "conditional" proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders' best interests, vote AGAINST the proposals. If the combined effect is positive, support such proposals.
CONVERSION OF SECURITIES
Vote CASE-BY-CASE on proposals regarding conversion of securities. When evaluating these proposals the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest. Vote FOR the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY
PLANS/REVERSE LEVERAGED BUYOUTS/WRAP PLANS
Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, taking into consideration the following:
o Dilution to existing shareholders' position;
o Terms of the offer;
o Financial issues;
o Management's efforts to pursue other alternatives;
o Control issues;
o Conflicts of interest.
Vote FOR the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
FORMATION OF HOLDING COMPANY
Vote CASE-BY-CASE on proposals regarding the formation of a holding company, taking into consideration the following:
o The reasons for the change;
o Any financial or tax benefits;
o Regulatory benefits;
o Increases in capital structure;
o Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend the transaction, vote AGAINST the formation of a holding company if the transaction would include either of the following:
o Increases in common or preferred stock in excess of the allowable maximum;
o Adverse changes in shareholder rights.
GOING PRIVATE TRANSACTIONS (LBOS, MINORITY SQUEEZEOUTS, AND
GOING DARK)
Vote CASE-BY-CASE on going private transactions, taking into account the following:
o Offer price/premium;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest;
o Other alternatives/offers considered; and
o Non-completion risk.
Vote CASE-BY-CASE on "going dark" transactions, determining whether the transaction enhances shareholder value by taking into consideration:
o Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); and
o Whether the interests of continuing and cashed-out shareholders are balanced.
JOINT VENTURES
Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the following:
o Percentage of assets/business contributed;
o Percentage ownership;
o Financial and strategic benefits;
o Governance structure;
o Conflicts of interest;
o Other alternatives;
o Noncompletion risk.
LIQUIDATIONS
Vote CASE-BY-CASE on liquidations, taking into account the following:
o Management's efforts to pursue other alternatives;
o Appraisal value of assets; and
o The compensation plan for executives managing the liquidation.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal is not approved.
MERGERS AND ACQUISITIONS/ ISSUANCE OF SHARES TO FACILITATE MERGER OR
ACQUISITION
Vote CASE-BY-CASE on mergers and acquisitions, determining whether the transaction enhances shareholder value by giving consideration to items listed under "Mergers and Corporate Restructurings: Overall Approach."
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Vote CASE-BY-CASE on proposals regarding private placements, taking into consideration:
o Dilution to existing shareholders' position;
o Terms of the offer;
o Financial issues;
o Management's efforts to pursue other alternatives;
o Control issues;
o Conflicts of interest; and
o Market reaction.
Vote FOR the private placement if it is expected that the company will file for bankruptcy if the transaction is not approved.
SPECIAL PURPOSE ACQUISITION CORPORATIONS (SPACS)
Vote on a CASE-BY-CASE basis on SPAC mergers and acquisitions taking into account the following:
o Valuation -- Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target, if it is a private entity.
o Market reaction -- How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.
o Deal timing -- A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date.
o Negotiations and process -- What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors.
o Conflicts of interest -- How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80% rule (the charter requires that the fair market value of the target is at least equal to 80% of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24 month timeframe.
o Voting agreements -- Are the sponsors entering into enter into any voting agreements/ tender offers with shareholders who are likely to vote AGAINST the proposed merger or exercise conversion rights?
o Governance -- What is the impact of having the SPAC CEO or founder on key committees following the proposed merger?
SPINOFFS
Vote CASE-BY-CASE on spin-offs, considering:
o Tax and regulatory advantages;
o Planned use of the sale proceeds;
o Valuation of spinoff;
o Fairness opinion;
o Benefits to the parent company;
o Conflicts of interest;
o Managerial incentives;
o Corporate governance changes;
o Changes in the capital structure.
VALUE MAXIMIZATION PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value by hiring a financial advisor to explore strategic alternatives, selling the company or liquidating the company and distributing the proceeds to shareholders. These proposals should be evaluated based on the following factors:
o Prolonged poor performance with no turnaround in sight;
o Signs of entrenched board and management;
o Strategic plan in place for improving value;
o Likelihood of receiving reasonable value in a sale or dissolution; and
o Whether company is actively exploring its strategic options, including retaining a financial advisor.
F. STATE OF INCORPORATION
CONTROL SHARE ACQUISITION PROVISIONS
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes
effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Vote FOR proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote AGAINST proposals to amend the charter to include control share acquisition provisions.
Vote FOR proposals to restore voting rights to the control shares.
CONTROL SHARE CASH-OUT PROVISIONS
Control share cash-out statutes give dissident shareholders the right to "cash-out" of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Vote FOR proposals to opt out of control share cash-out statutes.
DISGORGEMENT PROVISIONS
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company's stock to disgorge, or pay back; to the company any profits realized from the sale of that company's stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits provisions.
Vote FOR proposals to opt out of state disgorgement provisions.
FAIR PRICE PROVISIONS
Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally, vote AGAINST fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
FREEZE-OUT PROVISIONS
Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company.
GREENMAIL
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company's ability to make greenmail payments.
Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated on a CASE-BY-CASE basis, giving consideration to both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions, and a comparison of the economic benefits and jurisdictional laws.
Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes.
STAKEHOLDER PROVISIONS
Vote AGAINST proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
STATE ANTITAKEOVER STATUTES
Vote CASE-BY-CASE on proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freeze-out provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, anti-greenmail provisions, and disgorgement provisions).
G. CAPITAL STRUCTURE
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Vote FOR management proposals to reduce the par value of common stock.
COMMON STOCK AUTHORIZATION
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock authorized for issuance taking into account the rationale for the proposed increase, the dilutive impact of the request as determined through a model developed by ISS, the board's governance structure and practices, and risks to shareholders of not approving the request.
Vote FOR proposals to approve increases beyond the allowable increase when a company's shares are in danger of being delisted or if a company's ability to continue to operate as a going concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior voting rights.
Vote AGAINST proposals at companies with dual-class capital structures to increase the number of authorized shares of the class of stock that has superior voting rights.
Vote FOR proposals to create a new class of nonvoting or sub-voting common stock if:
o It is intended for financing purposes with minimal or no dilution to current shareholders;
o It is not designed to preserve the voting power of an insider or significant shareholder.
ISSUE STOCK FOR USE WITH RIGHTS PLAN
Vote AGAINST proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder approved shareholder rights plan (poison pill).
PREEMPTIVE RIGHTS
Vote CASE-BY-CASE to increase the number of shares of preferred
stock authorized for issuance, taking into consideration the
rationale for the proposal, the dilutive impact of the request as
determined through a model developed by ISS, the board's
governance structure and practices, and risks to shareholders of
not approving the request. Vote CASE-BY-CASE on shareholder
proposals that seek preemptive rights, taking into consideration:
the size of a company, the characteristics of its shareholder
base, and the liquidity of the stock.
PREFERRED STOCK
Vote AGAINST proposals authorizing the creation of new classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights ("blank check" preferred stock).
Vote AGAINST proposals to increase the number of blank check preferred stock authorized for issuance when no shares have been issued or reserved for a specific purpose.
Vote FOR proposals to create "de-clawed" blank check preferred stock (stock that cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock when the company specifies the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred shares authorized for issuance when no shares have been issued or reserved for a specific purpose.
RECAPITALIZATION
Vote CASE-BY-CASE on recapitalizations (reclassifications of securities), taking into account the following:
o More simplified capital structure;
o Enhanced liquidity;
o Fairness of conversion terms;
o Impact on voting power and dividends;
o Reasons for the reclassification;
o Conflicts of interest; and
o Other alternatives considered.
REVERSE STOCK SPLITS
Vote FOR management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced.
Vote FOR management proposals to implement a reverse stock split to avoid delisting.
Vote CASE-BY-CASE on proposals to implement a reverse stock split that do not proportionately reduce the number of shares authorized for issue based on the allowable increased calculated using the Capital Structure model.
SHARE REPURCHASE PROGRAMS
Vote FOR management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Vote FOR management proposals to increase the common share authorization for a stock split or share dividend, provided that the increase in authorized shares would not result in an excessive number of shares available for issuance as determined using a model developed by ISS.
TRACKING STOCK
Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
o Adverse governance changes;
o Excessive increases in authorized capital stock;
o Unfair method of distribution;
o Diminution of voting rights;
o Adverse conversion features;
o Negative impact on stock option plans; and
o Alternatives such as spin-off.
H. EXECUTIVE AND DIRECTOR COMPENSATION
EQUITY COMPENSATION PLANS
Votes with respect to equity compensation plans should be determined on a CASE-BY-CASE basis. Vote AGAINST the plan if:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing of stock options without prior shareholder approval;
o There is a disconnect between CEO pay and the company's performance;
o The company's most recent three year burn rate exceeds one standard deviation over the industry mean and is over 2% of the common shares outstanding;
o The plan provides for the acceleration of vesting of equity awards even though an actual change in control may not occur; or
o The plan is a vehicle for poor pay practices.
OTHER COMPENSATION PROPOSALS AND POLICIES
401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
MANAGEMENT PROPOSALS
Vote CASE-BY-CASE on management proposals for an advisory vote on
executive compensation. Vote AGAINST these resolutions in cases
where boards have failed to demonstrate good stewardship of
investors' interests regarding executive compensation practices.
The global principles and factors that should be considered are:
appropriate pay-for-performance alignment with emphasis on
long-term shareholder value, avoid arrangements that risk "pay
for failure," maintain an independent and effective compensation
committee, provide shareholders with clear, comprehensive
compensation disclosures, and avoid inappropriate pay to
non-executive directors.
For U.S. companies, vote CASE-BY-CASE considering such factors as: assessment of performance metrics relative to business strategy, evaluation of peer groups used to set target pay or award opportunities, alignment of company performance and executive pay trends over time (e.g., performance down: pay down), assessment of disparity between total pay of the CEO and other Named Executive Officers (NEOs), balance of fixed versus performance-driven pay, assessment of excessive practices with respect to perks, severance packages, supplemental executive pension plans, and burn rates, evaluation of information and board rationale about how compensation is determined (e.g., why certain elements and pay targets are used, specific incentive plan goals, especially retrospective goals), assessment of board's responsiveness to investor input and engagement on compensation issues (e.g., in responding to majority-supported shareholder proposals on executive pay topics).
DIRECTOR COMPENSATION
Votes on compensation plans for non-employee directors should be determined on a CASE-BY-CASE basis, based on the cost of the plans against the company's allowable cap. Vote for the plan if ALL of the following qualitative factors in the board's compensation plan are met and disclosed in the proxy statement:
o Director stock ownership guidelines with a minimum of three times the annual cash retainer.
o A vesting schedule or mandatory holding deferral period.
o A balanced mix between cash and equity. If the mix is heavier on equity, the vesting schedule or deferral period should be more stringent, with the lesser of five years or the term of directorship.
o No retirement/benefits and perquisites for non-employee directors; and
o A table with a detailed disclosure of the cash and equity compensation for each non-employee director for the most recent fiscal year.
DIRECTOR RETIREMENT PLANS
Vote AGAINST retirement plans for non-employee directors.
Vote FOR shareholder proposals to eliminate retirement plans for non-employee directors.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Vote FOR proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
EMPLOYEE STOCK PURCHASE PLANS--QUALIFIED PLANS
Votes on qualified employee stock purchase plans should be determined on a CASE-BY-CASE basis. Vote FOR employee stock purchase plans where purchase price is at least 85% of the fair market value, offering period is 27 months or less and the number of shares allocated to the plan is 10% or less of the outstanding shares.
Vote AGAINST qualified employee stock purchase plans where the purchase price is less than 85 percent of fair market value, the offering period is greater than 27 months or the number of shares allocated to the plan is more than ten percent of the outstanding shares.
EMPLOYEE STOCK PURCHASE PLANS--NON-QUALIFIED PLANS
Votes on nonqualified employee stock purchase plans should be determined on a CASE-BY-CASE basis. Vote FOR plans with broad-based participation (i.e. all employees excluding individuals with 5% or more beneficial ownership of the company), limits on employee contribution (a fixed dollar amount or percentage of base salary), company matching contribution up to 25% of employee's contribution, which is effectively a discount of 20% from market value and no discount on the stock price on the date of purchase since there is a company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan features do not meet the above criteria. If the company matching contribution exceeds 25 percent of employee's contribution, evaluate the cost of the plan against its allowable cap.
INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED
COMPENSATION PROPOSALS)
Vote FOR proposals that simply amend shareholder-approved compensation plans to include administrative features or place a cap on the annual grants any one participant may receive to comply with the provisions of Section 162(m) of the Internal Revenue Code.
Vote FOR proposals to add performance goals to existing compensation plans to comply with the provisions of Section 162(m) unless they are clearly inappropriate.
Vote CASE-BY-CASE on amendments to existing plans to increase shares reserved and to qualify for favorable tax treatment under the provisions of Section 162(m) as long as the plan does not exceed the allowable cap and the plan does not violate any of the supplemental policies.
Generally vote FOR cash or cash and stock bonus plans that are submitted to shareholders for the purpose of exempting compensation from taxes under the provisions of Section 162(m) if no increase in shares is requested.
Vote AGAINST proposals if the compensation committee does not fully consist of independent outsiders, as defined by ISS' classification of director independence.
OPTIONS BACKDATING
In cases where a company has practiced options backdating, vote AGAINST or WITHHOLD on a CASE-BY-CASE basis from the members of the compensation committee, depending on the severity of the practices and corrective measures on the part of the board. Vote AGAINST or WITHHOLD from the compensation committee members who oversaw the questionable options grant practices or from current compensation committee members who fail to respond to the issue proactively, depending on several factors, including but not limited to, the following factors: reason and motive for the backdating; length of time of backdating; size of restatement due to backdating; corrective action taken by the board or compensation committee; adoption of a grant policy that prohibits backdating, with a fixed grant schedule going forward.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-BY-CASE on management proposals seeking approval to exchange/reprice options taking into consideration historic trading patterns, rationale for the re-pricing, whether it is a value-for-value exchange, whether surrendered stock options are added back to the plan reserve, option vesting, term of the option, exercise price, and participants. Also, evaluate the intent, rationale, and timing of the repricing proposal. Repricing after a recent decline in stock price triggers additional scrutiny and a potential AGAINST vote on the proposal.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
STOCK PLANS IN LIEU OF CASH
Vote CASE-BY-CASE on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote FOR non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote CASE-BY-CASE on plans which do not provide a dollar-for-dollar cash for stock exchange.
TRANSFER PROGRAMS OF STOCK OPTIONS
One-time Transfers: Vote AGAINST or WITHHOLD from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
Vote CASE-BY-CASE on one-time transfers. Vote FOR if the executive officers and non-employee directors are excluded from participating, stock options are purchased by third-party financial institutions at a discount to their appropriate fair value using option pricing models and there is a two-year minimum holding period for sale proceeds (cash or stock) for all participants.
Vote AGAINST equity plan proposals if the details of ongoing TSO programs are not provided to shareholders.
SHAREHOLDER PROPOSALS ON COMPENSATION
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
Generally, vote FOR shareholder proposals that call for non-binding shareholder ratification of the compensation of the Named Executive Officers and the accompanying narrative disclosure of material factors provided to understand the Summary Compensation Table.
BAILOUT BILL/EXECUTIVE COMPENSATION RESOLUTIONS
Vote on a CASE-BY-CASE on shareholder proposals that call for the imposition of compensation limits at companies that are participating in the Capital Purchase Program established under the Troubled Asset Relief Program (TARP). Limits under the proposal include an emphasis on performance-vested equity awards, cap on bonus compensation, equity retention requirements, limits on retirement and severance benefits. While there are components of the program ISS would not support on a stand-alone basis, we consider the proposal to be a symbolic call on companies receiving this relief to adhere to higher compensation standards, a number of which were proposed in earlier drafts of the legislation. As such, the following factors will be taken into account:
o The absence of evidence that the Compensation Committee has taken substantial steps to review practices to reflect the dramatically different circumstances of the current environment, including the optics of maintaining former practices while taking tax-payer moneys.
o Problematic pay practices, current and past, particularly those which shareholders believe may have promoted a risk-taking environment that was ultimately in the detriment of shareholders' long-term interests.
COMPENSATION CONSULTANTS- DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION
Generally vote FOR shareholder proposals seeking disclosure regarding the Company, Board, or Compensation Committee's use of compensation consultants, such as company name, business relationship(s) and fees paid.
DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND
DIRECTORS
Generally vote FOR shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders' needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
Vote AGAINST shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation.
Vote AGAINST shareholder proposals requiring director fees be paid in stock only.
Vote CASE-BY-CASE on all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook.
GOLDEN COFFINS/EXECUTIVE DEATH BENEFITS
Generally vote FOR proposals calling companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals that the broad-based employee population is eligible.
PAY FOR SUPERIOR PERFORMANCE
Generally vote FOR shareholder proposals based on a case-by-case analysis that requests the board establish a pay-for-superior performance standard in the company's executive compensation plan for senior executives includes principles regarding setting compensation targets for the Plan's annual and long-term incentive pay components at or below the peer group median, delivering a majority of the Plan's target long-term compensation through performance-vested, not simply time-vested, equity awards, providing the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan, establishing performance targets for each plan financial metric relative to the performance of the company's peer companies and limiting payment under the annual and performance-vested long-term incentive components of the plan to when the company's performance on its selected financial performance metrics exceeds peer group median performance.
PERFORMANCE-BASED AWARDS
Vote CASE-BY-CASE on shareholder proposal requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based
and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
o First, vote FOR shareholder proposals advocating the use of performance-based equity awards unless the proposal is overly restrictive or if the company has demonstrated that it is using a "substantial" portion of performance-based awards for its top executives.
o Second, assess the rigor of the company's performance-based equity program. If the bar set for the performance-based program is too low based on the company's historical or peer group comparison, generally vote FOR the proposal. Furthermore, if target performance results in an above target payout, vote FOR the shareholder proposal due to program's poor design. If the company does not disclose the performance metric of the performance-based equity program, vote FOR the shareholder proposal regardless of the outcome of the first step to the test.
In general, vote FOR the shareholder proposal if the company does not meet both of the above two steps.
PENSION PLAN INCOME ACCOUNTING
Generally vote FOR shareholder proposals to exclude pension plan income in the calculation of earnings used in determining executive bonuses/compensation.
PRE-ARRANGED TRADING PLANS (10B5-1 PLANS)
Generally vote FOR shareholder proposals calling for certain principles regarding the use of prearranged trading plans (10b5-1 plans) for executives. These principles include:
o Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed within two business days in a Form 8-K;
o Amendment or early termination of a 10b5-1 Plan is allowed only under extraordinary circumstances, as determined by the board;
o Ninety days must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan;
o Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
o An executive may not trade in company stock outside the 10b5-1 Plan.
o Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive.
RECOUP BONUSES
Vote on a CASE-BY-CASE on proposals to recoup unearned incentive bonuses or other incentive payments made to senior executives if it is later determined that fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation, taking into consideration:
o If the company has adopted a formal recoupment bonus policy;
o If the company has chronic restatement history or material financial problems; or
o If the company's policy substantially addresses the concerns raised by the proponent.
SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES
Vote FOR shareholder proposals to require golden parachutes or executive severance agreements to be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts. Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden parachutes. An acceptable parachute should include:
o A trigger beyond the control of management;
o The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the five years prior to the year in which the change of control occurs);
o Change-in-control payments should be double-triggered,
i.e., (1) after a change in the company's ownership
structure has taken place, and (2) termination of the
executive as a result of the change in control (defined
as a change in the company ownership structure).
SHARE BUYBACK HOLDING PERIODS
Generally vote AGAINST shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock.
Vote FOR the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.
STOCK OWNERSHIP OR HOLDING PERIOD GUIDELINES
Generally vote AGAINST shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. While ISS favors stock ownership on the part of directors, the company should determine the appropriate ownership requirement.
Vote CASE-BY-CASE on shareholder proposals asking companies to adopt holding period or retention ratios for their executives, taking into account:
o Whether the company has any holding period, retention ratio, or officer ownership requirements in place. These should consist of:
o Rigorous stock ownership guidelines, or
o A short-term holding period requirement (six months to one year) coupled with a significant long-term ownership requirement, or
o A meaningful retention ratio,
o Actual officer stock ownership and the degree to which it meets or exceeds the proponent's suggested holding period/retention ratio or the company's own stock ownership or retention requirements;
o Problematic pay practices, current and past, which may promote a short-term versus a long-term focus.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
Generally vote FOR shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company's executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote FOR shareholder proposals requesting to limit the executive benefits provided under the company's supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive's annual salary and excluding of all incentive or bonus pay from the plan's definition of covered compensation used to establish such benefits.
TERMINATION OF EMPLOYMENT PRIOR TO SEVERANCE PAYMENT AND ELIMINATING
ACCELERATED VESTING OF UNVESTED EQUITY
Vote on a CASE-BY-CASE on shareholder proposals seeking a policy requiring termination of employment prior to severance payment, and eliminating accelerated vesting of unvested equity. Change-in-control payouts without loss of job or substantial diminution of job duties (single-triggered) are consider a poor pay practice under ISS policy, and may even result in withheld votes from compensation committee members. The second component of this proposal --related to the elimination of accelerated vesting -- requires more careful consideration. The following factors will be taken into regarding this policy:
o The company's current treatment of equity in change-of-control situations (i.e. is it double triggered, does it allow for the assumption of equity by acquiring company, the treatment of performance shares;
o Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements.
TAX GROSS-UP PROPOSALS
Generally vote FOR proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as relocation or expatriate tax equalization policy.
I. CORPORATE RESPONSIBILITY/SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics, including consumer and product safety, privacy, environment and energy policy, general corporate issues, labor standards, and animal and human rights. While a wide variety of factors goes into each analysis, the overall principal guiding all vote recommendations focuses on how the proposal will enhance the economic value of the company. Generally, vote FOR company's efforts to diversify the board, disclosure of company reports on financial and legal impact, standards, policies, and liabilities including those related to drug re-importation, toxic chemicals, Concentrated Feeding Operations, greenhouse gas emissions and preparations to comply with Kyoto Protocol, human rights reports requests. Generally, vote AGAINST certain methods of product testing on animal, certain privacy and labeling restraints, restrictions on drug re-importation, implementation of Controlled Atmosphere Killing methods, proposals to endorse or increase activity on the MacBride Principles and barring political contributions. Vote CASE-BY-CASE on tobacco and toxic chemical-related proposals, drug pricing proposals, linking executive compensation to social performance, outsourcing/offshoring, requests for reports on a company's lending guidelines and procedures, advertisements of tobacco products, information on a company's lobbying initiatives, and political contribution disclosure.
J. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Votes on the election of directors and trustees should be determined on a CASE-BY- CASE basis using the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Votes on conversion proposals are evaluated on a CASE-BY-CASE basis considering past performance as a closed-end fund, market in which the fund invests, measures taken by the board to address the discount and past shareholder activism, board activity, and votes on related proposals.
PROXY CONTESTS
Vote CASE-BY-CASE on proxy contests, considering the following factors:
o Past performance relative to its peers;
o Market in which fund invests;
o Measures taken by the board to address the issues;
o Past shareholder activism, board activity, and votes on related proposals;
o Strategy of the incumbents versus the dissidents;
o Independence of directors;
o Experience and skills of director candidates;
o Governance profile of the company;
o Evidence of management entrenchment.
INVESTMENT ADVISORY AGREEMENTS
Vote CASE-BY-CASE on investment advisory agreements, considering the following factors:
o Proposed and current fee schedules;
o Fund category/investment objective;
o Performance benchmarks;
o Share price performance as compared with peers;
o Resulting fees relative to peers;
o Assignments (where the advisor undergoes a change of control).
APPROVING NEW CLASSES OR SERIES OF SHARES
Vote FOR the establishment of new classes or series of shares.
PREFERRED STOCK PROPOSALS
Vote CASE-BY-CASE on the authorization for or increase in preferred shares, considering the following factors:
o Stated specific financing purpose;
o Possible dilution for common shares;
o Whether the shares can be used for antitakeover purposes.
1940 ACT POLICIES
Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940, considering the following factors:
o Potential competitiveness;
o Regulatory developments;
o Current and potential returns; and
o Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Vote CASE-BY-CASE on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
o The fund's target investments;
o The reasons given by the fund for the change; and
o The projected impact of the change on the portfolio.
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Vote AGAINST proposals to change a fund's fundamental investment objective to non-fundamental.
NAME CHANGE PROPOSALS
Vote CASE-BY-CASE on name change proposals, considering the following factors:
o Political/economic changes in the target market;
o Consolidation in the target market; and
o Current asset composition.
CHANGE IN FUND'S SUBCLASSIFICATION
Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the following factors:
o Potential competitiveness;
o Current and potential returns;
o Risk of concentration;
o Consolidation in target industry.
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate, considering the following factors:
o Strategies employed to salvage the company;
o The fund's past performance;
o The terms of the liquidation.
CHANGES TO THE CHARTER DOCUMENT
Vote CASE-BY-CASE on changes to the charter document, considering the following factors:
o The degree of change implied by the proposal;
o The efficiencies that could result;
o The state of incorporation;
o Regulatory standards and implications.
Vote AGAINST any of the following changes:
o Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;
o Removal of shareholder approval requirement for amendments to the new declaration of trust;
o Removal of shareholder approval requirement to amend the fund's management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act;
o Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund's shares;
o Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements;
o Removal of shareholder approval requirement to change the domicile of the fund.
CHANGING THE DOMICILE OF A FUND
Vote CASE-BY-CASE on re-incorporations, considering the following factors:
o Regulations of both states;
o Required fundamental policies of both states;
o The increased flexibility available.
AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISORS WITHOUT
SHAREHOLDER APPROVAL
Vote AGAINST proposals authorizing the board to hire/terminate subadvisors without shareholder approval.
DISTRIBUTION AGREEMENTS
Vote CASE-BY-CASE on distribution agreement proposals, considering the following factors:
o Fees charged to comparably sized funds with similar objectives;
o The proposed distributor's reputation and past performance;
o The competitiveness of the fund in the industry;
o The terms of the agreement.
MASTER-FEEDER STRUCTURE
Vote FOR the establishment of a master-feeder structure.
MERGERS
Vote CASE-BY-CASE on merger proposals, considering the following factors:
o Resulting fee structure;
o Performance of both funds;
o Continuity of management personnel;
o Changes in corporate governance and their impact on shareholder rights.
K. SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS
ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
Generally vote AGAINST shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote FOR the reimbursement of the solicitation expenses.
TERMINATE THE INVESTMENT ADVISOR
Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering the following factors:
o Performance of the fund's Net Asset Value (NAV);
o The fund's history of shareholder relations;
o The performance of other funds under the advisor's management.
II. GUIDELINES FOR INTERNATIONAL SECURITIES (SECURITIES TRADED IN THE NON-U.S. LISTED OR OVER-THE-COUNTER MARKETS)
It is important to understand, though, that corporate governance systems around the world are different, and the dogmatic application of policies developed for the U.S. corporate governance environment is not necessarily appropriate for foreign markets. The ultimate goal of proxy voting is to enhance long-term shareholder value through the effective use of the shareholder franchise. Achieving this goal internationally requires clear policy guidelines and flexibility in their application.
The Department of Labor has stated that for funds governed by ERISA, foreign proxies should be voted subject to a cost/benefit analysis. DCM attempts to secure notices of shareholder meetings of all international companies and cast votes for all shares held in those companies when it can be done cost-effectively.
A. OPERATIONAL ITEMS
FINANCIAL RESULTS/DIRECTOR AND AUDITOR REPORTS
Vote FOR approval of financial statements and director and auditor reports, unless there are concerns about the accounts presented or audit procedures used or the company is not responsive to shareholder questions about specific items that should be publicly disclosed.
APPOINTMENT OF AUDITORS AND AUDITOR COMPENSATION
Vote FOR the reelection of auditors and proposals authorizing the board to fix auditor fees, unless there are serious concerns about the accounts presented or the audit procedures used, the auditors are being changed without explanation, or nonaudit-related fees are substantial or are routinely in excess of standard annual audit fees.
Vote AGAINST the appointment of external auditors if they have previously served the company in an executive capacity or can otherwise be considered affiliated with the company.
APPOINTMENT OF INTERNAL STATUTORY AUDITORS
Vote FOR the appointment or reelection of statutory auditors, unless there are serious concerns about the statutory reports presented or the audit procedures used, questions exist concerning any of the statutory auditors being appointed, or the auditors have previously served the company in an executive capacity or can otherwise be considered affiliated with the company.
ALLOCATION OF INCOME
Vote FOR approval of the allocation of income unless the dividend payout ration has been consistently below 30% without adequate explanation or the payout is excessive given the company's financial position.
STOCK (SCRIP) DIVIDEND ALTERNATIVE
Vote FOR most stock dividend proposals.
Vote AGAINST proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value.
AMENDMENTS TO ARTICLES OF ASSOCIATION
Vote amendments to the articles of association on a CASE-BY-CASE basis.
CHANGE IN COMPANY FISCAL TERM
Vote FOR resolutions to change a company's fiscal term unless a company's motivation for the change is to postpone its AGM.
LOWER DISCLOSURE THRESHOLD FOR STOCK OWNERSHIP
Vote AGAINST resolutions to lower the stock ownership disclosure threshold below 5% unless specific reasons exist to implement a lower threshold.
AMEND QUORUM REQUIREMENTS
Vote proposals to amend quorum requirements for shareholder meetings on a CASE-BY-CASE basis.
TRANSACT OTHER BUSINESS
Vote AGAINST other business when it appears as a voting item.
B. BOARD OF DIRECTORS
DIRECTOR ELECTIONS
Vote FOR management nominees in the election of directors, unless adequate disclosure has not been provided in a timely manner, there are clear concerns over questionable finances or restatements, there have been questionable transactions with conflicts of interest, there are any records of abuses against minority shareholder interests, and the board fails to meet minimum corporate governance standards.
Vote FOR individual nominees unless there are specific concerns about the individual, such as criminal wrongdoing or breach of fiduciary responsibilities.
Vote AGAINST individual directors if they cannot provide an explanation for repeated absences at board meetings (in countries where this information is disclosed).
Vote CASE-BY-CASE for contested elections of directors, e.g. the election of shareholder nominees or the dismissal of incumbent directors, determining which directors are best suited to add value for shareholders.
Vote FOR employee and/or labor representatives if they sit on either the audit or compensation committee and are required by law to be on those committees.
Vote AGAINST labor representatives if they sit on either the audit or compensation committee, as they are not required to do so.
DIRECTOR COMPENSATION
Vote FOR proposals to award cash fees to non-executive directors unless the amounts are excessive relative to other companies in the country or industry.
Vote non-executive director compensation proposals that include both cash and share- based components on a CASE-BY-CASE basis.
Vote proposals that bundle compensation for both non-executive and executive directors into a single resolution on a CASE-BY-CASE basis.
Vote AGAINST proposals to introduce retirement benefits for non-executive directors.
DISCHARGE OF BOARD AND MANAGEMENT
Vote FOR discharge of the board and management, unless there is reliable information about significant and compelling controversies that the board is not fulfilling its fiduciary duties.
DIRECTOR, OFFICER, AND AUDITOR INDEMNIFICATION AND LIABILITY
PROVISIONS
Vote proposals seeking indemnification and liability protection for directors and officers on a CASE-BY-CASE basis.
Vote AGAINST proposals to indemnify auditors.
BOARD STRUCTURE
Vote FOR proposals to fix board size.
Vote AGAINST the introduction of classified boards and mandatory retirement ages for directors.
Vote AGAINST proposals to alter board structure or size in the context of a fight for control of the company or the board.
C. CAPITAL STRUCTURE
SHARE ISSUANCE REQUESTS
GENERAL ISSUANCES:
Vote FOR issuance requests with preemptive rights to a maximum of 100% over currently issued capital and those without preemptive rights to a maximum of 20% of currently issued capital.
SPECIFIC ISSUANCES:
Vote on a CASE-BY-CASE basis on all requests, with or without preemptive rights.
INCREASES IN AUTHORIZED CAPITAL
Vote FOR nonspecific proposals to increase authorized capital up to 100% over the current authorization unless the increase would leave the company with less than 30% of its new authorization outstanding.
Vote FOR specific proposals to increase authorized capital to any amount, unless the specific purpose of the increase (such as a share-based acquisition or merger) does not meet ISS' guidelines for the purpose being proposed or the increase would leave the company with less than 30% of its new authorization outstanding after adjusting for all proposed issuances.
Vote AGAINST proposals to adopt unlimited capital authorizations.
REDUCTION OF CAPITAL
Vote FOR proposals to reduce capital for routine accounting purposes unless the terms are unfavorable to shareholders.
Vote proposals to reduce capital in connection with corporate restructuring on a CASE- BY-CASE basis.
CAPITAL STRUCTURES
Vote FOR resolutions that seek to maintain or convert to a one share, one vote capital structure.
Vote AGAINST requests for the creation or continuation of dual class capital structures or the creation of new or additional supervoting shares.
PREFERRED STOCK
Vote FOR the creation of a new class of preferred stock or for issuances of preferred stock up to 50% of issued capital unless the terms of the preferred stock would adversely affect the rights of existing shareholders.
Vote FOR the creation/issuance of convertible preferred stock as long as the maximum number of common shares that could be issued upon conversion meets ISS' guidelines on equity issuance requests.
Vote AGAINST the creation of a new class of preference shares that would carry superior voting rights to the common shares.
Vote AGAINST the creation of blank check preferred stock unless the board clearly states that the authorization will not be used to thwart a takeover bid.
Vote proposals to increase blank check preferred authorizations on a CASE-BY-CASE basis.
DEBT ISSUANCE REQUESTS
Vote nonconvertible debt issuance requests on a CASE-BY-CASE basis, with or without preemptive rights.
Vote FOR the creation/issuance of convertible debt instruments as long as the maximum number of common shares that could be issued upon conversion meets ISS' guidelines on equity issuance requests.
Vote FOR proposals to restructure existing debt arrangements unless the terms of the restructuring would adversely affect the rights of shareholders.
PLEDGING OF ASSETS FOR DEBT
Vote proposals to approve the pledging of assets for debt on a CASE-BY-CASE basis.
INCREASE IN BORROWING POWERS
Vote proposals to approve increases in a company's borrowing powers on a CASE-BY- CASE basis.
SHARE REPURCHASE PLANS
Generally Vote FOR share repurchase plans, provided that the proposal allows 10% for market repurchase within any single authority and 10% of outstanding shares to be kept in treasury ("on the shelf") and the duration does not excluded eighteen months.
Vote AGAINST any proposal when the repurchase can be used for takeover defenses, there is clear evidence of abuse, there is no safeguard against selective buybacks, and pricing provisions and safeguards are deemed to be unreasonable in light of market practice.
REISSUANCE OF SHARES REPURCHASED
Vote FOR requests to reissue any repurchased shares unless there is clear evidence of abuse of this authority in the past.
CAPITALIZATION OF RESERVES FOR BONUS ISSUES/INCREASE IN PAR VALUE
Vote FOR requests to capitalize reserves for bonus issues of shares or to increase par value.
D. OTHER ITEMS
REORGANIZATIONS/RESTRUCTURINGS
Vote reorganizations and restructurings on a CASE-BY-CASE basis.
MERGERS AND ACQUISITIONS
Vote CASE-BY-CASE on mergers and acquisitions taking into account the following: valuation; market reaction; strategic reaction; conflicts of interest; and governance.
Vote AGAINST if the companies do not provide sufficient information upon request to make an informed voting decision.
MANDATORY TAKEOVER BID WAIVERS
Vote proposals to waive mandatory takeover bid requirements on a CASE-BY-CASE basis.
REINCORPORATION PROPOSALS
Vote reincorporation proposals on a CASE-BY-CASE basis.
EXPANSION OF BUSINESS ACTIVITIES
Vote FOR resolutions to expand business activities unless the new business takes the company into risky areas.
RELATED-PARTY TRANSACTIONS
Vote related-party transactions on a CASE-BY-CASE basis.
COMPENSATION PLANS
Vote compensation plans on a CASE-BY-CASE basis.
ANTITAKEOVER MECHANISMS
Vote AGAINST all antitakeover proposals unless they are structured in such a way that they give shareholders the ultimate decision on any proposal or offer.
SHAREHOLDER PROPOSALS
Generally vote all shareholder proposals on a CASE-BY-CASE basis. But, vote FOR proposals that would improve the company's corporate governance or business profile at a reasonable cost and vote AGAINST proposals that limit the company's business activities or capabilities or result in significant costs being incurred with little or no benefit.
OBTAINING VOTING INFORMATION
Clients who are interested in obtaining information from DCM on how their securities were voted may contact the Relationship Management Department at 1-800-688-8819. In addition, the Relationship Management Department mails to each client an annual record of all proxies voted on behalf of that client.
EXHIBIT J
Fairpointe Capital LLC
PROXY VOTING SUMMARY
Fairpointe Capital LLC ("Fairpointe"), as a matter of policy and as a fiduciary to our clients, has responsibility for voting proxies for portfolio securities consistent with the best economic interests of the clients. Our firm maintains written policies and procedures as to the handling, research, voting and reporting of proxy voting and makes appropriate disclosures about our firm's proxy policies and practices. Our policy and practice includes the responsibility to monitor corporate actions, receive and vote client proxies and disclose any potential conflicts of interest as well as making information available to clients about the voting of proxies for their portfolio securities and maintaining relevant and required records. Clients may obtain information with respect to the voting of proxies for their securities by contacting their portfolio manager or the firm's compliance officer.
Fairpointe has retained Risk Metric's ISS and Broadridge's ProxyEdge service to assist in the proxy voting process. The Portfolio Managers review each proxy and will approve or override the recommendations of ISS according to the firm's guidelines. The proxies are voted electronically with Broadridge's ProxyEdge system. Complete records of proxy votes are maintained electronically through ProxyEdge.
As a matter of firm policy the following guidelines are intended to assist in the proxy voting process:
(a) Fairpointe generally votes in favor of the following routine matters:
name changes, election of directors, appointment of independent
auditors, increase in the outstanding common stock or other equity
classes, date and place of annual meeting, ratification of directors'
actions on routine matters, indemnification of directors and/or
officers; employee stock purchase or ownership plans within dilution
limits, annual elections and confidential voting.
(b) Fairpointe generally votes in favor of mergers, acquisitions, restructurings, re-incorporations, changes in capitalization and employee and director compensation within reason and when pay and performance are aligned. However, other financial issues may need additional consideration and may involve issues such as hostile takeovers and mergers.
(c) Fairpointe will generally vote against any proposal that attempts to limit shareholder democracy, such as increased indemnification for directors and officers, certain supermajority rights, classified boards, cumulative voting, authorization of new securities that are unduly dilutive and amending state of corporation.
(d) Fairpointe intends to vote on a case-by-case basis on social issues.
(e) A client may have their own set of proxy voting guidelines which may conflict with Fairpointe or another client. If such situation arises, it is our intention to comply with client guidelines by voting proxies attributable to that client on a proportionate basis.
Should a conflict of interest arise, Fairpointe will resolve the conflict with the view of the best interest of the investors. If Fairpointe determines there is a material conflict of interest in connection with a proxy vote, Fairpointe will vote clients' proxies according to recommendations made by ISS, an independent third party.
EXHIBIT K
Harris Associates L.P.
PROXY VOTING POLICIES, GUIDELINES, AND PROCEDURES (Approved by the Proxy
Voting Committee on February 25, 2011)
I. PROXY VOTING POLICY
Harris Associates L.P. ("Harris", "the Firm" or "we") believes that proxy voting rights are valuable portfolio assets and an important part of our investment process, and we exercise our voting responsibilities as a fiduciary solely with the goal of serving the best interests of our clients in their capacity as shareholders of a company. As an investment manager, Harris is primarily concerned with maximizing the value of its clients' investment portfolios. Harris has long been active in voting proxies on behalf of shareholders in the belief that the proxy voting process is a significant means of addressing crucial corporate governance issues and encouraging corporate actions that are believed to enhance shareholder value. We have a Proxy Committee comprised of investment professionals that reviews and recommends policies and procedures regarding our proxy voting and ensures compliance with those policies.
The proxy voting guidelines below summarize Harris' position on various issues of concern to investors and give a general indication of how proxies on portfolio securities will be voted on proposals dealing with particular issues. We will generally vote proxies in accordance with these guidelines, except as otherwise determined by the Proxy Committee, unless the client has specifically instructed us to vote otherwise. These guidelines are not exhaustive and do not include all potential voting issues. Because proxy issues and the circumstances of individual companies vary, there may be instances when Harris may not vote in strict adherence to these guidelines. Our investment professionals, as part of their ongoing review and analysis of all portfolio holdings, are responsible for monitoring significant corporate developments, including proxy proposals submitted to shareholders, and notifying the Proxy Committee if they believe the economic interests of shareholders may warrant a vote contrary to these guidelines. In such cases, the Proxy Committee will determine how the proxies will be voted.
In determining the vote on any proposal, the Proxy Committee will consider the proposal's expected impact on shareholder value and will not consider any benefit to Harris, its employees, its affiliates or any other person, other than benefits to the owners of the securities to be voted, as shareholders.
Harris considers the reputation, experience and competence of a company's management when it evaluates the merits of investing in a particular company, and we invest in companies in which we believe management goals and shareholder goals are aligned. When this happens, by definition, voting with management is generally the same as voting to maximize the expected value of our investment. Accordingly, on most issues, our votes are cast in accordance with management's recommendations. This does not mean that we do not care about corporate governance. Rather, it is confirmation that our process of investing with shareholder aligned management is working. Proxy voting is not always black and white, however, and reasonable people can disagree over some matters of business judgment. When we believe management's position on a particular issue is not in the best interests of our clients, we will vote contrary to management's recommendation.
II. VOTING GUIDELINES
The following guidelines are grouped according to the types of proposals generally presented to shareholders.
BOARD OF DIRECTORS ISSUES
Harris believes that boards should have a majority of independent directors and that audit, compensation
and nominating committees should generally consist solely of independent directors.
1. Harris will normally vote in favor of the slate of directors recommended by the issuer's board provided that a majority of the directors would be independent.
2. Harris will normally vote in favor of proposals to require a majority of directors to be independent.
3. Harris will normally vote in favor of proposals that audit, compensation and nominating committees consist solely of independent directors, and will vote against the election of non- independent directors who serve on those committees.
4. Harris will normally vote in favor of proposals regarding director indemnification arrangements.
5. Harris will normally vote against proposals advocating classified or staggered boards of directors.
6. Harris will normally vote in favor of cumulative voting for directors.
7. Harris will normally vote in favor of proposals requiring a majority vote for directors.
8. Harris will normally vote in favor of proposals requiring the separation of the Chairman and Chief Executive Officer positions.
AUDITORS
Harris believes that the relationship between an issuer and its auditors should be limited primarily to the audit engagement, although it may include certain closely related activities such as financial statement preparation and tax-related services that do not raise any appearance of impaired independence.
1. Harris will normally vote in favor of ratification of auditors selected by the board or audit committee, subject to the above.
2. Harris will normally vote against proposals to prohibit or limit fees paid to auditors for ALL non- audit services, subject to the above.
3. Harris will normally vote in favor of proposals to prohibit or limit fees paid to auditors for general management consulting services other than auditing, financial statement preparation and controls, and tax-related services.
EQUITY BASED COMPENSATION PLANS
Harris believes that appropriately designed equity-based compensation plans approved by shareholders can be an effective way to align the interests of long-term shareholders and the interests of management, employees and directors. However, we are opposed to plans that substantially dilute our ownership interest in the company, provide participants with excessive awards or have inherently objectionable structural features.
1. Harris will normally vote against such plans where total potential dilution (including all equity- based plans) exceeds 15% of shares outstanding.
2. Harris will normally vote in favor of plans where total potential dilution (including all equity- based plans) does not exceed 15% of shares outstanding.
3. Harris will normally vote in favor of proposals to require expensing of options.
4. Harris will normally vote against proposals to permit repricing of underwater options.
5. Harris will normally vote against shareholder proposals that seek to limit directors' compensation to common stock.
6. Harris will normally vote in favor of proposals for employee stock purchase plans, so long as shares purchased through such plans are sold at no less than 85% of current market value.
CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS
Harris generally believes that all shareholders should have an equal voice and that barriers which limit the ability of shareholders to effect change and to realize full value are not desirable.
1. Harris will normally vote in favor of proposals to authorize the repurchase of shares.
2. Harris will normally vote against proposals creating or expanding supermajority voting rights.
3. Harris will normally vote against the adoption of poison pill plans.
4. Harris will normally vote in favor of proposals for stock splits and reverse stock splits.
5. Harris will normally vote against proposals to authorize different classes of stock with different voting rights.
6. Harris will normally vote against proposals to increase authorized shares with preemptive rights if the increase is greater than 100% of currently issued shares.
7. Harris will normally vote for proposals to increase authorized shares with preemptive rights if the increase is less than 100% of currently issued shares.
8. Harris will normally vote AGAINST proposals to increase authorized shares without preemptive rights if the increase is greater than 20% of currently issued shares.
9. Harris will normally vote for proposals to increase authorized shares without preemptive rights if the increase is less than 20% of currently issued shares.
ROUTINE CORPORATE MATTERS
Harris will generally vote in favor of routine business matters such as approving a motion to adjourn the meeting, declaring final payment of dividends, approving a change in the annual meeting date and location, approving the minutes of a previously held meeting, receiving consolidated financial statements, change of corporate name and similar matters. However, to the extent that the voting recommendation of Institutional Shareholder Services ("ISS") opposes the issuer's management on the routine matter, the proposal will be submitted to the Proxy Committee for determination.
SOCIAL RESPONSIBILITY ISSUES
Harris believes that matters related to a company's day-to-day business operations are primarily the responsibility of management and should be reviewed and supervised solely by the company's board of directors. Harris is focused on maximizing long-term shareholder value and will typically vote against shareholder proposals requesting that a company disclose or amend certain business practices unless we believe a proposal would have a substantial positive economic impact on the company.
CERTAIN OTHER ISSUES
Harris may also maintain Supplemental Proxy Voting Guidelines to address certain proposals that are not as enduring as those listed above, but yet may be presented repeatedly by issuers during a given proxy season. For example, companies in a particular industry or country may be affected by a change in the law that requires them to submit a one-time proxy proposal during the proxy season. The Proxy Committee will determine which proposals will be included on the list of Supplemental Proxy Voting Guidelines, and will update the list as needed. The Proxy Committee will provide the list to research analysts and the Proxy Administrator.
III. VOTING SHARES OF FOREIGN ISSUERS
Because foreign issuers are incorporated under the laws of countries outside the United States, protection for and disclosures to shareholders may vary significantly from jurisdiction to jurisdiction. Laws governing foreign issuers may, in some cases, provide substantially less protection for shareholders. As a result, the foregoing guidelines, which are premised on the existence of a sound corporate governance and disclosure framework, may not be appropriate under some circumstances for foreign issuers. Harris will generally vote proxies of foreign issuers in accordance with the foregoing guidelines where appropriate. On occasion, the proxy statements of foreign issuers may lack disclosure or transparency with respect to a significant element(s) for consideration (e.g., names of directors, targets for incentive plans, etc.), which may be a sufficient basis for voting contrary to the foregoing guidelines. If an analyst decides to vote contrary to guidelines solely due to the lack of disclosure or transparency, then the matter need not be submitted to the Proxy Committee for approval. The basis for such a decision to vote contrary to a guideline pursuant to the aforementioned reason(s) shall be appropriately documented.
In some non-U.S. jurisdictions, sales of securities voted may be prohibited for some period of time, usually between the record and meeting dates ("share blocking"). Since these time periods are usually relatively short in light of our long-term investment strategy, in most cases, share blocking will not impact our voting decisions. However, there may be occasions where the loss of investment flexibility resulting from share blocking will outweigh the benefit to be gained by voting.
IV. CONFLICTS OF INTEREST
The Proxy Committee, in consultation with the Legal and Compliance Departments, is responsible for monitoring and resolving possible material conflicts of interest with respect to proxy voting. A conflict of interest may exist, for example, when: (i) proxy votes regarding non-routine matters are solicited by an issuer who has an institutional separate account relationship with Harris or Harris is actively soliciting business from the issuer; (ii) when we are aware that a proponent of a proxy proposal has a business relationship with Harris or Harris is actively soliciting such business (E.G., an employee group for which Harris manages money); (iii) when we are aware that Harris has business relationships with participants in proxy contests, corporate directors or director candidates; or (iv) when we are aware that a Harris employee has a personal interest in the outcome of a particular matter before shareholders (E.G., a Harris executive has an immediate family member who serves as a director of a company). Any employee with knowledge of any conflict of interest relating to a particular proxy vote shall disclose that conflict to the Proxy Committee. In addition, if any member of the Proxy Committee has a conflict of interest, he or she will recuse himself or herself from any consideration of the matter, and an alternate member of the committee will act in his or her place.
Harris is committed to resolving any such conflicts in its clients'
collective best interest, and accordingly, we will vote pursuant to the
Guidelines set forth in this Proxy Voting Policy when conflicts of interest
arise. However, if we believe that voting in accordance with a Guideline is
not in the best interest of our clients under the particular facts and
circumstances presented, or if the proposal is not addressed by the
Guidelines, then we will vote in accordance with the guidance of ISS. If
ISS has not provided guidance with respect to the proposal or if we believe
the recommendation of ISS is not in the best interests of our clients, then
the Proxy Committee will refer the matter to (1) the Executive Committee of
the Board of Trustees of Harris Associates Investment Trust for a
determination of how shares held in The Oakmark Funds will be voted, and
(2) the Proxy Voting Conflicts Committee consisting of Harris' General
Counsel, Chief Compliance Officer and Chief Financial Officer for a
determination of how shares held in all other client accounts will be
voted. Each of those committees will keep a written record of the basis for
its decision.
V. VOTING PROCEDURES
The following procedures have been established with respect to the voting of proxies on behalf of all clients, including mutual funds advised by Harris, for which Harris has voting responsibility.
PROXY VOTING COMMITTEE. The Proxy Voting Committee (the "Committee") is responsible for recommending proxy voting guidelines, establishing and maintaining policies and procedures for proxy voting, and ensuring compliance with these policies and procedures. The Committee consists of three investment professionals: one domestic portfolio manager, one domestic research analyst, and one international research analyst. Committee members serve for three years with members replaced on a rotating basis. New Committee members are nominated by the Committee and confirmed in writing by Harris' President. The Committee also has two alternate members (one domestic analyst and one international analyst) either of who may serve in the absence of a regular member of the Committee.
PROXY ADMINISTRATOR. The Proxy Administrator is an employee of Harris reporting to the Manager of Account Services and is responsible for ensuring that all votes are placed with the proxy voting service provider and that all necessary records, as appropriate, are maintained reflecting such voting.
PROXY VOTING SERVICE PROVIDER. Harris has engaged ISS, an independent proxy voting service provider, to assist in voting proxies. ISS provides the Firm with information concerning shareholder meetings, electronic voting, recordkeeping and reporting services, research with respect to companies, and proxy voting guidance and recommendations.
VOTING DECISIONS. As described in the Proxy Voting Policy above, the Firm has established proxy voting guidelines, including supplemental proxy voting guidelines, on various issues. We will generally vote proxies in accordance with these guidelines except as otherwise determined by the Proxy Committee. The Proxy Administrator, or designated back-up, is responsible for alerting the Firm's research analyst who follows the company about the proxy proposals. If the analyst believes the proxy should be voted in accordance with the Guidelines, he or she will vote the proposal accordingly and indicate his or her initials in the appropriate location of the electronic ballot and submit the vote for further processing by the Proxy Administrator. If the analyst believes the proxy should be voted contrary to the Guidelines, he or she will submit the proposal, along with his or her recommended vote and ISS's recommended vote, if any, to the Proxy Committee, which reviews the proposal and the analyst's recommendation and makes a voting decision by majority vote. If a proposal is not explicitly addressed by the Guidelines but the analyst agrees with the voting recommendation of ISS regarding that proposal, he or she will vote the proxy in accordance with such recommendation and indicate his or her initials in the appropriate location of the electronic ballot and submit the vote for further processing by the Proxy Administrator. If a proposal is not explicitly addressed by the Guidelines and the analyst believes the proxy should be voted contrary to the ISS recommendation, he or she will submit the proposal, along with his or her recommended vote and ISS's recommended vote to the Proxy Committee, which reviews the proposal and the analyst's recommendation and makes a voting decision by majority vote. If neither the Guidelines nor ISS address the proxy proposal, the analyst will submit the proposal and his or her recommended vote to the Proxy Committee, which makes a voting decision by majority vote. That Proxy Committee decision is reflected in the electronic ballot.
In the case where securities that are not on the Firm's Approved Lists of domestic, international or small cap securities are held in managed accounts, the Proxy Administrator, or designated back-up, will vote all shares in accordance with the Firm's guidelines or, if the guidelines do not address the particular issue, in accordance with the guidance of ISS.
In the case of a conflict of interest, the Proxy Administrator will vote in accordance with the procedures set forth in the Conflicts of Interest provisions described above.
VOTING BALLOTS. For shares held in The Oakmark Funds and other client accounts, the MIS Department sends a daily holdings file to ISS detailing the holdings in the Funds and other client accounts. ISS is responsible for reconciling this information with the information it receives from the custodians and escalating any discrepancies to the attention of the Proxy Administrator. The Proxy Administrator works with ISS and custodians to resolve any discrepancies to ensure that all shares entitled to vote are voted.
RECORDKEEPING AND REPORTING. Much of Harris' recordkeeping and reporting is maintained electronically on ISS's systems. In the event that records are not held electronically within ISS's system, Harris will maintain records of proxy voting proposals received, records of votes cast on behalf of clients, and any documentation material to a proxy voting decision as required by law. Upon request, or on an annual basis for ERISA accounts, Harris will provide clients with the proxy voting record for that client's account. In addition, annually, Harris will file with the U.S. Securities and Exchange Commission and make available on the Oakmark Funds' website the voting record for the Oakmark Funds for the previous one-year period ended June 30(th).
EXHIBIT L
Kayne Anderson Capital Advisors, L.P.
A. POLICY
KACALP/KAFA (for purposes thereof, the "Firm") votes client proxies in the interest of maximizing shareholder value. To that end, the Firm votes in a way that it believes, consistent with its fiduciary duty, will cause the value of the issue to increase the most or decline the least. Consideration is given to both the short-term and long-term implications of the proposal to be voted on when considering the optimal vote.
However, absent special circumstances, it is the policy of the Firm to exercise its proxy voting discretion in accordance with the proxy voting guidelines herein. The guidelines are applicable to the voting of all proxies. However, any proxy voting guidelines provided by an advisory client or its designated agent in writing supersede such guidelines. Clients may wish to have their proxies voted by an independent third party or other named fiduciary or agent, at the client's cost.
The Firm may be subject to conflicts of interest in the voting of proxies from time to time. Such conflicts of interest are addressed as set forth below.
B. PROCEDURES FOR IDENTIFICATION AND VOTING OF PROXIES
As an integral part of the investment process the Firm has the responsibility for voting proxies, with limited exception as described below. Compliance is responsible for ensuring that this policy is adhered to and for voting the Firm's proxies, in conjunction with advice from the applicable portfolio manager or research analysts. This constitutes the "Proxy Voting Group".
To fulfill its fiduciary duty in voting client proxies, the Firm ensures
that (i) knowledge of a vote to be taken is acquired in a timely fashion
and sufficient information is acquired to allow for an informed vote; and
(ii) all proxy votes are cast (except as set forth under paragraph D. Other
Special Circumstances below).
1. FUNDS
The vast majority of the Firm's investment activities are for the benefit of commingled accounts (i.e. funds) for which it serves as general partner, and it therefore votes proxies for such accounts. Compliance reviews the list of clients and compares the record date of the proxies with a security holdings list for the security or company soliciting the proxy vote.
2. SEPARATE ACCOUNTS
Separate accounts are treated the same as fund accounts, except that if a separate account client provides specific voting instructions, Compliance votes that client's proxy in accordance with the client's written instructions. Proxies of separate account clients who have selected a third party to vote proxies, and whose proxies were received by the Firm, are forwarded to the designee for voting and submission. Proxies received after the separate account termination date of a client relationship are not voted. Such proxies are delivered to the last known address of the client or to the
intermediary who distributed the proxy with a written or oral statement indicating that the advisory relationship has been terminated and that future proxies for the named client should not be delivered to the Firm.
3. INTERNAL PROXY DISTRIBUTION
Compliance will provide the appropriate research analyst and portfolio manager with a copy of the relevant proxy ballot and as a reference, if available, an analysis by Glass Lewis, a third-party corporate governance research service for their review and voting advice.
4. DETERMINATION OF VOTING POSITION
While the third-party instructions may be useful, the Firm may, and generally is expected to have in-depth knowledge of the vast majority of the company's in which it has invested, particularly in areas such as energy master limited partnerships and related sectors, which knowledge may provide good reason to vote in a manner that is not consistent with the advice of the third-party service provider. After receiving voting instructions from the research analyst and/or portfolio manager, Compliance will vote the proxy(ies) according to the instructions received. It is the responsibility of the research analyst, if communicating voting instruction, to concurrently communicate such instructions to Compliance and the affected portfolio manager(s). The later may override the instructions of the research analyst but must do so promptly.
5. POTENTIAL CONFLICTS OF INTEREST
As discussed below, material conflicts between the Firm's interests and those of its clients with respect to proxy voting are reviewed and discussed with the GC. If the Proxy Voting Group detects a material conflict of interest that it cannot reasonably resolve itself, the Firm may rely on the third-party proxy voting service or another consultant to provide an independent recommendation on the direction in which the Firm should vote on the proposal. Alternatively, the Firm may make a voting determination based on the advice of GC or outside counsel concerning the conflict of interest.
6. ABSTENTIONS
The Firm may elect to abstain from voting if it deems such abstinence in its clients' best interests. The rationale for "abstain" votes is documented and the documentation is maintained in the proxy file.
7. OPPOSING VOTING
There may be circumstances which lead the Firm to vote the same proxy in two directions for different accounts. This may occur, for example, if a client requires the Firm to vote a certain way on an issue, while the Firm deems it beneficial to vote in the opposing direction for its other clients. In all such cases, the Firm maintains documentation to support its voting in the permanent file.
C. POTENTIAL CONFLICTS OF INTEREST
The Firm may be subject to a material conflict of interest in the voting of proxies from time to time due to business or personal relationships it maintains with persons having an interest in the outcome of certain votes. For example, the Firm may provide investment management related services to
accounts owned or controlled by companies whose management is soliciting proxies. The Firm and/or its employees may also occasionally have business or personal relationships with other proponents of proxy proposals, participants in proxy contests, corporate directors or candidates for directorships. If at anytime, the responsible voting parties become aware of any potential conflict of interest relating to a particular proxy proposal, they will promptly report such conflict to the Firm's GC.
Upon the identification of a material conflict of interest, the procedure described under Item 5 of Procedures for Identification and Voting of Proxies above are followed.
D. OTHER SPECIAL CIRCUMSTANCES
The Firm may choose not to vote proxies in certain situations or for certain accounts, such as: (1) where a client has informed the Firm that it wishes to retain the right to vote the proxy, the Firm will instruct the custodian to send the proxy material directly to the client, (2) where a proxy is received for a client account that has been terminated with the Firm, (3) where a proxy is received for a security the Firm no longer manages (i.e., the Firm had previously sold the entire position), or (4) where the exercise of voting rights could restrict the ability of an account's portfolio manager to freely trade the security in question (as is the case, for example, in certain foreign jurisdictions known as "blocking markets").
E. ERISA ACCOUNTS
Plans governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), are to be administered consistent with the terms of the governing plan documents and applicable provisions of ERISA. In cases where sole proxy voting discretion rests with Adviser, the foregoing policies and procedures will be followed, subject to the fiduciary responsibility standards of ERISA. These standards generally require fiduciaries to act prudently and to discharge their duties solely in the interests of participants and beneficiaries. The Department of Labor has indicated that the voting decisions of ERISA fiduciaries must generally focus on the course that would most likely increase the value of the stock being voted.
Consistent with Labor Department positions, it is the policy of the Firm to follow the provisions of a plan's governing documents in the voting of employer securities, unless it determines that to do so would breach its fiduciary duties under ERISA.
F. RECORDKEEPING
As required under rule 204-2 of the Advisers Act, the Firm shall maintain the following proxy records:
(i) A copy of these policies and procedures;
(ii) A copy of each proxy statement the firm receives regarding client's securities;
(iii) A record of each vote cast by the firm on behalf of a client;
(iv) A copy of any document created by the Adviser that was material to making a decision how to vote proxies on behalf of a client or that memorialized the basis for that decision;
(v) A copy of each written client request for information on how the Adviser voted proxies on behalf of the client, and a copy of any written response by the firm to any (written or oral) client request for information on how the firm voted proxies on behalf of the requesting client.
The proxy voting records described in the section shall be maintained and preserved in an easily accessible place for a period of not less than five years. The firm may rely on one or more third parties to make and retain the records referred to in items (ii) and (iii) above.
G. DISCLOSURE
As disclosed in Schedule F of the ADV Part II, a copy of these policies and procedures will be provided to clients upon request. In addition, if a client inquires about how a particular proxy proposal was voted, that information will be provided to the client in a timely manner.
H. PROXY SOLICITATION
As a matter of practice, it is the Firm's policy to not reveal or disclose to any client how the Adviser may have voted (or intends to vote) on a particular proxy until after such proxies have been counted at a shareholder's meeting.
The Compliance Department is to be promptly informed of the receipt of any solicitation from any person to vote proxies on behalf of clients. At no time may any employee accept any remuneration in the solicitation of proxies.
EXHIBIT M
LSV ASSET MANAGEMENT
PROXY VOTING POLICY
VOTING RESPONSIBILITY. LSV's standard investment management agreement expressly authorizes LSV to vote proxies on behalf of the client's account. Therefore, unless the client expressly reserves proxy voting responsibility, it is LSV's responsibility to vote proxies relating to securities held for the client's account.
ERISA ACCOUNTS. Unless proxy voting responsibility has been expressly reserved and is being exercised by another fiduciary for an ERISA plan client, LSV, as the investment adviser for the account, must vote all proxies relating to securities held for the plan's account. If LSV is responsible for voting, LSV shall make appropriate arrangements with each account custodian to have proxies forwarded, on a timely basis to the appropriate person, and shall endeavor to correct delays or other problems relating to timely delivery of proxies and proxy materials.
Fiduciary obligations of prudence and loyalty require an investment adviser with proxy voting responsibility to vote proxies on issues that affect the value of the client's investment. Proxy voting decisions must be made solely in the best interests of the client's account. In voting proxies, LSV is required to consider those factors that may affect the value of the client's investment and may not subordinate the interests of the client to unrelated objectives.
LSV has adopted proxy voting guidelines that provide direction in determining how various types of proxy issues are to be voted. LSV will engage an expert independent third party to design guidelines for client accounts that are updated for current corporate governance issues, helping to ensure that clients' best interests are served by voting decisions. Clients are sent a copy of their respective guidelines on an annual basis.
LSV's quantitative investment process does not provide output or analysis that would be functional in analyzing proxy issues. LSV therefore will retain an independent, expert third party, currently Glass Lewis & Co. ("GLC"). GLC will implement LSV's proxy voting process, provide assistance in developing guidelines and provide analysis of proxy issues on a case-by-case basis. LSV is responsible for monitoring GLC to ensure that proxies are appropriately voted. LSV will vote issues contrary to, or issues not covered by, the guidelines only when LSV believes it is in the best interest of the client. Where the client has provided proxy voting guidelines to LSV, those guidelines will be followed, unless it is determined that a different vote would add more value to the client's holding of the security in question. Direction from a client on a particular proxy vote will take precedence over the guidelines. LSV's use of GLC is not a delegation of LSV's fiduciary obligation to vote proxies for clients.
Should a material conflict arise between LSV's interest and that of its clients (e.g., a client bringing a shareholder action has solicited LSV's support; LSV manages a pension plan for a company whose management is soliciting proxies; or an LSV employee has a relative involved in management at an investee company), LSV will vote the proxies in accordance with the recommendation of the independent third party proxy voting service. A written record will be maintained describing the conflict of interest, and an explanation of how the vote taken was in the client's best interest.
LSV may refrain from voting a proxy if the cost of voting the proxy exceeds the expected benefit to the client, for example in the case of voting a foreign security when the proxy must be translated into English or the vote must be cast in person.
Clients may receive a copy of LSV's voting record for their account by request. LSV will additionally provide any mutual fund for which LSV acts as adviser or sub-adviser, a copy of LSV's voting record for the fund so that the fund may fulfill its obligation to report proxy votes to fund shareholders.
RECORDKEEPING. In accordance with the recordkeeping rules, LSV will retain:
(i) Copies of its proxy voting policies and procedures.
(ii) A copy of each proxy statement received regarding client securities (maintained by the proxy voting service and/or available on EDGAR).
(iii) A record of each vote cast on behalf of a client (maintained by the proxy voting service).
(iv) A copy of any document created that was material to the voting decision or that memorializes the basis for that decision (maintained by the proxy voting service).
(v) A copy of clients' written requests for proxy voting information and a copy of LSV's written response to a client's request for proxy voting information for the client's account.
(vi) LSV will ensure that it may obtain access to the proxy voting service's records promptly upon LSV's request.
LSV will maintain required materials in an easily accessible place for not less than five years from the end of the fiscal year during which the last entry took place, the first two years in LSV's principal office.
EXHIBIT N
Marsico Capital Management, LLC
It is the policy of Marsico Capital Management, LLC ("MCM") to seek to vote or otherwise process, such as by a decision to abstain from voting or to take no action on, proxies over which it has voting authority in the best interests of MCM's clients, as summarized here.
MCM's security analysts generally review proxy proposals as part of their monitoring of portfolio companies. Under MCM's investment discipline, one of the qualities that MCM generally seeks in companies selected for client portfolios is good management teams that generally seek to serve shareholder interests. Because MCM believes that the management teams of most companies it invests in generally seek to serve shareholder interests, MCM believes that voting proxy proposals in clients' best economic interests usually means voting with the recommendations of these management teams (including their boards of directors).
In certain circumstances, MCM's vote-by-vote analysis of proxy proposals could lead it to conclude that particular management or board recommendations may not appear as closely aligned with shareholder interests as MCM may deem desirable, or could be disregarded in the best interests of shareholders. In those and other circumstances, MCM may, in its sole discretion, vote against a management or board recommendation (or abstain or take no action) based on its analysis if such a vote appears consistent with the best interests of clients.
MCM may process certain proxies without voting them, such as by making a decision to abstain from voting or take no action on such proxies (or on certain proposals within such proxies). Examples include, without limitation, proxies issued by companies that MCM has decided to sell, proxies issued for securities that MCM did not select for a client portfolio (such as, without limitation, securities that were selected by a previous adviser, unsupervised securities held in a client's account, money market securities, or other securities selected by clients or their representatives other than MCM), or proxies issued by foreign companies that impose burdensome or unreasonable voting, power of attorney, or holding requirements. MCM also may abstain from voting, or take no action on, proxies in other circumstances, such as when voting may not be in the best interests of clients, as an alternative to voting with (or against) management, or when voting may be unduly burdensome or expensive, or if MCM may have a material conflict of interest in voting certain proxies and alternative voting procedures are not desirable.
In circumstances when there may be an apparent material conflict of interest between MCM's interests and clients' interests in how proxies are voted (such as when MCM knows that a proxy issuer is also an MCM client), MCM generally will resolve any appearance concerns by causing those proxies to be "echo voted" or "mirror voted" in the same proportion as other votes, by voting the proxies as recommended by an independent service provider, or by abstaining or taking no action. In other cases, MCM might use other procedures to resolve an apparent material conflict.
MCM may use an independent service provider to assist in voting proxies, keep voting records, and disclose voting information to clients. MCM's Proxy Voting policy and reports describing the voting of a client's proxies are available to the client on request.
MCM seeks to ensure that, to the extent reasonably feasible, proxies for which MCM receives ballots in good order and receives timely notice will be voted or otherwise processed (such as through a decision to abstain or take no action) as intended under MCM's Proxy Voting policy and procedures. MCM may be unable to vote or otherwise process proxy ballots that are not received or processed in a timely manner
due to functional limitations of the proxy voting system, custodial limitations, or other factors beyond MCM's control. Such ballots may include, without limitation, ballots for securities out on loan under securities lending programs initiated by the client or its custodian, ballots not timely forwarded by a custodian, or ballots for which MCM does not timely receive essential information such as the proxy proposal itself or modifications to the required voting date. Other ballots may be voted but not counted, or may be counted in an unexpected way, because of factors such as foreign voting requirements or other limitations.
EXHIBIT O
Parametric Portfolio Associates LLC
PROXY VOTING POLICY AND PROCEDURES
INTRODUCTION
Proxy voting policies and procedures are required by Rule 206(4)-6 of the Investment Advisers Act of 1940. Parametric Portfolio Associates' Proxy Voting Policy and Procedures are effective immediately.
POLICY:
We recognize our responsibility to exercise voting authority over shares we hold as a fiduciary. Proxies increasingly contain controversial issues involving shareholder rights, corporate governance and social concerns, among others, which deserve careful review and consideration. Exercising the proxy vote has economic value for our clients, and therefore, we consider it to be our fiduciary duty to preserve and protect the assets of our clients including proxy votes for their exclusive benefit.
It is our policy to vote proxies in a prudent and diligent manner after careful review of each company's proxy statement. We vote on an individual basis and base our voting decision exclusively on our reasonable judgment of what will serve the best financial interests of our clients, the beneficial owners of the security. Where economic impact is judged to be immaterial, we typically will vote in accordance with management's recommendations. In determining our vote, we will not and do not subordinate the economic interests of our clients to any other entity or interested party.
Our responsibility for proxy voting for the shareholders of a particular client account will be determined by the investment management agreement or other documentation. Upon establishing that we have such authority, we will instruct custodians to forward all proxy materials to us.
For those clients for whom we have undertaken to vote proxies, we will retain final authority and responsibility for such voting. In addition to voting proxies, we will:
o Provide clients with this proxy voting policy, which may be updated and supplemented from time to time;
o Apply the policy consistently and keep records of votes for each client in order to verify the consistency of such voting;
o Keep records of such proxy voting available for inspection by the client or governmental agencies --to determine whether such votes were consistent with policy and demonstrate that all proxies were voted; and
o Monitor such voting for any potential conflicts of interest and maintain systems to deal with these issues appropriately.
VOTING POLICY
Unless specifically directed in writing by the client, Parametric follows the general guidelines below with regards to voting management initiatives and shareholder initiatives.
We generally vote with management in the following cases:
o "Normal" elections of directors
o Approval of auditors/CPA
o Directors' liability and indemnification
o General updating/corrective amendments to charter
o Elimination of cumulative voting
o Elimination of preemptive rights
o Capitalization changes which eliminate other classes of stock and voting rights
o Changes in capitalization authorization for stock splits, stock dividends, and other specified needs
o Stock purchase plans with an exercise price of not less than 85% fair market value
o Stock option plans that are incentive-based and are not excessive
o Reductions in supermajority vote requirements
o Adoption of anti-greenmail provisions
We generally will not support management in the following initiatives:
o Capitalization changes that add classes of stock which are blank check in nature or that dilute the voting interest of existing shareholders
o Changes in capitalization authorization where management does not offer an appropriate rationale, or that are contrary to the best interest of existing shareholders
o Anti-takeover and related provisions which serve to prevent the majority of shareholders from exercising their rights or effectively deter appropriate tender offers and other offers
o Amendments to by-laws which would require super-majority shareholder votes to pass or repeal certain provisions
o Classified boards of directors
o Re-incorporation into a state which has more stringent anti-takeover and related provisions
o Shareholder rights plans which allow appropriate offers to shareholders to be blocked by the board or trigger provisions which prevent legitimate offers from proceeding
o Excessive compensation or non-salary compensation related proposals
o Change-in-control provisions in non-salary compensation plans, employment contracts, and severance agreements that benefit management and would be costly to shareholders if triggered
Traditionally, shareholder proposals have been used mainly for putting social initiatives and issues in front of management and other shareholders. Under our fiduciary obligations, it is typically inappropriate to use client assets to carry out such social agendas or purposes. Therefore, shareholder proposals are examined closely for their effect on the best interest of shareholders (economic impact) and the interests of our clients, the beneficial owners of the securities. In certain cases, an alternate course of action may be chosen for a particular account if socially responsible proxy voting or shareholder activism is a component of the client's investment mandate.
When voting shareholder proposals, initiatives related to the following items are generally supported:
o Auditors attendance at the annual meeting of shareholders
o Election of the board on an annual basis
o Equal access to proxy process
o Submit shareholder rights plan poison pill to vote or redeem
o Revise various anti-takeover related provisions
o Reduction or elimination of super-majority vote requirements
o Anti-greenmail provisions
We generally will not support shareholders in the following initiatives:
o Requiring directors to own large amounts of stock before being eligible to be elected
o Restoring cumulative voting in the election of directors
o Reports which are costly to provide or which would require duplicative efforts or expenditures which are of a non-business nature or would provide no pertinent information from the perspective of shareholders
o Restrictions related to social, political or special interest issues which impact the ability of the company to do business or be competitive and which have a significant financial or best interest impact, such as specific boycotts of restrictions based on political, special interest or international trade considerations; restrictions on political contributions; and the Valdez principals.
On occasion, we will elect to "take no action" when it is determined that voting the proxy will result in share blocking, which prevents us from trading that specific security for an uncertain period of time prior to the next annual meeting. Additionally, we may "take no action" if the economic effect on shareholders' interests or the value of the portfolio holdings is indeterminable or insignificant.
PROXY COMMITTEE
The Proxy Committee is responsible for voting proxies in accordance with Parametric Portfolio Associates' Proxy Voting Policy. The committee maintains all necessary corporate meetings, executes voting authority for those meetings, and maintains records of all voting decisions.
The Proxy Committee consists of the following staff:
o Proxy Administrator
o Proxy Administrator Supervisor
o Portfolio Management Representative
o Chief Investment Officer
In the case of a conflict of interest between Parametric Portfolio Associates and its clients, the Proxy Committee will meet to discuss the appropriate action with regards to the existing voting policy or outsource the voting authority to an independent third party.
RECORDKEEPING
Proxy Voting records are maintained for 5 years. Records can be retrieved and accessed via our third-party vendor.
In addition to maintaining voting records, Parametric Portfolio Associates maintains the following:
o Current voting policy and procedures;
o All written client requests as they relate to proxy voting; and,
o Any material research documentation related to proxy voting.
TO OBTAIN PROXY VOTING INFORMATION
Clients have the right to access any voting actions that were taken on their behalf. Upon request, this information will be provided free of charge.
Toll-free phone number: 1-800-211-6707
E-mail address: proxyinfo@paraport.com
Due to confidentiality, voting records will not be provided to any third party unless authorized by the client.
PROCEDURES:
These procedures should be read in connection with the Proxy Voting Policy.
o All proxies must be voted when such voting authority has been authorized.
o Non-routine proxies must be forwarded to the appropriate analyst/portfolio manager for review.
o Analysts/portfolio managers must complete, sign and return the proxy forms.
o Routine proposals will be voted in a manner consistent with the firm's standard proxy voting policy and will be voted accordingly, unless notified otherwise by the analyst/portfolio manager.
o Non-routine proposals (i.e., those outside the scope of the firm's standard proxy voting policy) will be voted in accordance with analyst/portfolio manager guidance, and such rational will be documented via the Non-routine Proxy Voting Form (below).
o Periodically, Parametric Compliance will distribute a list of potentially Conflicted Companies to the Proxy Administrator. This list consists of corporate affiliates and significant business partners and is prepared by the Parametric's parent company Eaton Vance. When presented with proxies of Conflicted Companies, the Proxy Administrator shall:
o If the Proxy Administrator expects to vote the proxy of the Conflicted Company strictly according to the guidelines contained in these Proxy Voting Policies (the "Policies"), she will (i) inform the CCO and Chief Investment Officer (or their designees) of that fact, (ii) vote the proxies and (iii) record the existence of the conflict and the resolution of the matter.
o If the Proxy Administrator intends to vote in a manner inconsistent with the guidelines contained herein, or if the issues raised by the proxy are not contemplated by these Policies, and the matters involved in such proxy could have a material economic impact on the client(s) involved, the Proxy Administrator will seek instruction on how the proxy should be voted from members of the Proxy Committee.
o If deemed necessary the Proxy Committee may seek instructions from:
o The client, in the case of an individual or corporate client;
o The Board of Directors, in the case of a Fund, or any committee identified by the board; or
o The adviser, in situations where the adviser acts as a sub-adviser or overlay manager to such adviser.
o If the client, Fund Board of Directors or adviser, as the case may be, does not instruct the adviser on how to vote the proxy, the adviser will generally vote according to the guidelines, in order to avoid the appearance of impropriety. In either case, the Proxy Administrator will record the existence of the conflict and the resolution of the matter.
EXHIBIT P
PROXY VOTING POLICY
Phocas Financial Corporation ("Phocas") has adopted the ISS 2012 U.S. Proxy Voting Guidelines. Accordingly, all proxies shall be submitted to ISS directly from the custodian and available for review and vote by Phocas personnel. Phocas will generally vote in-line with ISS recommendations, but reserves the right to go against the recommendation if management deems it is in the best interest of the shareholders.
The following pages represent the 2012 U.S. Voting Proxy Guidelines Concise Summary as published by the Institutional Shareholder Services.
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2012 U.S. PROXY VOTING CONCISE GUIDELINES
DECEMBER 20, 2011
Institutional Shareholder Services Inc.
Copyright (C) 2011 by ISS.
www. issgovernance.com
2012 U.S. PROXY VOTING CONCISE GUIDELINES
THE POLICIES CONTAINED HEREIN ARE A SAMPLING OF SELECT,
KEY PROXY VOTING GUIDELINES AND ARE NOT EXHAUSTIVE. A FULL
LISTING OF ISS' 2012 PROXY VOTINGGUIDELINES CAN BE FOUND AT
http://www.issgovernance.com/files/2012ussummaryguidelines.pdf
ROUTINE/MISCELLANEOUS
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the company, and is therefore not independent;
o There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company's financial position;
o Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees>audit fees + audit-related fees + tax compliance/preparation fees
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BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be determined CASE-BY-CASE.
Four fundamental principles apply when determining votes on director nominees:
1. Board Accountability
2. Board Responsiveness
3. Director Independence
4. Director Competence
1. BOARD ACCOUNTABILITY
Vote AGAINST(1) or WITHHOLD from the entire board of directors (except new nominees(2), who should be considered CASE-BY-CASE) for the following:
(2) A "new nominee" is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the nominee joined the board before or after the problematic action transpired, the nominee will be considered a "new nominee" if he or she joined the board within the 12 months prior to the upcoming shareholder meeting.
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PROBLEMATIC TAKEOVER DEFENSES:
CLASSIFIED BOARD STRUCTURE:
1.1. The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election -- any or all appropriate nominees (except new) may be held accountable;
DIRECTOR PERFORMANCE EVALUATION:
1.2. The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company's four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company's five-year total shareholder return and five-year operational metrics. Problematic provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections;
o The inability of shareholders to call special meetings;
o The inability of shareholders to act by written consent;
o A dual-class capital structure; and/or
o A non--shareholder- approved poison pill.
POISON PILLS:
1.3. The company's poison pill has a "dead-hand" or "modified dead-hand" feature. Vote WITHOLD or AGAINST every year until this feature is removed;
1.4. The board adopts a poison pill with a term of more than 12 months ("long-term pill"), or renews any existing pill, including any "short-term" pill (12 months or less), without shareholder approval. A commitment or policy that puts a newly adopted pill to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such companies with annually elected boards at least once every three years, and vote AGAINST or WITHHOLD votes from all nominees if the company still maintains a non-shareholder-approved poison pill. This policy applies to all companies adopting or renewing pills after the announcement of this policy (Nov. 19, 2009); or
1.5. The board makes a material adverse change to an existing poison pill without shareholder approval.
Vote CASE-BY-CASE on all nominees if:
1.6. The board adopts a poison pill with a term of 12 months or less ("short-term pill") without shareholder approval, taking into account the following factors:
o The date of the pill's adoption relative to the date of the next meeting of shareholders--I.E. whether the company had time to put the pill on ballot for shareholder ratification given the circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
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PROBLEMATIC AUDIT-RELATED PRACTICES
Generally vote AGAINST or WITHHOLD from the members of the Audit Committee if:
1.7. The non-audit fees paid to the auditor are excessive (see discussion under "Auditor Ratification");
1.8. The company receives an adverse opinion on the company's financial statements from its auditor; or
1.9. There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and potentially the full board if:
1.10. Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence and duration, as well as the ,company's efforts determining efforts at remediation or corrective actions, in determining whether WITHHOLD/AGAINST votes are warranted.
PROBLEMATIC COMPENSATION PRACTICES/PAY FOR PERFORMANCE MISALIGNMENT
In the absence of an Advisory Vote on Executive Compensation ballot item, or, in egregious situations, vote AGAINST or WITHHOLD from the members of the Compensation Committee and potentially the full board if:
1.11. There is a significant misalignment between CEO pay and company performance (PAY FOR PERFORMANCE);
1.12. The company maintains significant PROBLEMATIC PAY PRACTICES;
1.13. The board exhibits a significant level of POOR COMMUNICATION AND RESPONSIVENESS to shareholders;
1.14. The company fails to submit one-time TRANSFERS OF STOCK OPTIONS to a shareholder vote; or
1.15. The company fails to fulfill the terms of a BURN RATE COMMITMENT made to shareholders.
Vote CASE-BY-CASE on Compensation Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:
1.16. The company's previous say-on-pay proposal received the support of less than 70 percent of votes cast, taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
o Specific actions taken to address the issues that contributed to the low level of support;
o Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
GOVERNANCE FAILURES
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors individually, committee members, or the entire board, due to:
1.17. Material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company;
1.18. Failure to replace management as appropriate; or
1.19. Egregious actions related to a director's service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.
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2. BOARD RESPONSIVENESS
Vote AGAINST or WITHHOLD from the entire board of directors (except new nominees, who should be considered CASE-BY-CASE) if:
2.1. The board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year;
2.2. The board failed to act on a shareholder proposal that received the support of a majority of shares cast in the last year and one of the two previous years;
2.3. The board failed to act on takeover offers where the majority of shares are tendered;
2.4. At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote; or
2.5. The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency.
Vote CASE-BY-CASE on the entire board if:
2.6. The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received a plurality, but not a majority, of the votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency, taking into account:
o The board's rationale for selecting a frequency that is different from the frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a history of problematic compensation practices; and
o The previous year's support level on the company's say-on-pay proposal.
3. DIRECTOR INDEPENDENCE
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when:
3.1. The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
3.2. The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
3.3. The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or
3.4. Independent directors make up less than a majority of the directors.
4. DIRECTOR COMPETENCE
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS:
Vote AGAINST or WITHHOLD from the entire board of directors (except new nominees, who should be considered CASE-BY-CASE) if:
4.1. The company's proxy indicates that not all directors attended 75 percent of the aggregate board and committee meetings, but fails to provide the required disclosure of the names of the director(s) involved.
Generally vote AGAINST or WITHHOLD from individual directors who:
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4.2. Attend less than 75 percent of the board and committee meetings (with the exception of new nominees). Acceptable reasons for director absences are generally limited to the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting.
These reasons for directors' absences will only be considered by ISS if disclosed in the proxy or another SEC filing. If the disclosure is insufficient to determine whether a director attended at least 75 percent of board and committee meetings in aggregate, vote AGAINST or WITHHOLD from the director.
OVERBOARDED DIRECTORS:
Vote AGAINST or WITHHOLD from individual directors who:
4.3. Sit on more than six public company boards; or
4.4. Are CEOs of public companies who sit on the boards of more than two public companies besides their own -- withhold only at their outside boards.
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VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE-BY-CASE on the election of directors in contested elections, considering the following factors:
o Long-term financial performance of the target company relative to its industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against management;
o Likelihood that the proposed goals and objectives can be achieved (both slates);
o Stock ownership positions.
* * * * * *
PROXY ACCESS
ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach in evaluating these proposals.
Vote CASE-BY-CASE on proposals to enact proxy access, taking into account, among other factors:
o Company-specific factors; and
o Proposal-specific factors, including:
o The ownership thresholds proposed in the resolution (I.E., percentage and duration);
o The maximum proportion of directors that shareholders may nominate each year; and
o The method of determining which nominations should appear on the ballot if multiple shareholders submit nominations.
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SHAREHOLDER RIGHTS & DEFENSES
EXCLUSIVE VENUE
Vote CASE-BY-CASE on exclusive venue proposals, taking into account:
o Whether the company has been materially harmed by shareholder litigation outside its jurisdiction of incorporation, based on disclosure in the company's proxy statement; and
o Whether the company has the following good governance features:
o An annually elected board;
o A majority vote standard in uncontested director elections; and
o The absence of a poison pill, unless the pill was approved by shareholders.
* * * * * *
POISON PILLS- MANAGEMENT PROPOSALS TO RATIFY POISON PILL
Vote CASE-BY-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limits the ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company's existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
* * * * * *
POISON PILLS- MANAGEMENT PROPOSALS TO RATIFY A PILL TO PRESERVE NET OPERATING LOSSES (NOLS)
Vote AGAINST proposals to adopt a poison pill for the stated purpose of protecting a company's net operating losses ("NOLs") if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
Vote CASE-BY-CASE on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
o The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs);
o The company's existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and
o Any other factors that may be applicable.
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SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally vote AGAINST management and shareholder proposals to restrict or prohibit shareholders' ability to act by written consent.
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Generally vote FOR management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
o Shareholders' current right to act by written consent;
o The consent threshold;
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous shareholder proposals.
Vote CASE-BY-CASE on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:
o An unfettered(3) right for shareholders to call special meetings at a 10 percent threshold;
o A majority vote standard in uncontested director elections;
o No non-shareholder-approved pill; and
o An annually elected board.
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CAPITAL/RESTRUCTURING
COMMON STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.
Vote AGAINST proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized shares during the last three years
o The Current Request:
o Disclosure in the proxy statement of the specific purposes of the proposed increase;
o Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and
o The dilutive impact of the request as determined by an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total shareholder returns.
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PREFERRED STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class or series of preferred stock to increase the number of authorized shares of the class or series of preferred stock that has superior voting rights.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of preferred stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized preferred shares during the last three years;
o The Current Request:
o Disclosure in the proxy statement of the specific purposes for the proposed increase;
o Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request;
o In cases where the company has existing authorized preferred stock, the dilutive impact of the request as determined by an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total shareholder returns; and
o Whether the shares requested are blank check preferred shares that can be used for antitakeover purposes.
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DUAL CLASS STRUCTURE
Generally vote AGAINST proposals to create a new class of common stock unless:
o The company discloses a compelling rationale for the dual-class capital structure, such as:
o The company's auditor has concluded that there is substantial doubt about the company's ability to continue as a going concern; or
o The new class of shares will be transitory;
o The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and
o The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
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MERGERS AND ACQUISITIONS
Vote CASE -- BY- CASE on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:
o VALUATION -- Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale.
o MARKET REACTION -- How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
o STRATEGIC RATIONALE -- Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions.
o NEGOTIATIONS AND PROCESS -- Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also
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signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value.
o CONFLICTS OF INTEREST -- Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
o GOVERNANCE -- Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
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COMPENSATION
EXECUTIVE PAY EVALUATION
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
1. Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;
2. Avoid arrangements that risk "pay for failure": This principal addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
3. Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed);
4. Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;
5. Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers' pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.
ADVISORY VOTES ON EXECUTIVE COMPENSATION- MANAGEMENT PROPOSALS (MANAGEMENT SAY-ON-PAY)
Vote CASE-BY-CASE on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
Vote AGAINST Advisory Votes on Executive Compensation (Management Say-on-Pay -- MSOP) if:
o There is a significant misalignment between CEO pay and company performance (PAY FOR PERFORMANCE);
o The company maintains significant PROBLEMATIC PAY PRACTICES;
o The board exhibits a significant level of POOR COMMUNICATION AND RESPONSIVENESS to shareholders.
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Vote AGAINST or WITHHOLD from the members of the Compensation Committee and potentially the full board if:
o There is no MSOP on the ballot, and an AGAINST vote on an MSOP is warranted due to pay for performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
o The board fails to respond adequately to a previous MSOP proposal that received less than 70 percent support of votes cast;
o The company has recently practiced or approved problematic pay practices, including option repricing or option backdating; or
o The situation is egregious.
Vote AGAINST an equity plan on the ballot if:
o A pay for performance misalignment is found, and a significant portion of the CEO's misaligned pay is attributed to non-performance-based equity awards, taking into consideration:
o Magnitude of pay misalignment;
o Contribution of non-performance-based equity grants to overall pay; and
o The proportion of equity awards granted in the last three fiscal years concentrated at the named executive officer (NEO) level.
PRIMARY EVALUATION FACTORS FOR EXECUTIVE PAY
PAY- FOR-PERFORMANCE EVALUATION
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 index, this analysis considers the following:
1. Peer Group(4) Alignment:
o The degree of alignment between the company's TSR rank and the CEO's total pay rank within a peer group, as measured over one-year and three-year periods (weighted 40/60);
o The multiple of the CEO's total pay relative to the peer group median.
2. Absolute Alignment: The absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years -- I.E., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of non-Russell 3000 index companies, misaligned pay and performance are otherwise suggested, analyze the following
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qualitative factors to determine how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
o The ratio of performance- to time-based equity awards;
o The ratio of performance-based compensation to overall compensation;
o The completeness of disclosure and rigor of performance goals;
o The company's peer group benchmarking practices;
o Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
o Special circumstances related to, for example, a new CEO in the prior fiscal year or anomalous equity grant practices (E.G., biennial awards); and
o Any other factors deemed relevant.
PROBLEMATIC PAY PRACTICES
The focus is on executive compensation practices that contravene the global pay principles, including:
o Problematic practices related to non-performance-based compensation elements;
o Incentives that may motivate excessive risk-taking; and
o Options Backdating.
PROBLEMATIC PAY PRACTICES RELATED TO NON-PERFORMANCE-BASED COMPENSATION ELEMENTS
Pay elements that are not directly based on performance are generally evaluated CASE-BY-CASE considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
o Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
o Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
o New or extended agreements that provide for:
o CIC payments exceeding 3 times base salary and average/target/most recent bonus;
o CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);
o CIC payments with excise tax gross-ups (including "modified" gross-ups).
INCENTIVES THAT MAY MOTIVATE EXCESSIVE RISK-TAKING
o Multi-year guaranteed bonuses;
o A single or common performance metric used for short- and long-term plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o Mega annual equity grants that provide unlimited upside with no downside risk.
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Factors that potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.
OPTIONS BACKDATING
The following factors should be examined CASE-BY-CASE to allow for distinctions to be made between "sloppy" plan administration versus deliberate action or fraud:
o Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and
o Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future.
BOARD COMMUNICATIONS AND RESPONSIVENESS
Consider the following factors CASE-BY-CASE when evaluating ballot items related to executive pay on the board's responsiveness to investor input and engagement on compensation issues:
o Failure to respond to majority-supported shareholder proposals on executive pay topics; or
o Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
o Specific actions taken to address the issues that contributed to the low level of support;
o Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
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FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION (MANAGEMENT "SAY ON PAY")
Vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.
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VOTING ON GOLDEN PARACHUTES IN AN ACQUISITION, MERGER, CONSOLIDATION, OR PROPOSED SALE
Vote CASE-BY-CASE on proposals to approve the company's golden parachute compensation, consistent with ISS' policies on problematic pay practices related to severance packages. Features that may lead to a vote AGAINST include:
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o Recently adopted or materially amended agreements that include excise
tax gross-up provisions (since prior annual meeting);
o Recently adopted or materially amended agreements that include
modified single triggers (since prior annual meeting);
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o Single trigger payments that will happen immediately upon a change in control, including cash payment and such items as the acceleration of performance-based equity despite the failure to achieve performance measures;
o Single-trigger vesting of equity based on a definition of change in control that requires only shareholder approval of the transaction (rather than consummation);
o Potentially excessive severance payments;
o Recent amendments or other changes that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders;
o In the case of a substantial gross-up from pre-existing/grandfathered contract: the element that triggered the gross-up (i.e., option mega-grants at low point in stock price, unusual or outsized payments in cash or equity made or negotiated prior to the merger); or
o The company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. ISS would view this as problematic from a corporate governance perspective.
In cases where the golden parachute vote is incorporated into a company's separate advisory vote on compensation ("management "say on pay"), ISS will evaluate the "say on pay" proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
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EQUITY-BASED AND OTHER INCENTIVE PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits repricing;
o A pay-for-performance misalignment is found;
o The company's three year burn rate exceeds the burn rate cap of its industry group;
o The plan has a liberal change-of-control definition; or
o The plan is a vehicle for problematic pay practices.
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SOCIAL/ENVIRONMENTAL ISSUES
OVERALL APPROACH
When evaluating social and environmental shareholder proposals, ISS considers the following factors:
o Whether adoption of the proposal is likely to enhance or protect shareholder value;
o Whether the information requested concerns business issues that relate to a meaningful percentage of the company's business as measured by sales, assets, and earnings;
o The degree to which the company's stated position on the issues raised in the proposal could affect its reputation or sales, or leave it vulnerable to a boycott or selective purchasing;
o Whether the issues presented are more appropriately/effectively dealt with through governmental or company- specific action;
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o Whether the company has already responded in some appropriate manner
to the request embodied in the proposal;
o Whether the company's analysis and voting recommendation to
shareholders are persuasive;
o What other companies have done in response to the issue addressed in
the proposal;
o Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
o Whether implementation of the proposal's request would achieve the
proposal's objectives;
o Whether the subject of the proposal is best left to the discretion of
the board;
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o Whether the requested information is available to shareholders either from the company or from a publicly available source; and
o Whether providing this information would reveal proprietary or confidential information that would place the company at a competitive disadvantage.
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POLITICAL SPENDING & LOBBYING ACTIVITIES
Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as:
o There are no recent, significant controversies, fines or litigation regarding the company's political contributions or trade association spending; and
o The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion.
Vote AGAINST proposals to publish in newspapers and other media the company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Generally vote FOR proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities. However, the following will be considered:
o The company's current disclosure of policies and oversight mechanisms related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes, including information on the types of organizations supported and the business rationale for supporting these organizations; and
o Recent significant controversies, fines, or litigation related to the company's political contributions or political activities.
Vote AGAINST proposals barring the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying activities, including direct lobbying as well as grassroots lobbying activities, considering:
o The company's current disclosure of relevant policies and oversight mechanisms;
o Recent significant controversies, fines, or litigation related to the company's public policy activities; and
o The impact that the policy issues may have on the company's business operations.
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HYDRAULIC FRACTURING
Generally vote FOR proposals requesting greater disclosure of a company's (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering:
o The company's current level of disclosure of relevant policies and oversight mechanisms;
o The company's current level of such disclosure relative to its industry peers;
o Potential relevant local, state, or national regulatory developments; and
o Controversies, fines, or litigation related to the company's hydraulic fracturing operations.
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.
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EXHIBIT Q
STEELPATH CAPITAL MANAGEMENT, LLC
Original Issue Date: 2010 Policy Number: Chapter 27 Functional Applicability: All Employees Last Revision Date: December 3, 2010 Next Review Date: December 2012 Version: 2010-12 |
INTRODUCTION
Proxies are an asset of a client account, which should be treated by SteelPath
with the same care, diligence and loyalty as any asset belonging to a client.
As such, SteelPath views seriously its responsibility to exercise voting
authority over securities that are owned by its client's portfolios. The
following guidelines should be observed with respect to proxies. These
guidelines also address special provisions for voting proxies of the SteelPath
Mutual Funds (the "Trust"), and conflicts of interests that may arise in
connection with such proxies. A client may direct SteelPath to vote in a
particular manner at any time upon written notice to SteelPath.
POLICY STATEMENT
The Firm understands and appreciates the importance of proxy voting. To the
extent that Firm has discretion to vote proxies for an Advisory Client, the
Firm will vote any such proxies in the best interests of the Advisory Client
and in accordance with the procedures outlined below (as applicable).
SteelPath's policy is to review each proxy statement on an individual basis and to vote exclusively with the goal to best serve the financial interests of its clients.
PROCEDURES
All proxies sent to Advisory Clients that are actually received by the Firm (to
vote on behalf of the Advisory Client) will be provided to the SteelPath
through a third-party voting administrator.
SteelPath will generally adhere to the following procedures (subject to limited exception):
o A written record of each proxy voted on by the Firm will be kept either by the proxy administrator or in the Firm's files;
o The Chief Compliance Officer or designee may call a meeting, as necessary, (which may be via telephone) of appropriate officers and/or employees (collectively referred to as "Proxy Voting Committee")
o The Proxy Voting Committee will determine if there are any conflicts of interest related to the proxy in question in accordance with the general guidelines below. If a conflict is identified, the Proxy Voting Committee will then make a determination (which may be in consultation with outside legal counsel) as to whether the conflict is material or not.
o If no material conflict is identified pursuant to these procedures, the Proxy Voting Committee will make a decision on how to vote the proxy in question in accordance with the guidelines set forth below. The internal proxy administrator will deliver to the proxy voting administrator in accordance with instructions related to such proxy in a timely and appropriate manner.
o The third-party proxy administrator shall maintain the voting records.
HANDLING OF CONFLICTS OF INTEREST
The Proxy Voting Committee will determine whether there is a conflict of interest related to the proxy in question between the Firm and Advisory Clients. This examination will include (but will not be limited to) an evaluation of whether the Firm (or any affiliate of the Firm) has any relationship with the company (or an affiliate of the company) to which the proxy relates outside an investment in such company by an Advisory Client.
If a conflict is identified and deemed "material" by the Proxy Voting Committee, the Firm will determine whether voting in accordance with the proxy voting guidelines outlined below is in the best interests of affected Advisory Clients. If conflicts arise, the Firm will:
o Engage outside counsel to determine how to vote such proxies; or
o Determine it is appropriate to disclose the conflict to affected Advisory Clients and give Advisory Clients the opportunity to vote the proxies in question themselves.
VOTING GUIDELINES
In the absence of specific voting guidelines mandated by a particular Managed Account, the Firm will endeavor to vote proxies in the best interests of each Advisory Client.
Although voting certain proxies may be subject to the discretion of the Firm, the Firm is of the view that voting proxies in accordance with the following general guidelines is in the best interests of the Advisory Clients:
The Firm will generally vote in favor of routine corporate housekeeping proposals including, but not limited to, the following:
o Election of directors (where there are no related corporate governance issues);
o Selection or reappointment of auditors; or
o Increasing or reclassification of common stock.
The Firm will generally vote against proposals that:
o Make it more difficult to replace members of the issuer's board of directors or board of managers; and
o Introduce unequal voting rights (although there may be regulatory reasons that would make such a proposal favorable to certain Advisory Clients).
The Firm will generally vote against proposals that make it more difficult for an issuer to be taken over by outsiders, and in favor of proposals to do the opposite.
The Firm will generally vote in favor of proposals by management or shareholders concerning various compensation and stock option plans that will act to make management and employee compensation more dependent on long-term stock price performance.
The Firm will generally vote against proposals to move the company to another state less favorable to shareholders' interests, or to restructure classes of stock in such a way as to benefit one class of shareholders at the expense of another, such as dual classes (A and B shares) of stock.
DISCLOSURE OF PROCEDURES
Employees should note that a brief summary of these proxy-voting procedures will be included in the Firm's Form ADV Part II and will be updated whenever these policies and procedures are updated. Advisory Clients will also be provided with contact information as to how they can obtain information about the details of the Firm's procedures (i.e., a copy of these procedures), and voted proxies.
BOOKS AND RECORDS
The Proxy Administrator is responsible for maintaining files relating to the
Firm's proxy voting records. Records will be maintained and preserved for five
(5) years from the end of the fiscal year during which the last entry was made
on a record.
Records of the following will be included in the files:
o Copies of these proxy voting policies and procedures, and any amendments thereto;
o A copy of each proxy statement that the Firm actually receives;
o A record of each vote that the Firm casts;
o A copy of any document that the Firm created that was material to making a decision on how to vote the proxies, or memorializes that decision (if any); ando A copy of each written request for information on how the Firm voted proxies and a copy of any written response to any request for information on how the Firm voted proxies on behalf of an Advisory Client.
ASSOCIATED POLICIES
Books and Records
Registration
Fiduciary Duty
EXHIBIT R
TCW Investment Management Company
PROXY VOTING GUIDELINES AND PROCEDURES
March 1, 2011
INTRODUCTION
Certain affiliates of The TCW Group, Inc. (these affiliates are collectively referred to as "TCW") act as investment advisors for a variety of clients, including mutual funds. If TCW has responsibility for voting proxies in connection with these investment advisory duties, or has the responsibility to specify to an agent of the client how to vote the proxies, TCW exercises such voting responsibilities for its clients through the corporate proxy voting process. TCW believes that the right to vote proxies is a significant asset of its clients' holdings. In order to provide a basis for making decisions in the voting of proxies for its clients, TCW has established a proxy voting committee (the "Proxy Committee") and adopted these proxy voting guidelines and procedures (the "Guidelines"). The Proxy Committee generally meets quarterly (or at such other frequency as determined by the Proxy Committee), and its duties include establishing proxy voting guidelines and procedures, overseeing the internal proxy voting process, and reviewing proxy voting issues. The members of the Proxy Committee include TCW personnel from the investment, compliance, legal and marketing departments. TCW also uses outside proxy voting services (each an "Outside Service") to help manage the proxy voting process. An Outside Service facilitates TCW's voting according to the Guidelines (or, if applicable, according to guidelines submitted by TCW's clients) and helps maintain TCW's proxy voting records. All proxy voting and record keeping by TCW is, of course, dependent on the timely provision of proxy ballots by custodians, clients and other third parties. Under specified circumstances described below involving potential conflicts of interest, an Outside Service may also be requested to help decide certain proxy votes. In certain limited circumstances, particularly in the area of structured financing, TCW may enter into voting agreements or other contractual obligations that govern the voting of shares. In the event of a conflict between any such contractual requirements and the Guidelines, TCW will vote in accordance with its contractual obligations.
PHILOSOPHY
The Guidelines provide a basis for making decisions in the voting of proxies for clients of TCW. When voting proxies, TCW's utmost concern is that all decisions be made solely in the interests of the client and with the goal of maximizing the value of the client's investments. With this goal in mind, the Guidelines cover various categories of voting decisions and generally specify whether TCW will vote for or against a particular type of proposal. TCW's underlying philosophy, however, is that its portfolio managers, who are primarily responsible for evaluating the individual holdings of TCW's clients, are best able to determine how to further client interests and goals. The portfolio managers may, in their discretion, take into account the recommendations of TCW management, the Proxy Committee, and an Outside Service.
OVERRIDES AND CONFLICT RESOLUTION
Individual portfolio managers, in the exercise of their best judgment and discretion, may from time to time override the Guidelines and vote proxies in a manner that they believe will enhance the economic value of clients' assets, keeping in mind the best interests of the beneficial owners. A portfolio manager choosing to override the Guidelines must deliver a written rationale for each such decision to TCW's Proxy Specialist (the "Proxy Specialist"), who will maintain such documentation in TCW's proxy voting
records and deliver a quarterly report to the Proxy Committee of all votes cast other than in accordance with the Guidelines. If the Proxy Specialist believes there is a question regarding a portfolio manager's vote, he/she will obtain the approval of TCW's Director of Research (the "Director of Research") for the vote before submitting it. The Director of Research will review the portfolio manager's vote and make a determination. If the Director of Research believes it appropriate, he/she may elect to convene the Proxy Committee.
It is unlikely that serious conflicts of interest will arise in the context of TCW's proxy voting, because TCW does not engage in investment banking or the managing or advising of public companies. In the event a potential conflict of interest arises in the context of voting proxies for TCW's clients, the primary means by which TCW will avoid a conflict is by casting such votes solely in the interests of its clients and in the interests of maximizing the value of their portfolio holdings. In this regard, if a potential conflict of interest arises but the proxy vote to be decided is predetermined hereunder to be cast either in favor or against, then TCW will vote accordingly. On the other hand, if a potential conflict of interest arises and there is no predetermined vote, or the Guidelines themselves refer such vote to the portfolio manager for decision, or the portfolio manager would like to override a predetermined vote, then TCW will undertake the following analysis.
First, if a potential conflict of interest is identified because the issuer soliciting proxy votes is itself a client of TCW's (or because an affiliate of such issuer, such as a pension or profit sharing plan sponsored by such issuer, is a client of TCW's), then the Proxy Specialist will determine whether such relationship may be deemed not to be material to TCW. A relationship will be deemed not to be material, and no further conflict analysis will be required, if the assets managed for that client by TCW represent, in the aggregate, 0.25% (25 basis points) or less of TCW's total assets under management. On the other hand, if the assets managed for that client by TCW exceed, in the aggregate, 0.25% (25 basis points) of TCW's total assets under management, then the Proxy Committee will investigate whether the relationship should be deemed to be material under the particular facts and circumstances. If the relationship is deemed not to be material, then no further conflict analysis will be required. If a material conflict is deemed to have arisen, then TCW will refrain completely from exercising its discretion with respect to voting the proxy with respect to such vote and will, instead, refer that vote to an Outside Service for its independent consideration as to how the vote should be cast.
Second, a potential conflict of interest may arise because an employee of TCW sits on the Board of a public company. The Proxy Specialist is on the distribution list for an internal chart that shows any Board seats in public companies held by TCW personnel. If the Proxy Specialist confirms that such Board member is not the portfolio manager and, that the portfolio manager has not spoken with such Board member, then such conflict of interest will not be deemed to be material and no further conflict analysis will be required. If, on the other hand, either the particular Board member is the portfolio manager or there has been communication concerning such proxy vote between the portfolio manager and the particular Board member, then the Proxy Specialist will provide the Proxy Committee with the facts and vote rationale so that it can determine and vote the securities. The vote by the Proxy Committee will be documented.
Third, a potential conflict of interest may arise if the issuer is an affiliate of TCW. It is currently not anticipated that this would be the case, but if this were to arise TCW will refrain completely from exercising its discretion with respect to voting the proxy with respect to such a vote and will, instead, refer that vote to an Outside Service for its independent consideration as to how the vote should be cast. Finally, if any other portfolio manager conflict is identified with respect to a given proxy vote, the Proxy Committee will remove such vote from the conflicted portfolio manager and will itself consider and cast the vote.
PROXY VOTING INFORMATION AND RECORDKEEPING
Upon request, TCW provides proxy voting records to its clients. These records state how votes were cast on behalf of client accounts, whether a particular matter was proposed by the company or a shareholder, and whether or not TCW voted in line with management recommendations. TCW is prepared to explain to clients the rationale for votes cast on behalf of client accounts. To obtain proxy voting records, a client should contact the Proxy Specialist.
TCW or an Outside Service will keep records of the following items: (i) these Proxy Voting Guidelines and any other proxy voting procedures; (ii) proxy statements received regarding client securities (unless such statements are available on the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system); (iii) records of votes cast on behalf of clients (if maintained by an Outside Service, that Outside Service will provide copies of those records promptly upon request); (iv) records of written requests for proxy voting information and TCW's response (whether a client's request was oral or in writing); and (v) any documents prepared by TCW that were material to making a decision how to vote, or that memorialized the basis for the decision. Additionally, TCW or an Outside Service will maintain any documentation related to an identified material conflict of interest. TCW or an Outside Service will maintain these records in an easily accessible place for at least five years from the end of the fiscal year during which the last entry was made on such record. For the first two years, TCW or an Outside Service will store such records at its principal office.
INTERNATIONAL PROXY VOTING
While TCW utilizes these Proxy Voting Guidelines for both international and
domestic portfolios and clients, there are some significant differences between
voting U.S. company proxies and voting non-U.S. company proxies. For U.S.
companies, it is relatively easy to vote proxies, as the proxies are
automatically received and may be voted by mail or electronically. In most
cases, the officers of a U.S. company soliciting a proxy act as proxies for the
company's shareholders.
For proxies of non-U.S. companies, however, it is typically both difficult and
costly to vote proxies. The major difficulties and costs may include: (i)
appointing a proxy; (ii) knowing when a meeting is taking place; (iii)
obtaining relevant information about proxies, voting procedures for foreign
shareholders, and restrictions on trading securities that are subject to proxy
votes; (iv) arranging for a proxy to vote; and (v) evaluating the cost of
voting. Furthermore, the operational hurdles to voting proxies vary by country.
As a result, TCW considers whether or not to vote an international proxy based
on the particular facts and circumstances. However, when TCW believes that an
issue to be voted is likely to affect the economic value of the portfolio
securities, that its vote may influence the ultimate outcome of the contest,
and that the benefits of voting the proxy exceed the expected costs, TCW will
make every reasonable effort to vote such proxies.
GUIDELINES
The proxy voting decisions set forth below refer to proposals by company management except for the categories of "Shareholder Proposals" and "Social Issue Proposals." The voting decisions in these latter two categories refer to proposals by outside shareholders.
Governance
o For director nominees in uncontested elections
o For management nominees in contested elections
o For ratifying auditors, except against if the previous auditor was dismissed because of a disagreement with the company or if the non-audit services exceed 51% of fees
o For changing the company name
o For approving other business
o For adjourning the meeting
o For technical amendments to the charter and/or bylaws
o For approving financial statements
Capital Structure
o For increasing authorized common stock
o For decreasing authorized common stock
o For amending authorized common stock
o For the issuance of common stock, except against if the issued common stock has superior voting rights
o For approving the issuance or exercise of stock warrants
o For authorizing preferred stock, except against if the board has unlimited rights to set the terms and conditions of the shares
o For increasing authorized preferred stock, except against if the board has unlimited rights to set the terms and conditions of the shares
o For decreasing authorized preferred stock
o For canceling a class or series of preferred stock
o For amending preferred stock
o For issuing or converting preferred stock, except against if the shares have voting rights superior to those of other shareholders
o For eliminating preemptive rights
o For creating or restoring preemptive rights
o Against authorizing dual or multiple classes of common stock
o For eliminating authorized dual or multiple classes of common stock
o For amending authorized dual or multiple classes of common stock
o For increasing authorized shares of one or more classes of dual or multiple classes of common stock, except against if it will allow the company to issue additional shares with superior voting rights
o For a stock repurchase program
o For a stock split
o For a reverse stock split, except against if the company does not intend to proportionally reduce the number of authorized shares
Mergers And Restructuring
o For merging with or acquiring another company
o For recapitalization
o For restructuring the company
o For bankruptcy restructurings
o For liquidations
o For reincorporating in a different state
o For a leveraged buyout of the company
o For spinning off certain company operations or divisions
o For the sale of assets
o Against eliminating cumulative voting
o For adopting cumulative voting
Board of Directors
o For limiting the liability of directors
o For setting the board size
o For allowing the directors to fill vacancies on the board without shareholder approval
o Against giving the board the authority to set the size of the board as needed without shareholder approval
o For a proposal regarding the removal of directors, except against if the proposal limits the removal of directors to cases where there is legal cause
o For non-technical amendments to the company's certificate of incorporation, except against if an amendment would have the effect of reducing shareholders' rights
o For non-technical amendments to the company's by laws, except against if an amendment would have the effect of reducing shareholder's rights
Anti-Takeover Provisions
o Against a classified board
o Against amending a classified board
o For repealing a classified board
o Against ratifying or adopting a shareholder rights plan (poison pill)
o Against redeeming a shareholder rights plan (poison pill)
o Against eliminating shareholders' right to call a special meeting
o Against limiting shareholders' right to call a special meeting
o For restoring shareholders' right to call a special meeting
o Against eliminating shareholders' right to act by written consent
o Against limiting shareholders' right to act by written consent
o For restoring shareholders' right to act by written consent
o Against establishing a supermajority vote provision to approve a merger or other business combination
o For amending a supermajority vote provision to approve a merger or other business combination, except against if the amendment would increase the vote required to approve the transaction
o For eliminating a supermajority vote provision to approve a merger or other business combination
o Against adopting supermajority vote requirements (lock-ins) to change certain bylaw or charter provisions
o Against amending supermajority vote requirements (lock-ins) to change certain bylaw or charter provisions
o For eliminating supermajority vote requirements (lock-ins) to change certain bylaw or charter provisions
o Against expanding or clarifying the authority of the board of directors to consider factors other than the interests of shareholders in assessing a takeover bid
o Against establishing a fair price provision
o Against amending a fair price provision
o For repealing a fair price provision
o For limiting the payment of greenmail
o Against adopting advance notice requirements
o For opting out of a state takeover statutory provision
o Against opt into a state takeover statutory provision
Compensation
o For adopting a stock incentive plan for employees, except refer if the plan dilution is more than 15% of outstanding common stock or if the potential dilution from all company plans, including the one proposed, is more than 20% of outstanding common stock
o For amending a stock incentive plan for employees, except refer if the minimum potential dilution from all company plans, including the one proposed, is more than 20% of outstanding common stock
o For adding shares to a stock incentive plan for employees, except refer if the plan dilution is more than 15% of outstanding common stock or if the potential dilution from all company plans, including the one proposed, is more than 20% of outstanding common stock
o For limiting per-employee option awards
o For extending the term of a stock incentive plan for employees
o Refer on assuming stock incentive plans
o For adopting a stock incentive plan for non-employee directors, except refer if the plan dilution is more than 5% of outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is more than 10% of outstanding common equity
o For amending a stock incentive plan for non-employee directors, except refer if the minimum potential dilution from all plans, including the one proposed, is more than 10% of outstanding common equity
o For adding shares to a stock incentive plan for non-employee directors, except refer if the plan dilution is more than 5% of outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is more than 10% of the outstanding common equity
o For adopting an employee stock purchase plan, except against if the proposed plan allows employees to purchase stock at prices of less than 75% of the stock's fair market value
o For amending an employee stock purchase plan, except against if the proposal allows employees to purchase stock at prices of less than 75% of the stock's fair market value
o For adding shares to an employee stock purchase plan, except against if the proposed plan allows employees to purchase stock at prices of less than 75% of the stock's fair market value
o For adopting a stock award plan, except refer if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is more than 10% of the outstanding common equity
o For amending a stock award plan, except against if the amendment shortens the vesting requirements or lessens the performance requirements
o For adding shares to a stock award plan, except refer if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is more than 10% of the outstanding common equity
o For adopting a stock award plan for non-employee directors, except refer if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is more than 10% of the outstanding common equity
o For amending a stock award plan for non-employee directors, except refer if the minimum potential dilution from all plans is more than 10% of the outstanding common equity.
o For adding shares to a stock award plan for non-employee directors, except refer if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is more than 10% of the outstanding common equity
o For approving an annual bonus plan
o For adopting a savings plan
o For granting a one-time stock option or stock award, except refer if the plan dilution is more than 15% of the outstanding common equity
o For adopting a deferred compensation plan
o For approving a long-term bonus plan
o For approving an employment agreement or contract
o For amending a deferred compensation plan
o For exchanging underwater options (options with a per-share exercise price that exceeds the underlying stock's current market price)
o For amending an annual bonus plan
o For reapproving a stock option plan or bonus plan for purposes of OBRA
o For amending a long-term bonus plan
o With management on "say on pay" proposals
o With management on the frequency a "say on pay" proposal will be submitted for a shareholder vote
Shareholder Proposals
o For requiring shareholder ratification of auditors
o Against requiring the auditors to attend the annual meeting
o Against limiting consulting by auditors
o Against requiring the rotation of auditors
o Against restoring preemptive rights
o For asking the company to study sales, spin-offs, or other strategic alternatives
o For asking the board to adopt confidential voting and independent tabulation of the proxy ballots
o Against asking the company to refrain from counting abstentions and broker non- votes in vote tabulations
o Against eliminating the company's discretion to vote unmarked proxy ballots.
o For providing equal access to the proxy materials for shareholders
o Against requiring a majority vote to elect directors
o Against requiring the improvement of annual meeting reports
o Against changing the annual meeting location
o Against changing the annual meeting date
o Against asking the board to include more women and minorities as directors.
o Against seeking to increase board independence
o Against limiting the period of time a director can serve by establishing a retirement or tenure policy
o Against requiring minimum stock ownership by directors
o Against providing for union or employee representatives on the board of directors
o For increasing disclosure regarding the board's role in the development and monitoring of the company's long-term strategic plan
o For increasing the independence of the nominating committee
o For creating a nominating committee of the board
o Against urging the creation of a shareholder committee
o Against asking that the chairman of the board of directors be chosen from among the ranks of the non-employee directors
o Against asking that a lead director be chosen from among the ranks of the non- employee directors
o For adopting cumulative voting
o Against requiring directors to place a statement of candidacy in the proxy statement
o Against requiring the nomination of two director candidates for each open board seat
o Against making directors liable for acts or omissions that constitute a breach of fiduciary care resulting from a director's gross negligence and/or reckless or willful neglect
o For repealing a classified board
o Against asking the board to redeem or to allow shareholders to vote on a poison pill shareholder rights plan
o For eliminating supermajority provisions
o For reducing supermajority provisions
o Against repealing fair price provisions
o For restoring shareholders' right to call a special meeting
o For restoring shareholders' right to act by written consent
o For limiting the board's discretion to issue targeted share placements or requiring shareholder approval before such block placements can be made
o For seeking to force the company to opt out of a state takeover statutory provision
o Against reincorporating the company in another state
o For limiting greenmail payments
o Against restricting executive compensation
o For enhance the disclosure of executive compensation
o Against restricting director compensation
o Against capping executive pay
o Against calling for directors to be paid with company stock
o Against calling for shareholder votes on executive pay
o Against calling for the termination of director retirement plans
o Against asking management to review, report on, and/or link executive compensation to non-financial criteria, particularly social criteria
o Against seeking shareholder approval to reprice or replace underwater stock options
o For banning or calling for a shareholder vote on future golden parachutes
o Against seeking to award performance-based stock options
o Against establishing a policy of expensing the costs of all future stock options issued by the company in the company's annual income statement
o Against requesting that future executive compensation be determined without regard to any pension fund income
o Against approving extra benefits under Supplemental Executive Retirement Plans (SERPs)
o Against requiring option shares to be held
o For creating a compensation committee
o Against requiring that the compensation committee hire its own independent compensation consultants-separate from the compensation consultants working with corporate management-to assist with executive compensation issues
o For increasing the independence of the compensation committee
o For increasing the independence of the audit committee
o For increasing the independence of key committees
Social Issue Proposals
o Against asking the company to develop or report on human rights policies
o For asking the company to review its operations' impact on local groups, except against if the proposal calls for action beyond reporting
o Against asking the company to limit or end operations in Burma
o For asking management to review operations in Burma
o For asking management to certify that company operations are free of forced labor
o Against asking management to implement and/or increase activity on each of the principles of the U.S. Business Principles for Human Rights of Workers in China.
o Against asking management to develop social, economic, and ethical criteria that the company could use to determine the acceptability of military contracts and to govern the execution of the contracts
o Against asking management to create a plan of converting the company's facilities that are dependent on defense contracts toward production for commercial markets
o Against asking management to report on the company's government contracts for the development of ballistic missile defense technologies and related space systems
o Against asking management to report on the company's foreign military sales or foreign offset activities
o Against asking management to limit or end nuclear weapons production
o Against asking management to review nuclear weapons production
o Against asking the company to establish shareholder-designated contribution programs
o Against asking the company to limit or end charitable giving
o For asking the company to increase disclosure of political spending and activities
o Against asking the company to limit or end political spending
o For requesting disclosure of company executives' prior government service
o Against requesting affirmation of political nonpartisanship
o For asking management to report on or change tobacco product marketing practices, except against if the proposal calls for action beyond reporting
o Against severing links with the tobacco industry
o Against asking the company to review or reduce tobacco harm to health
o For asking management to review or promote animal welfare, except against if the proposal calls for action beyond reporting
o For asking the company to report or take action on pharmaceutical drug pricing or distribution, except against if the proposal asks for more than a report
o Against asking the company to take action on embryo or fetal destruction
o For asking the company to review or report on nuclear facilities or nuclear waste, except against if the proposal asks for cessation of nuclear-related activities or other action beyond reporting
o For asking the company to review its reliance on nuclear and fossil fuels, its development or use of solar and wind power, or its energy efficiency, except vote against if the proposal asks for more than a report.
o Against asking management to endorse the Ceres principles
o For asking the company to control generation of pollutants, except against if the proposal asks for action beyond reporting or if the company reports its omissions and plans to limit their future growth or if the company reports its omissions and plans to reduce them from established levels
o For asking the company to report on its environmental impact or plans, except against if management has issued a written statement beyond the legal minimum
o For asking management to report or take action on climate change, except against if management acknowledges a global warming threat and has issued company policy or if management has issued a statement and committed to targets and timetables or if the company is not a major emitter of greenhouse gases
o For asking management to report on, label, or restrict sales of bioengineered products, except against if the proposal asks for action beyond reporting or calls for a moratorium on sales of bioengineered products
o Against asking the company to preserve natural habitat
o Against asking the company to review its developing country debt and lending criteria and to report to shareholders on its findings
o Against requesting the company to assess the environmental, public health, human rights, labor rights, or other socioeconomic impacts of its credit decisions
o For requesting reports and/or reviews of plans and/or policies on fair lending practices, except against if the proposal calls for action beyond reporting
o Against asking the company to establish committees to consider issues related to facilities closure and relocation of work
o For asking management to report on the company's affirmative action policies and programs, including releasing its EEO-1 forms and providing statistical data on specific positions within the company, except against if the company releases its EEO-1 reports
o Against asking management to drop sexual orientation from EEO policy
o Against asking management to adopt a sexual orientation non-discrimination policy
o For asking management to report on or review Mexican operations
o Against asking management to adopt standards for Mexican operations
o Against asking management to review or implement the MacBride principles
o Against asking the company to encourage its contractors and franchisees to implement the MacBride principles
o For asking management to report on or review its global labor practices or those of its contractors, except against if the company already reports publicly using a recognized standard or if the resolution asks for more than a report
o Against asking management to adopt, implement, or enforce a global workplace code of conduct based on the International Labor Organization's core labor conventions
o For requesting reports on sustainability, except against if the company has already issued a report in GRI format
EXHIBIT S
THORNBURG INVESTMENT MANAGEMENT, INC.
THORNBURG INVESTMENT TRUST
PROXY VOTING POLICY
MARCH 2012
POLICY OBJECTIVES
This Policy has been adopted by Thornburg Investment Management, Inc. ("TIM") and Thornburg Investment Trust (the "Trust") to facilitate the voting of proxies relating to portfolio securities in what it perceives to be the best interests of persons for whom TIM performs investment management services and is authorized and required to vote or consider voting proxies.
The Trust has delegated to TIM the authority to vote proxies relating to its portfolio securities in accordance with this Policy.
This Policy is intended by TIM to constitute "written policies and procedures" as described in Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). This Policy is intended by the Trust to constitute proxy voting policies and procedures referred to in Item 13 of Form N-1A adopted under the Investment Company Act of 1940, as amended (the "Investment Company Act").
Please see the Glossary of Terms for definitions of terms used in this Policy.
VOTING OBJECTIVES
This Policy defines procedures for voting securities in each Account managed by TIM, for the benefit of and in the best interest of the Investment Client. The objective of voting a security in each case under this Policy is to seek to enhance the value of the security, or to reduce potential for a decline in the security's value. This Policy does not prescribe voting requirements or specific voting considerations. Instead, this Policy provides procedures for assembling voting information and applying the informed expertise and judgment of TIM's personnel on a timely basis in pursuit of the above stated voting objectives.
A further element of this Policy is that while voting on all issues presented should be considered, voting on all issues is not required by this Policy unless specifically directed or required by an Investment Client. Some issues presented for a vote of security holders may not be relevant to this Policy's voting objectives, or it may not be reasonably possible to ascertain what effect, if any, a vote on a given issue may have on the value of an investment. Accordingly, unless an Investment Client and TIM have agreed that TIM shall vote a specific security or all securities in an Account, TIM may abstain from voting or decline to vote in those cases where there appears to be no relationship between the issue and the enhancement or preservation of an investment's value, when TIM believes the costs of voting exceed the likely benefit to the Investment Client, or when TIM believes other factors indicate that the objectives of the Policy are less likely to be realized by voting a security.
It is also important to the pursuit of the Policy's voting objectives that TIM be able to substitute its judgment in any specific situation for a presumption in this Policy where strict adherence to the
presumption could reasonably be expected by TIM, based upon the information then available (including but not limited to media and expert commentary and outside professional advice and recommendations sought by TIM on the issue), to be inconsistent with the objectives of this Policy. Accordingly, TIM understands that it may substitute its judgment in a specific voting situation described in the preceding sentence, except where explicitly prohibited by agreement with the Investment Client or this Policy.
TIM is not responsible for voting proxies relating to proxy materials that are not forwarded on a timely basis, nor does TIM control the setting of record dates, shareholder meeting dates, or the timing of distribution of proxy materials and ballots relating to shareholder votes. In addition, administrative matters beyond TIM's control may at times prevent TIM from voting proxies in certain non-US markets (see "Voting Restrictions in Certain Non-US Markets," below).
ERISA ACCOUNTS
Portfolio managers should recognize, in considering proxy votes for ERISA Accounts:
(a) Plan trustees are ordinarily responsible for voting securities held by a plan, unless the plan documents direct TIM or another person to vote the proxies;
(b) If TIM is delegated authority to vote proxies, voting may be subject to specific written guidelines issued by the plan's trustees or other officials; and
(c) TIM may not delegate authority to vote proxies, unless the plan documents or other written agreement expressly permit delegation.
PROXY VOTING COORDINATOR
The President shall appoint a Proxy Voting Coordinator. The Proxy Voting Coordinator shall discharge the following functions in effectuating this Policy:
(a) Collecting and assembling proxy statements and other communications pertaining to proxy voting, together with proxies or other means of voting or giving voting instructions, and providing those materials to the appropriate portfolio managers to permit timely voting of proxies;
(b) Collecting recommendations, analysis, commentary and other information respecting subjects of proxy votes, from service providers engaged by TIM and other services specified by portfolio managers, and providing this information to the President or the appropriate portfolio managers to permit evaluation of proxy voting issues;
(c) Providing to appropriate portfolio managers any specific voting instructions from Investment Clients;
(d) Collecting proxy votes or instructions from portfolio managers, and transmitting the votes or instructions to the appropriate custodians, brokers, nominees or other persons (which may include proxy voting services or agents engaged by TIM);
(e) Accumulating Voting Results as set forth in this Policy (which may be performed by proxy voting services or agents engaged by TIM) and transmitting or arranging for the transmission of that information in accordance with "Communicating Votes," below; and
(f) Recordkeeping in accordance with "Recordkeeping", below.
The Proxy Voting Coordinator may, with the President's approval, delegate any portion or all of any one or more of these functions to one or more other individuals employed by TIM. Any portion or all of any one or more of these functions may be performed by service providers engaged by TIM.
ASSEMBLING VOTING INFORMATION
The Proxy Voting Coordinator shall obtain proxy statements and other communications pertaining to proxy voting, together with proxies or other means of voting or giving voting instructions to custodians, brokers, nominees, tabulators or others in a manner to permit voting on relevant issues in a timely manner. TIM may engage service providers and other third parties to assemble this information, digest or abstract the information where necessary or desirable, and deliver it to the portfolio managers or others to evaluate proxy voting issues.
PORTFOLIO MANAGERS
The portfolio manager responsible for management of a specific Account is responsible for timely voting (or determining not to vote in appropriate cases) proxies relating to securities in the Account in accordance with this Policy. The President may exercise this authority in any instance. The portfolio manager or President may delegate voting responsibilities to one or more other portfolio managers or other individuals. Persons exercising voting authority under this paragraph are authorized to consider voting recommendations and other information and analysis from service providers (including proxy voting services) engaged by TIM.
ACCUMULATING VOTING RESULTS
The Proxy Voting Coordinator is responsible for accumulating the following information as to each matter relating to a portfolio security held by any Account, considered at any shareholder meeting, and with respect to which the Account was entitled to vote:
(a) The name of the issuer of the portfolio security;
(b) The exchange ticker symbol of the portfolio security;
(c) The CUSIP number for the portfolio security;
(d) The shareholder meeting date; (e) A brief identification of the matter voted on;
(g) Whether a vote was cast on the matter;
(h) How we cast the vote (e.g., "for," "against," "abstain," or "withhold regarding election of directors"); and
(i) Whether we cast the vote for or against management.
TIM may use service providers to record and cumulate the foregoing information. The Proxy Voting Coordinator may, with the President's approval, delegate any portion or all of these functions to one or more other individuals employed by TIM.
RESOLUTION OF CONFLICTS OF INTEREST
In any case where a portfolio manager determines that a proxy vote involves an actual Conflict of Interest, and the proxy vote relates to the election of a director in an uncontested election or ratification of selection of independent accountants, the portfolio manager shall vote the proxy in accordance with the recommendation of any proxy voting service engaged by TIM. If no such recommendation is available, or if the proxy vote involves any other matters, the portfolio manager shall immediately refer the vote to the Investment Client (or in the case of any Investment Company as to which TIM is the adviser or subadviser and is authorized to vote proxies, to the chairman of its audit committee) for direction on the voting of the proxy or consent to vote in accordance with the portfolio manager's recommendation. In all cases where such a vote is referred to the Investment Client, TIM shall disclose the Conflict of Interest to the Investment Client.
COMMUNICATING VOTES
The Proxy Voting Coordinator shall (i) communicate to TIM's fund accounting
department proxy voting information respecting votes on portfolio securities
held by Investment Clients which are Investment Companies, sufficient to permit
fund accounting to prepare Form N-PX filings for the Investment Companies; and
(ii) provide in writing to any Investment Client requesting information on
voting of proxies with respect to portfolio securities, the information
described under the caption "Accumulating Voting Results," for the period or
periods specified by the Investment Client. If the information requested by the
Investment Client pertains to a period which is not readily available, or is
not described above under the caption "Accumulating Voting Results," the Proxy
Voting Coordinator will confer with the Chief Compliance Officer. The Proxy
Voting Coordinator may, with the President's approval, delegate any portion or
all of this function to one or more individuals employed by TIM. TIM may engage
one or more service providers to facilitate timely communication of proxy
votes.
RECORD OF VOTING DELEGATION
The Proxy Voting Coordinator shall maintain a list of all Accounts, with a specification as to each Account whether or not TIM is authorized to vote proxies respecting the Account's portfolio securities.
COMMENT ON VOTING
It is the Policy of TIM not to comment on specific proxy votes with respect to securities in an Account in response to inquiries from persons who are not specifically authorized representatives as to the Account. Attention is directed in this regard to the Thornburg Investment Management Internal Confidentiality and Privacy Protection Policy and the Thornburg Investment Trust Policy and Procedures for Disclosure of Portfolio Securities Holdings, as in effect from time to time. Customer service representatives and other persons who may receive such inquiries should advise persons presenting the inquiries that TIM does not comment on proxy voting, and that as to Investment Companies for which TIM is required to disclose proxy votes, the information is available on the Investment Company's website and filed with the SEC. The President may authorize comments in specific cases, in his discretion.
JOINING INSURGENT OR VOTING COMMITTEES
It is the policy of TIM, for itself and the Accounts, not to join any insurgent or voting committee or similar group. The President may approve participation in any such committee or group in his discretion, and shall advise the authorized representatives for the Account of any such action.
SOCIAL ISSUES
It is the presumption of this Policy that proxies shall not be voted on Social Issues except that TIM may substitute its judgment in any specific situation involving a Social Issue as provided in the third paragraph under the caption "Voting Objectives."
VOTING RESTRICTIONS IN CERTAIN NON-US MARKETS
Proxy voting in certain countries requires "share blocking." During a "share blocking" period, shares that will be voted at a meeting may not be sold until the meeting has taken place and the shares are returned to the Investment Client's custodian bank. TIM may choose not to vote an Investment Client's shares in a "share blocking" market if TIM believes that the benefit to the Investment Client of being able to sell the shares during this "share blocking" period outweighs the benefit of exercising the vote. TIM will exercise its judgment subject to any specific voting instructions agreed to between TIM and the Investment Client.
Certain non-US markets require that TIM provide a power of attorney to give
local agents authority to carry out TIM's voting instructions. While TIM will
make efforts to comply with relevant local market rules, TIM frequently does
not provide a power of attorney for the following reasons that include but are
not limited to: (i) TIM may not have the required Investment Client information
that the local market requires, (ii) TIM may deem the expense too great, or
(iii) TIM may determine not to provide a power of attorney based upon advice of
legal counsel. Failure to provide an effective power of attorney in a
particular non-US market may prevent TIM from being able to vote an Investment
Client's shares in that market.
ANNUAL REVIEW OF POLICY FUNCTION
Pursuant to the review requirements of Rule 206(4)-7 under the Advisers Act and Rule 38a-1 under the Investment Company Act, the Chief Compliance Officer, or a Designated Compliance Officer, shall conduct a periodic review, no less often than annually, which shall comprise the following elements:
(a) Review a sample of the record of voting delegation maintained by the Proxy Voting Coordinator against Voting Results to determine if TIM is exercising its authority to vote proxies on portfolio securities held in the selected Accounts;
(b) Request and review voting data to determine if timely communication of proxy votes is reasonably accomplished during the period reviewed;
(c) Meet with the Proxy Voting Coordinator to review the voting of proxies, communication of proxy votes, accumulation of Voting Results and the general functioning of this Policy;
(d) Evaluate the performance of any proxy voting services or agents employed by TIM, including whether or not the service or agent maintains its independence with respect to companies the securities of which are the subject of voting recommendations, information or analysis from the service or agent; and
(e) Prepare written reports respecting the foregoing items to the President, the Trustees of the Trust, and any Investment Company Clients for which such a report is required.
RECORDKEEPING
The Proxy Voting Coordinator shall maintain the following records:
(a) Copies of this Policy as from time to time revised or supplemented;
(b) A copy of each proxy statement that TIM receives regarding Investment Client securities. In maintaining a record of proxy statements referred to in this item, the Proxy Voting Coordinator may rely on obtaining copies from the Securities and Exchange Commission's EDGAR system or similar accessible database;
(c) Voting Results for each Investment Client;
(d) A copy of any document created by TIM that was material to making a decision how to vote proxies on behalf of an Investment Client or that memorializes the basis for that decision;
(e) A copy of each written Investment Client request for information on how TIM voted proxies on behalf of the Investment Client, and a copy of any written response by TIM to any (written or oral) Investment Client request for information on how TIM voted proxies on behalf of the requesting Investment Client; and
(f) Communications to Investment Clients respecting Conflicts of Interest.
The Chief Compliance Officer, or a Designated Compliance Officer, shall maintain the following records:
(a) All written reports arising from annual reviews of policy function; and
(b) Chronological record of proxy voting records reviewed by quarter.
All records shall be maintained and preserved pursuant to the separately adopted Document Retention and Destruction Policy for the time period indicated in the current Books and Records Matrix. The President may authorize the Proxy Voting Coordinator to engage one or more service providers to perform any portion of this recordkeeping function provided (1) the function is performed in compliance with then applicable governmental regulations, and (2) each service provider provides a written undertaking to furnish the records to TIM promptly upon request.
GLOSSARY OF TERMS
"ACCOUNT" means any discrete account or portfolio as to which TIM has discretionary investment authority. An Investment Client may have multiple Accounts. Each series of any Investment Company as to which TIM is the adviser or subadviser is an Account.
"CHIEF COMPLIANCE OFFICER" means the Chief Compliance Officer of TIM.
"CONFLICT OF INTEREST" means as to any Account, any conflict between a pecuniary interest of TIM or any affiliate, and the duties of TIM to the Investment Client who is the owner of the Account.
"ERISA" means the Employee Retirement Income Security Act of 1975, as amended. Reference to an "ERISA Account" means an account for an employee benefit plan governed by ERISA.
"INVESTMENT CLIENT" means any person with whom TIM has a contract to perform discretionary investment management services, including a series of an Investment Company, and for whom TIM is authorized by the contract or required by applicable law to vote or consider voting securities in the Investment Client's Account.
"INVESTMENT COMPANY" means a company registered as such under the Investment Company Act.
"PRESIDENT" means the president of TIM, or in the event of his unavailability any individual who is a vice president and managing director of TIM.
"PROXY VOTING COORDINATOR" means the individual appointed from time to time by the President to perform the proxy voting coordination functions described in this Policy.
"SOCIAL ISSUES" means any issue presented for a vote of holders of any security which is held in an Account, which may reasonably be interpreted as (i) unrelated in any substantial respect to the voting objectives of this Policy, and (ii) intended to promote directly or indirectly the interests of persons who are not holders of the security.
"TIM" means Thornburg Investment Management, Inc.
"VOTING RESULTS" means the specific information described under the caption "Accumulating Voting Results."
EXHIBIT T
TURNER INVESTMENTS, L.P.
TURNER INVESTMENT MANAGEMENT LLC
PROXY VOTING POLICY AND PROCEDURES
Turner Investments, L.P., as well as its investment advisory affiliate, Turner Investment Management LLC (collectively, "Turner"), act as fiduciaries in relation to their clients and the assets entrusted by them to their management. Where the assets placed in Turner's care include shares of corporate stock, and except where the client has expressly reserved to itself or another party the duty to vote proxies, it is Turner's duty as a fiduciary to vote all proxies relating to such shares.
DUTIES WITH RESPECT TO PROXIES:
Turner has an obligation to vote all proxies appurtenant to shares of corporate stock owned by its client accounts in the best interests of those clients. In voting these proxies, Turner may not be motivated by, or subordinate the client's interests to, its own objectives or those of persons or parties unrelated to the client. Turner will exercise all appropriate and lawful care, skill, prudence and diligence in voting proxies, and shall vote all proxies relating to shares owned by its client accounts and received by Turner. Turner shall not be responsible, however, for voting proxies that it does not receive in sufficient time to respond.
DELEGATION TO PROXY VOTER SERVICES:
In order to carry out its responsibilities in regard to voting proxies, Turner must track all shareholder meetings convened by companies whose shares are held in Turner client accounts, identify all issues presented to shareholders at such meetings, formulate a principled position on each such issue and ensure that proxies pertaining to all shares owned in client accounts are voted in accordance with such determinations.
Consistent with these duties, Turner has delegated certain aspects of the proxy voting process to Institutional Shareholder Services, and its Proxy Voter Services (PVS) subsidiary. PVS is a separate investment adviser registered under the Investment Advisers Act of 1940, as amended. Under an agreement entered into with Turner, PVS has agreed to vote proxies in accordance with recommendations developed by PVS and overseen by Turner, except in those instances where Turner has provided it with different direction.
PVS's voting recommendations typically favor the interests of the shareholder/owner rather than a company's management. Turner's long-standing practice has been to follow voting guidelines of this type. Although Turner has not chosen PVS or its services for this reason, its engagement of PVS could be interpreted as helpful to maintaining or attracting clients or potential clients supportive of shareholder/owner rights. In this respect its engagement of PVS potentially presents a conflict of interest for Turner, which has a number of clients concerned with shareholder/owner rights, including but not limited to public plans and unions.
It should be emphasized that any client or potential client of Turner need not delegate the voting of proxies to Turner (and thus indirectly to PVS as overseen by Turner), and may instead direct its custodian or another party to undertake this responsibility. Alternatively, a client or potential client may direct Turner to vote following guidelines it selects rather than following the Turner selected PVS guidelines if its preference is to follow voting guidelines that typically favor the interests of company management. Turner will provide upon request a copy of the current proxy voting guidelines followed by PVS to assist you in this evaluation.
REVIEW AND OVERSIGHT:
Turner has reviewed the methods used by PVS to identify and track shareholder meetings called by publicly traded issuers throughout the United States and around the globe. Turner has satisfied itself that PVS operates a system reasonably designed to identify all such meetings and to provide Turner with timely notice of the date, time and place of such meetings. Turner has further reviewed the principles and procedures employed by PVS in making recommendations on voting proxies on each issue presented, and has satisfied itself that PVS's recommendations are: (i) based upon an appropriate level of diligence and research, and (ii) designed to further the interests of shareholders and not serve other unrelated or improper interests. Turner, either directly or through its duly-constituted Proxy Committee, shall review its determinations as to PVS at least annually.
Notwithstanding its belief that PVS's recommendations are consistent with the best interests of shareholders and appropriate to be implemented for Turner's client accounts, Turner has the right and the ability to depart from a recommendation made by PVS as to a particular vote, slate of candidates or otherwise, and can direct PVS to vote all or a portion of the shares owned for client accounts in accordance with Turner's preferences. PVS is bound to vote any such shares subject to that direction in strict accordance with all such instructions. Turner, through its Proxy Committee, reviews on a regular basis the overall shareholder meeting agenda, and seeks to identify shareholder votes that warrant further review based upon either (i) the total number of shares of a particular company stock that Turner holds for its clients accounts, or (ii) the particular subject matter of a shareholder vote, such as board independence or shareholders' rights issues. In determining whether to depart from a PVS recommendation, the Turner Proxy Committee looks to its view of the best interests of shareholders, and provides direction to PVS only where in Turner's view departing from the PVS recommendation appears to be in the best interests of Turner's clients as shareholders. The Proxy Committee keeps minutes of its determinations in this regard.
The Turner Proxy Committee has only very infrequently departed from the PVS recommendation, and clients should expect that the PVS recommendation will be followed for the vast majority of votes.
CONFLICTS OF INTEREST:
Turner stock is not publicly traded, and Turner is not otherwise affiliated with any issuer whose shares are available for purchase by client accounts. Further, no Turner affiliate currently
provides brokerage, underwriting, insurance, banking or other financial services to issuers whose shares are available for purchase by client accounts.
Where a client of Turner is a publicly traded company in its own right, Turner may be restricted from acquiring that company's securities for the client's benefit. Further, while Turner believes that any particular proxy issues involving companies that engage Turner, either directly or through their pension committee or otherwise, to manage assets on their behalf, generally will not present conflict of interest dangers for the firm or its clients, in order to avoid even the appearance of a conflict of interest, the Proxy Committee will determine, by surveying the Firm's employees or otherwise, whether Turner, an affiliate or any of their officers has a business, familial or personal relationship with a participant in a proxy contest, the issuer itself or the issuer's pension plan, corporate directors or candidates for directorships. In the event that any such relationship is found to exist, the Proxy Committee will take appropriate steps to ensure that any such relationship (or other potential conflict of interest), does not influence Turner's or the Committee's decision to provide direction to PVS on a given vote or issue. Further to that end, Turner will adhere to all recommendations made by PVS in connection with all shares issued by such companies and held in Turner client accounts, and, absent extraordinary circumstances that will be documented in writing, will not subject any such proxy to special review by the Proxy Committee.
As discussed above, Turner's selection of PVS may be considered a potential conflict of interest. Turner will in all instances seek to resolve any conflicts of interests that may arise prior to voting proxies or selecting a proxy voting agent/research provider in a manner that reflects the best interests of its clients.
SECURITIES LENDING:
Turner will generally not vote nor seek to recall in order to vote shares on loan in connection with client administered securities lending programs, unless it determines that a vote is particularly significant. Seeking to recall securities in order to vote them even in these limited circumstances may nevertheless not result in Turner voting the shares because the securities are unable to be recalled in time from the party with custody of the securities, or for other reasons beyond Turner's control. Clients that participate in securities lending programs should expect that Turner will not frequently vote or seek to recall in order to vote shares that are on loan.
OBTAINING PROXY VOTING INFORMATION:
To obtain information on how Turner voted proxies or for a copy of current PVS guidelines, please contact:
Andrew Mark, Director of Operations
and Technology Administration
c/o Turner Investments, L.P.
1205 Westlakes Drive, Suite 100
Berwyn, PA 19312
Recordkeeping:
Turner shall retain its (i) proxy voting policies and procedures; (ii) proxy statements received regarding client statements; (iii) records or votes it casts on behalf of clients; (iv) records of client requests for proxy voting information, and (v) any documents prepared by Turner that are material in making a proxy voting decision. Such records may be maintained with a third party, such as PVS, that will provide a copy of the documents promptly upon request.
Adopted: July 1, 2003
Last revised: June 15, 2009
STATEMENT OF ADDITIONAL INFORMATION
EDGEWOOD GROWTH FUND
(INSTITUTIONAL CLASS SHARES TICKER SYMBOL: EGFIX)
(RETAIL SHARES TICKER SYMBOL: EGFFX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
EDGEWOOD MANAGEMENT LLC
This Statement of Additional Information ("SAI") is not a prospectus. It is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Edgewood Growth Fund (the "Fund"). This SAI is incorporated by reference into and should be read in conjunction with the prospectuses dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund for the fiscal year ended October 31, 2012, including the notes thereto and the report of Ernst & Young LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Fund's 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9009 or calling the Fund toll-free at 1-800-791-4226.
TABLE OF CONTENTS
THE TRUST ................................................................ S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES .......... S-1 DESCRIPTION OF PERMITTED INVESTMENTS ..................................... S-2 INVESTMENT LIMITATIONS ................................................... S-11 THE ADVISER .............................................................. S-13 THE PORTFOLIO MANAGERS ................................................... S-14 THE ADMINISTRATOR ........................................................ S-15 THE DISTRIBUTOR .......................................................... S-16 SHAREHOLDER SERVICES ..................................................... S-17 PAYMENTS TO FINANCIAL INTERMEDIARIES ..................................... S-17 THE TRANSFER AGENT ....................................................... S-18 THE CUSTODIAN ............................................................ S-18 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................ S-18 LEGAL COUNSEL ............................................................ S-18 TRUSTEES AND OFFICERS OF THE TRUST ....................................... S-18 PURCHASING AND REDEEMING SHARES .......................................... S-28 DETERMINATION OF NET ASSET VALUE ......................................... S-28 TAXES .................................................................... S-29 FUND TRANSACTIONS ........................................................ S-33 PORTFOLIO HOLDINGS ....................................................... S-35 DESCRIPTION OF SHARES .................................................... S-36 SHAREHOLDER LIABILITY .................................................... S-36 LIMITATION OF TRUSTEES' LIABILITY ........................................ S-36 PROXY VOTING ............................................................. S-36 CODE OF ETHICS ........................................................... S-36 5% AND 25% SHAREHOLDERS .................................................. S-37 APPENDIX A -- DESCRIPTION OF RATINGS ..................................... A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ....................... B-1 March 1, 2013 EMC-SX-001-0800 |
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. The Fund pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information. The Trust reserves the right to create and issue additional series or classes of shares.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer shares of the Fund in Institutional and Retail Shares. The different classes provide for variations in certain distribution and shareholder servicing expenses and in the minimum initial investment requirements. Minimum investment requirements and investor eligibility are described in the prospectus. The Trust reserves the right to create and issue additional classes of shares. For more information on shareholder servicing and distribution expenses, see "The Distributor and "Shareholder Services."
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objectives and principal investment strategies are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
EDGEWOOD GROWTH FUND. The Fund seeks to provide long-term growth of capital. The Fund is non-diversified and will primarily invest in a core group of 15-35 equity securities, such as common stocks and American Depositary Receipts ("ADRs"). The Fund is flexibly managed, with the ability to invest in equity securities of a smaller number of issuers and/or industry sectors than diversified mutual funds. There can be no assurance that the Fund will achieve its investment objective. The investment objective of the Fund is non-fundamental and may be changed without shareholder approval.
As its principal investment strategy, the Fund invests primarily in equity securities of issuers that Edgewood Management LLC (the "Adviser") believes are quality companies whose stock offers potential for future appreciation as described in the prospectus. In selecting investments for the Fund, the Adviser seeks to identify companies possessing fundamentally strong market positions in growing industries, exceptional earnings power, and consistency of earnings performance. Focus is concentrated toward growing companies experiencing superior rates of return over varying economic cycles. Investment
decisions are based upon a fundamental analysis that emphasizes company
specific research. The goal of the process is to invest in growth companies in
established and growing industries that display the following characteristics:
record of consistent earnings power; earnings growth rate in excess of the S&P
500 Growth Index; dominant market position or proven strength; attractive
fundamental financial valuation; superior management; management/insider
ownership; and industry growth rate in excess of the growth of GDP. A security
may be sold if there is a fundamental deterioration, the price is no longer
justifiable and/or if the security demonstrates earnings disappointments. When
consistent with the investment strategy and specific policies of the Fund, the
Fund may hold uninvested assets in cash or similar investments.
NON-DIVERSIFICATION. The Fund is classified as a "non-diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), which means that a relatively high percentage of assets of the Fund may be invested in obligations of a limited number of issuers. The value of the shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence that the shares of a diversified investment company would be. The Fund intends to satisfy the diversification requirements necessary to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), which generally requires that the Fund be diversified (i.e., that it will not invest more than 5% of its assets in the securities of any one issuer) with respect to 50% of its assets.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments and investment practices and the associated risk factors. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer's home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
Investments in the securities of foreign issuers may subject the Fund to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments, possible imposition of withholding taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition, foreign issuers are, generally speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend
payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request.
EQUITY SECURITIES. Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants to acquire common stock and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
o SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of smaller companies are often traded in the over- the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
EXCHANGE TRADED FUNDS ("ETFS"). ETFs are investment companies whose shares are bought and sold on a securities exchange. An ETF holds a portfolio of securities designed to track a particular market segment or index. Some examples of ETFs are SPDRs([R]), DIAMONDS(SM), NASDAQ 100 Index Tracking Stock(SM) ("QQQs(SM)"), and iShares([R]). The Fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or foreign market while awaiting an opportunity to purchase securities directly. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities and ETFs have management fees that increase their costs versus the costs of owning the underlying securities directly. See also "Securities of Other Investment Companies" below.
FIXED INCOME SECURITIES. Fixed income securities include bonds, notes, debentures and other interest-bearing securities that represent indebtedness. The market value of the fixed income investments in which the Fund invests will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. Changes by recognized agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of these securities will not necessarily affect cash income derived from these securities but will affect the Fund's net asset value.
FOREIGN SECURITIES. Foreign securities include equity securities of foreign entities, obligations of foreign branches of U.S. banks and of foreign banks, including, without limitation, European Certificates of Deposit, European Time Deposits, European Bankers' Acceptances, Canadian Time Deposits, Europaper and Yankee Certificates of Deposit, and investments in Canadian Commercial Paper and foreign securities. These instruments have investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include future adverse political and economic developments, the possible imposition of withholding taxes on interest or other income, possible seizure, nationalization, or expropriation of foreign deposits, the possible establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations. Such investments may also entail higher custodial fees and sales commissions than domestic investments. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks.
MONEY MARKET SECURITIES. Money market securities include: short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Rating Services ("S&P") or Moody's Investor Service ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover agreement, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U.S. TREASURY OBLIGATIONS. U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U.S. government obligations that are issued by banks or brokerage firms and are created by depositing U.S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon securities.
o U.S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U.S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U.S. government are supported by the full faith and credit of the U.S. Treasury, others are supported by the right of the issuer to borrow from the U.S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U.S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. It is the current policy of the Fund, not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by that Fund,
amounts to more than 15% of the Fund's total assets. The investments of the
Fund in repurchase agreements, at times, may be substantial when, in the view
of the Adviser, liquidity or other considerations so warrant.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering
of expenses, such that shareholders would indirectly bear a proportionate share
of the operating expenses of such investment companies, including advisory
fees, in addition to paying the Fund's expenses. Unless an exception is
available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i)
acquiring more than 3% of the voting shares of any one investment company, (ii)
investing more than 5% of its total assets in any one investment company, and
(iii) investing more than 10% of its total assets in all investment companies
combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund's Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. The Board has adopted procedures reasonably designed to
ensure that the foregoing criteria will be met. Loan agreements involve certain
risks in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Fund will reduce the risk that it will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission ("CFTC"). The Fund may use futures contracts and related options for bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. To the extent futures and/or options on futures are employed by the Fund, such use will be in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Fund, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Fund is not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When the Fund purchases or sells a futures contract, or sells an option thereon, the Fund is required to "cover" its position in order to limit leveraging and related risks. To cover its position, the Fund may segregate (and marked-to-market on a daily basis) cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund's outstanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the Fund arising from such investment activities.
The Fund may also cover its long position in a futures contract by purchasing a put option on the same futures contract with a strike price (i.e., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Fund will segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. The Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
The Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. The Fund may also cover its sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. The Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with the Fund's use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and options on futures. In addition, some strategies reduce the Fund's exposure to price fluctuations, while others tend to increase its market exposure.
OPTIONS. The Fund may purchase and write put and call options on indices and enter into related closing transactions. A put option on a security gives the purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time during the option period. A call option on a security gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is the consideration for undertaking the obligations under the option contract.
The Fund may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage its exposure to exchange rates. Call options on foreign currency written by the Fund will be "covered," which means that the Fund will own an equal amount of the underlying foreign currency.
Put and call options on indices are similar to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than the price movements in individual securities.
All options written on indices or securities must be covered. When the Fund writes an option on a security, an index or a foreign currency, it will establish a segregated account containing cash or liquid securities in an amount at least equal to the market value of the option and will maintain the account while the option is open or will otherwise cover the transaction.
The Fund may trade put and call options on securities, securities indices and currencies, as the Adviser determines is appropriate in seeking the Fund's investment objective, and except as restricted by the Fund's investment limitations. See "Investment Limitations" in the SAI.
The initial purchase (sale) of an option contract is an "opening transaction." In order to close out an option position, the Fund may enter into a "closing transaction," which is simply the sale (purchase) of an option contract on the same security with the same exercise price and expiration date as the option contract originally opened. If the Fund is unable to effect a closing purchase transaction with respect to an option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security upon exercise.
The Fund may purchase put and call options on securities to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that the Fund may seek to purchase in the future. The Fund purchasing put and call options pays a premium therefor. If price movements in the underlying securities are such that exercise of the options would not be profitable for the Fund, loss of the premium paid may be offset by an increase in the value of the Fund's securities or by a decrease in the cost of acquisition of securities by the Fund.
The Fund may write covered call options on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases in its market value. When the Fund writes an option, if the underlying securities do not increase or decrease to a price level that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised and the Fund will realize as profit the premium received for such option. When a call option of which the Fund is the writer is exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate in any increase in the price of such securities above the strike price. When a put option of which the Fund is the writer is exercised, the Fund will be required to purchase the underlying securities at a price in excess of the market value of such securities.
The Fund may purchase and write options on an exchange or over-the-counter. Over-the-counter options ("OTC options") differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available for exchange-traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information from a market maker. It is the SEC's position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand, interest rates, the pricing volatility of the underlying security and the time remaining until the expiration date.
Risks associated with options transactions include: (1) the success of a
hedging strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while the Fund will receive a premium
when it writes covered call options, it may not participate fully in a rise in
the market value of the underlying security.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board. Despite such good faith efforts to determine fair value prices, the Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon their sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Trust's Board, the Adviser determines the liquidity of the Fund's investments. In determining the liquidity of the Fund's investments, the Adviser may consider various factors, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required
to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not hold more than 15% of its net assets in illiquid securities.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the U.S. Securities Act of
1933, as amended (the "1933 Act") or an exemption from registration. As
consistent with the Fund's investment objectives, the Fund may invest in
Section 4(2) commercial paper. Section 4(2) commercial paper is issued in
reliance on an exemption from registration under Section 4(2) of the Act and is
generally sold to institutional investors who purchase for investment. Any
resale of such commercial paper must be in an exempt transaction, usually to an
institutional investor through the issuer or investment dealers who make a
market in such commercial paper. The Trust believes that Section 4(2)
commercial paper is liquid to the extent it meets the criteria established by
the Board. The Trust intends to treat such commercial paper as liquid and not
subject to the investment limitations applicable to illiquid securities or
restricted securities.
SHORT SALES -- As consistent with the Fund's investment objectives, the Fund may engage in short sales that are either "uncovered" or "against the box." A short sale is "against the box" if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
Uncovered short sales are transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund will: (a) maintain a segregated account containing cash or liquid securities at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the security sold short or (b) otherwise cover the Fund's short position.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
In addition to the investment objective of the Fund, the following investment limitations of the Fund are non-fundamental and may be changed by the Trust's Board without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
The Fund may not:
1. Purchase any securities which would cause 25% or more of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities. For purposes of this limitation: (i) utility companies will be classified according to their services, for example, gas distribution, gas transmission, electric and telephone will each be considered a separate industry; and (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry.
2. Borrow money from a bank in an amount exceeding 33 1/3% of the value of its total assets, provided that, for purposes of this limitation, investment strategies that either obligate the Fund to purchase securities or require the Fund to segregate assets are not considered to be borrowing. Asset coverage of at least 300% is required for all borrowing, except where the Fund has borrowed money for temporary purposes in an amount not exceeding 5% of its total assets.
3. Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) lend its securities.
4. Purchase or sell real estate, real estate limited partnership interests, physical commodities or commodities contracts except that the Fund may purchase: (i) marketable securities issued by companies which own or invest in real estate (including real estate investment trusts), commodities or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
5. Hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
CONCENTRATION. The SEC staff has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries, with certain exceptions.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets.
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as short sales, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Fund's current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its Statement of Additional Information.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly.
COMMODITIES AND REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in commodities or real estate, but does require that every investment company have a fundamental investment policy governing such investments.
THE ADVISER
GENERAL. Edgewood Management LLC serves as the investment adviser to the Fund. The Adviser is a New York limited liability company formed in 2006 and is the successor to Edgewood Management Company, founded in 1974. The Adviser is principally located at 535 Madison Avenue, 15th Floor, New York, New York 10022. The Adviser is a professional investment management firm registered with the SEC under the Investment Advisers Act of 1940. As of December 31, 2012, the Adviser had approximately $6.8 billion in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated February 27, 2006 (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser serves as investment adviser and makes the investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence generally in the performance of its duties hereunder or its reckless disregard of its obligation and duties thereunder. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.00% of the average daily net assets of the Institutional Shares and Retail Shares of the Fund. The Adviser has contractually agreed to waive its fees and reimburse expenses in order to limit the
Fund's total annual fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses) to an amount equal to the sum of the management fees, and, to the extent incurred, distribution (12b-1) fees and shareholder servicing fees until February 28, 2014.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Adviser the following advisory fees:
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CONTRACTUAL
ADVISORY FEES PAID FEES WAIVED BY ADVISER TOTAL FEES PAID TO ADVISER
----------------------------------------------------------------------------------------------------------------------------------
FUND
EDGEWOOD 2010 2011 2012 2010 2011 2012 2010 2011 2012
GROWTH -----------------------------------------------------------------------------------------------------------------------
FUND $10,134,861 $11,855,985 $15,989,290 $1,460,222 $1,769,682 $2,062,032 $8,674,639 $10,086,303 $13,927,258
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THE PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates the Fund's portfolio managers for their management of the Fund and other accounts managed by the Adviser. Each of the Fund's portfolio mangers' compensation consists of a fixed cash salary and retirement plan benefits. The portfolio managers are also paid a discretionary cash bonus which takes into account performance of the products they manage and profitability of the firm. In general, the discretionary cash bonus is determined based on the Fund's and the other accounts' pre-tax performance as compared to a particular benchmark, currently the Russell 1000 Growth Index, over varying time-periods and economic cycles. The bonus also is based on other subjective factors, such as leadership, ideas and overall contributions to the investment team.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES(1) -------------------------------------------------------------------------------- Alan W. Breed Over $1,000,000 -------------------------------------------------------------------------------- Lawrence G. Creel $500,001 - $1,000,000 -------------------------------------------------------------------------------- Scott Edwardson None -------------------------------------------------------------------------------- Alexander Farman-Farmaian None -------------------------------------------------------------------------------- Peter Jennison Over $1,000,000 -------------------------------------------------------------------------------- James Robillard None -------------------------------------------------------------------------------- Kevin R. Seth $100,001 - $500,000 -------------------------------------------------------------------------------- Nicholas A. Stephens $500,001 - $1,000,000 -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Fund, certain portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED OTHER POOLED
INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
--------------------------------------------------------------------------------------------------------
NUMBER OF TOTAL NUMBER OF NUMBER OF
NAME ACCOUNTS ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
--------------------------------------------------------------------------------------------------------
Alan W. Breed 0 $0 1 $2,005,224 132(1) $1,493,643,516
--------------------------------------------------------------------------------------------------------
Lawrence G. Creel 0 $0 0 $0 160(1) $870,608,244
--------------------------------------------------------------------------------------------------------
Scott Edwardson 0 $0 0 $0 0(1) $0
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Alex Farman-Farmaian 0 $0 0 $0 48(1) $1,495,648,740
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Peter Jennison 0 $0 3 $24,903,130 89(1) $298,876,936
--------------------------------------------------------------------------------------------------------
James Robillard 0 $0 0 $0 0(1) $0
--------------------------------------------------------------------------------------------------------
Kevin R. Seth 0 $0 0 $0 84(1) $424,062,753
--------------------------------------------------------------------------------------------------------
Nicholas A. Stephens 0 $0 0 $0 343(1) $996,046,382
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(1) Six accounts are subject to a performance-based advisory fee with aggregated assets under management of $286 million as of October 31, 2012.
CONFLICTS OF INTERESTS. The Adviser also manages other accounts. The investment process is the same for similar accounts, including the Fund, and is driven by proprietary team-oriented, in-depth, fundamental research. The investment research team is organized by industry coverage and supports all of the accounts managed in each of the Adviser's investment strategies. Each of the Adviser's investment strategies is managed by a portfolio team. Weekly research meetings provide a forum where the Adviser's investment professionals discuss current investment ideas within their assigned industries. Generally, the entire portfolio team, or a sub-set of the team, then debates the merits of recommendations, taking into account the prevailing market environment, the portfolio's current composition, and the relative value of alternative investments. Investment decisions are made by majority agreement of the portfolio team.
The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio manager could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Fund. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
Personal accounts may give rise to potential conflicts of interest. The Adviser's employees will, from time to time, for their own account, purchase, sell, hold or own securities or other assets which may be recommended for purchase, sale or ownership for one or more clients. The Adviser has a Code of Ethics which regulates trading in personal accounts. Personal accounts are reported to compliance and most personal transactions are pre-approved by compliance. Compliance also reviews personal trading activity regularly.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.10% First $250 million
--------------------------------------------------------------------------------
0.09% $250 million - $500 million
--------------------------------------------------------------------------------
0.08% Over $500 million
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The Fund will be subject to a minimum annual fee of $90,000 applicable to the Edgewood Fund Complex which will initially consist of two classes of one fund. Additions of new classes of shares to any fund will be subject to an additional minimum fee at a rate of $15,000 per class.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Administrator following administration fees:
--------------------------------------------------------------------------------
FUND ADMINISTRATION FEES PAID
--------------------------------------------------------------------------------
2010 2011 2012
--------------------------------------------------------------------------------
Edgewood Growth Fund $885,795 $1,023,486 $1,354,177
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THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly -owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
THE DISTRIBUTION PLAN. The Distribution Plan (the "Plan") provides that Retail Shares of the Fund pay the Distributor a maximum annual fee of 0.25% of the average daily net assets of the shares. Under the Plan, the Distributor may make payments pursuant to written agreements to financial institutions and intermediaries such as banks, savings and loan associations, insurance companies including, without limit, investment counselors, broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for services, reimbursement of expenses incurred in connection with distribution assistance or provision of shareholder services. The Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution or shareholder service expenses incurred by the Distributor or the amount of payments made to other financial institutions and intermediaries. Investors should understand that some Agents may charge their clients fees in connection with purchases of shares or the provision of shareholder services with
respect to shares. The Trust intends to operate the Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
The Trust has adopted the Plan in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or in any agreements related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the Fund. All material amendments of the Plan will require approval by a majority of the Trustees of the Trust and of the Qualified Trustees.
PAYMENTS UNDER THE DISTRIBUTION PLAN. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Distributor the following fees:
--------------------------------------------------------------------------------
FEES PAID
------------------------------------------
FUND SHARE CLASS 2010 2011 2012
--------------------------------------------------------------------------------
Edgewood Growth Fund Retail Shares $232,475 $131,030 $255,846
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SHAREHOLDER SERVICES
SHAREHOLDER SERVICES PLAN. The Fund has entered into shareholder servicing arrangements with third-party service providers pursuant to which the service providers provide certain shareholder services to Fund shareholders (the "Service Plan"). Under the Service Plan, service providers may perform, or may compensate other service providers for performing the following shareholder services: maintaining client accounts; arranging for bank wires; responding to client inquiries concerning services provided on investments; assisting clients in changing dividend options; account designations and addresses; sub-accounting; providing information on share positions to clients; forwarding shareholder communications to clients; processing purchase, exchange and redemption orders; and processing dividend payments. Under the Service Plan, the Fund may pay service providers a fee at a rate of up to 0.25% annually of the average daily net assets of the Retail Shares of the Fund, subject to the arrangement for provision of shareholder and administrative services.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
U.S. Bank National Association, 800 Nicollett Mall, Minneapolis, Minnesota 55402-4302 (the "Custodian"), serves as custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by Ernst & Young LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-today management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other
things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, Jr., an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the
amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Chief Trust and New Covenant Funds.
Executive Officer of Director of SEI Global Master Fund
SEI Alpha Strategy plc, SEI Global Assets Fund plc, SEI
Portfolios, LP, June Global Investments Fund plc, SEI
2007 to present. Investments--Global Funds Services,
President and Director Limited, SEI Investments Global,
of SEI Opportunity Limited, SEI Investments (Europe)
Fund, L.P. to 2010. Ltd., SEI Investments--Unit Trust
Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd. and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Administrator Trust, SEI Asset Allocation Trust and SEI
and the Distributor. Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
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POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Business Current Directorships: Trustee of The
(08/20/34) (since 2005) Consultant, Business Advisors' Inner Circle Fund II and
Projects Inc. since 1997. Bishop Street Funds. Director of
Oregon Transfer Co.
-------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Executive Current Directorships: Trustee of The
(08/17/44) (since 2008) Officer, Office of Advisors' Inner Circle Fund II and
Finance, Federal Home Bishop Street Funds. Director of
Loan Banks, from 1992 Federal Home Loan Bank of
to 2007. Pittsburgh and Manna, Inc. (non-
profit developer of affordable housing
for ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
-------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since January Advisors' Inner Circle Fund II and
2012. Director of Bishop Street Funds. Director of The
Endowments and Korea Fund, Inc.
Foundations, Morningstar
Investment Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010. Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson (since 2005) since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
-------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house)
for State Street Bank
from 1995 to 2003.
-------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011; Executive
Vice President --
Investment Management
Services, John Hancock
Financial Services
(subsidiary of Manulife
Financial), June 2003 to
June 2010.
-------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
George J. Sullivan, Jr. Trustee Retired since January Current Directorships:
(11/13/42) (since 1999) 2012. Self-employed Trustee/Director of State Street
Lead Independent Consultant, Newfound Navigator Securities Lending Trust,
Trustee Consultants Inc., April The Advisors' Inner Circle Fund II,
1997 to December 2011. Bishop Street Funds, SEI Structured
Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's independent registered public accounting firm and whether to terminate this relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence;
(iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities; (iv) serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------------
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF SHARES
NAME FUND SHARES (FUND)(1) (ALL FUNDS IN THE FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------------
Sullivan None None
--------------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the "Fund Complex."
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
----------------------------------------------------------------------------------------------------
PENSION OR
RETIREMENT ESTIMATED
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS
COMPENSATION AS PART OF FUND UPON TOTAL COMPENSATION FROM THE
NAME FROM THE TRUST EXPENSES RETIREMENT TRUST AND FUND COMPLEX(1)
----------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
----------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
----------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
----------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
----------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1)
board
----------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1)
board
----------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1)
board
----------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1)
board
----------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1)
board
----------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1)
board
----------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1)
board
----------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1)
board
----------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND
OF BIRTH LENGTH OF TERM PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
------------------------------------------------------------------------------------------------------
Michael Lawson Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
(10/08/60) Financial Officer since July 2005. Manager, SEI Investments,
(since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed Trust and
New Covenant Funds. Chief Compliance Officer
of SEI Opportunity Fund, L.P. until 2010.
Director of Investment Product Management and
Development, SEI Investments, since February
2003; Senior Investment Analyst -- Equity Team,
SEI Investments, from March 2000 to February
2003.
------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(03/28/68) (since 1999) SIMC and the Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
(07/18/77) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
------------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain federal income tax considerations generally affecting the Fund and its shareholders that are not described in the Fund's prospectus. The discussion is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elects to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to be qualify as a RIC under the Code the Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in qualified publicly traded partnerships ("Qualifying Income Test"); (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships ("Asset Test").
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
The Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. If the Fund fails to distribute in a calendar year at least 98% of its ordinary income for the year and 98.2% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses) for the one-year period ending October 31 of such year (and any retained amount from the prior calendar year on which the Fund paid no federal income tax), the Fund will be subject to a nondeductible 4% Federal excise tax on the undistributed amounts. The Fund intends to make sufficient distributions to avoid imposition of this tax, or to retain, at most its net capital gains and pay tax thereon but can make no assurances that such tax will be completely eliminated. The Fund may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
DISTRIBUTIONS TO SHAREHOLDERS. The Fund may derive capital gains and losses in connection with sales or other dispositions of its portfolio of securities. Distributions of net short-term capital gains will be taxable to you as ordinary income. Distributions of net long-term capital gains will be taxable to you as long-term capital gain regardless of how long you have held your shares. Distributions of dividends will be taxed as ordinary income except that distributions of qualified dividend income will be taxed at the lower capital gains rates available for individual shareholders.
Certain distributions from the Fund may qualify as qualified dividend income
eligible for the reduced maximum tax rate to individuals of 20% (lower rates
apply to individuals in lower tax brackets) to the extent that the Fund
receives qualified dividend income on the securities it holds and the Fund
designates the distributions as qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations and
certain foreign corporations (e.g., foreign corporations incorporated in a
possession of the United States or in certain countries with a comprehensive
tax treaty with the United States, or the stock of which is readily tradable on
an established securities market in the United States). A dividend will not be
treated as qualified dividend income to the extent that: (i) the shareholder
has not held the shares on which the dividend was paid for more than 60 days
during the 121-day period that begins on the date that is 60 days before the
date on which the shares become "ex-dividend" (which is the day on which
declared distributions (dividends or capital gains) are deducted from a Fund's
assets before it calculates the net asset value) with respect to such dividend;
(ii) a Fund has not satisfied similar holding period requirements with respect
to the securities it holds that paid the dividends distributed to the
shareholder); (iii) the shareholder is under an obligation (whether pursuant to
a short sale or otherwise) to make related payments with respect to
substantially similar or related property; or (iv) the shareholder elects to
treat such dividend as investment income under section 163(d)(4)(B) of the
Code. Distributions reported to Fund shareholders as capital gain dividends
shall be taxable as long-term capital gains at a maximum rate of 20%,
regardless of how long the shareholder has owned the shares.
The Fund will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Fund.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
In the case of corporate shareholders, Fund distributions (other than capital gains distributions) generally qualify for the dividend-received deduction to the extent such distributions are so designated and do not exceed the gross amount of qualifying dividends received by the Fund for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses. In turn, those rules may affect the amount, timing or character of the income distributed to you by the Fund.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
REDEMPTIONS AND EXCHANGES. Redemptions and exchanges of Fund shares may be taxable transactions for federal and state income tax purposes. If you hold your shares as a capital asset, the gain or loss that you realize will be capital gain or loss and will be long-term or short-term, generally depending on how long you hold your shares. Any loss incurred on the redemption or exchange of shares held for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gains distributed to you by the Fund on such shares. All or a portion of any loss that you realize upon the redemption of your Fund shares will be disallowed to the extent that you buy other shares in the Fund (through reinvestment of dividends or otherwise) within 30 days before or after your share redemption. Any loss disallowed under these rules will be added to your tax basis in the new shares you buy.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders the cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to the requirement to report the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares the Fund will permit Fund shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as their default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult
with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold, at a rate of 28%, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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Edgewood Growth Fund $1,545,167 $823,600 $980,682
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.
To the extent that research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in
connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the Trust's most recently completed fiscal year ended October 31, 2012, the Fund paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR AMOUNT OF BROKERAGE TOTAL DOLLAR AMOUNT OF TRANSACTIONS
COMMISSIONS FOR RESEARCH SERVICES INVOLVING BROKERAGE COMMISSIONS FOR
FUND RESEARCH SERVICES
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Edgewood Growth Fund $406,533 $438,371,049
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BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. During the fiscal year ended October 31, 2012, the Fund did not hold any securities of regular brokers and dealers.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under U.S. Securities and Exchange Commission (the "SEC") rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Fund may invest since such contracts generally have remaining maturities of less than one-year. The Fund may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover.
For the fiscal years ended October 31, 2011 and 2012, the Fund's portfolio turnover rates were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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Edgewood Growth Fund 39% 38%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter or any affiliated person of the Fund, their Adviser, or their principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer (the "Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person reports at least quarterly to the Board regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31 and October 31). The Fund discloses a complete schedule of investments in each Semi-Annual Report and Annual Report to Fund shareholders or, following the first and third fiscal quarters, in quarterly holdings reports filed with the SEC on Form N-Q. Semi-Annual and Annual Reports are distributed to Fund shareholders. Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders, but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov.
The Fund provides information about its complete portfolio holdings on the internet at http://aicfundholdings.com/edgewood. This information is provided on a quarterly basis, forty-five (45) days after the end of the fiscal quarter, and is publicly available to all shareholders until updated to reflect the next applicable period. The Fund may provide ratings and rankings organizations with the same information at the same time it is filed with the SEC or one day after it is made available on the internet web site.
The Fund's policies and procedures provide that the Authorized Person may authorize disclosure of portfolio holdings information to third parties at differing times and/or with different lag times than the information posted to the internet, provided that the recipient is, either by contractual agreement or otherwise by law, (i) required to maintain the confidentiality of the information and (ii) prohibited from using the information to facilitate or assist in any securities transactions or investment program. No compensation or other consideration is paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information. The Fund will review a third party's request for portfolio holdings information to determine whether the third party has legitimate business objectives in requesting such information. Legitimate business objectives may include but are not necessarily limited to: disclosure for required due diligence purposes; disclosure to a newly hired investment adviser or sub-adviser; or disclosure to a rating agency for use in developing a rating.
The Adviser currently has two arrangements to provide Fund portfolio holdings information to third parties prior to the date on which portfolio holdings information is posted on the Fund's web site. These arrangements are with Ayco Company, L.P. and Wells Fargo Bank, N.A., respectively. In each arrangement, the Adviser provides to the respective third party Fund portfolio holdings information as of the end of each calendar quarter, generally within 10 days after the quarter end. The information provided to these third parties, until made publicly available, is considered confidential and will not be distributed to the public nor traded upon. The Fund believes this disclosure serves a legitimate business purpose. No compensation is received by the Fund or the Adviser in connection with the disclosure of portfolio holdings information. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
In addition, the Fund's service providers, such as the Custodian, Administrator and transfer agent, may receive portfolio holdings information as frequently as daily in connection with their services to the Fund. In addition to any contractual
provisions relating to confidentiality of information that may be included in the service providers contract with the Trust, these arrangements impose obligations on the Fund's service providers that would prohibit them from disclosing or trading on the Fund's non-public information. Financial printers and pricing information vendors may receive portfolio holdings information, as necessary, in connection with their services to the Fund.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-800-791-4226 or by writing to the Fund at Edgewood Management LLC, 535 Madison Avenue, 15th Floor, New York, New York 10022; and (ii) on the SEC's website at http://www.sec.gov.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics
(each a "Code of Ethics" and together the "Codes of Ethics") apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, INCLUDING SECURITIES THAT MAY BE PURCHASED OR HELD BY THE FUND, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of any class of the shares of the Fund. The Trust believes that most of the shares referred to below were held by the persons listed below in account for their fiduciary, agency or custodial customers. Persons who owned of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to control the Fund within the meaning of the 1940 Act. Shareholders controlling the Fund may have a significiant impact on any shareholder vote of the Fund.
------------------------------------------------------------------------------------------------ EDGEWOOD GROWTH FUND ------------------------------------------------------------------------------------------------ NAME AND ADDRESS NUMBER OF SHARES CLASS OF SHARES % OF CLASS ------------------------------------------------------------------------------------------------ National Financial Services LLC 5,725,045.7020 Retail 60.51% For the Exclusive Benefit of Our Customers 200 Liberty St One World Financial Center New York, NY 10281-1003 ------------------------------------------------------------------------------------------------ Charles Schwab & Co. Inc. 2,876,384.7100 Retail 30.40% Special Custody A/C FBO Customers Attn Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------ National Financial Services LLC 20,865,975.5310 Institutional 16.53% For the Exclusive Benefit of Our Customers 200 Liberty St One World Financial Center New York, NY 10281-1003 ------------------------------------------------------------------------------------------------ Charles Schwab & Co. Inc. 12,097,362.0790 Institutional 9.58% Special Custody A/C FBO Customers Attn Mutual Funds 101 Montgomery St San Francisco, CA 94104-4151 ------------------------------------------------------------------------------------------------ Reliance Trust Company FBO 6,571,170.0730 Institutional 5.20% Retirement Plans Serviced by Metlife C/O Fascore LLC 8515 E Orchard Rd 2T2 Greenwood Village, CO 80111-5002 ----------------------------------------------------------------------------------------------- |
APPENDIX A -- RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
SUMMARY OF EDGEWOOD MANAGEMENT LLC'S
PROXY VOTING POLICY AND PROCEDURES
Effective December 1, 2011
In accordance with Rule 206(4)-6 under the Advisers Act, as a registered investment adviser with voting authority over proxies for clients' securities, Edgewood must adopt policies and procedures reasonably designed to ensure that Edgewood votes proxies in the best interest of clients; discloses information to clients about those policies and procedures; and describe to clients how they may obtain information about how Edgewood has voted the clients' proxies.
As indicated below, Olivia Fleming has been designated as the Proxy Officer and is primarily responsible for compliance with the Firm's proxy voting policies.
A. The SEC has indicated that a discretionary investment manager is required to exercise voting authority with respect to client securities, even if the investment advisory agreement is silent on this point, unless the client has specifically retained voting authority.
B. Where Edgewood has an obligation to vote, (1) the Proxy Officer will vote
all stock, by proxy or in person, pursuant to Edgewood's Voting Guidelines,
(2) a written record of such voting will be kept by Edgewood, and (3)
Edgewood's Investment Committee (the "Committee") will supervise the voting
of stock (subject to the review of Edgewood's Chief Compliance Officer and
senior management) and will establish and maintain Voting Guidelines to
carry out this function consistent with the foregoing principles. Edgewood
may retain a third party to assist it in coordinating and voting proxies
with respect to client securities. If so, the Proxy Officer shall monitor
the third party to assure that all proxies are being properly voted and
appropriate records are being retained.
C. Edgewood will vote proxies in accordance with client instructions. In the absence of specific voting guidelines from the client or material conflicts, Edgewood will vote proxies in what it judges are the best interests of its client/shareholders.
D. The Committee has adopted general positions regarding selected proxyproposals that periodicallyare considered at annual meetings. Edgewood will generally vote in favor of routine corporate housekeeping proposals, including election of directors (where no corporate governance issues are implicated), selection of auditors, and increases in or reclassification of common stock. Edgewood will generally vote against proposals that make it more difficult to replace members of the issuer's board of directors, including proposals to stagger the board, cause management to be overrepresented on the board, introduce cumulative voting, introduce unequal voting rights, and create supermajority voting.
E. For other proposals not addressed in the following guidelines, the Committee shall determine whether a proposal is in the best interests of its clients. Decisions are made exclusively in accordance with the economic interests of the account. Except where required under the terms of the governing instrument, social interests are not among the criteria employed by the Committee. The Committee's opinion concerning the management and prospects of the issuer may be taken into account, where appropriate, with special consideration given to the Master List issuers held in Edgewood's model portfolios. The Committee may take into account, among other things, the effect of the proposal on the underlying value of the securities (including the effect on marketability of the
securities, potential legal issues arising from the proposal, and the effect of the proposal on future prospects of the issuer), the makeup of the issuer's Board of Directors, including the number and quality of both management and non-management directors, the likelihood of a change in such makeup or quality of directors, the necessity of providing the directors with sufficient tools and flexibility to properly discharge their duties as directors, the desirability of providing directors with sufficient time to carefully consider any proposals made to the issuer that might significantly affect the result or nature of activities or ownership of the issuer, and the quality of communications from the corporation to its shareholders. In considering anti-takeover provisions, consideration may be given to whether or not the proposal is part of a package of anti-takeover proposals or whether other anti- takeover measures are already in place. Insufficient information or vague or ambiguous wording may indicate that a vote against a proposal is appropriate even though the Committee agrees with the principle of the proposal. Conversely, a vote in support of a well-principled proposal may be appropriate despite inferior format or ambiguity in language or provisions.
F. The Chief Compliance Officer will identify any conflicts that exist between the interests of Edgewood and its clients. This examination will include a review of the relationship of the firm with the issuer of each security to determine if the issuer is a client of Edgewood or has some other relationship with Edgewood or one of its clients.
G. If a material conflict exists, Edgewood will determine whether voting in accordance with the Voting Guidelines and factors described above is in the best interests of the client. The firm will also determine whether it is appropriate to disclose the conflict to the affected clients and, except in the case of clients that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), give the clients the opportunity to vote their proxies themselves. In the case of ERISA clients, if the Investment Management Agreement reserves to the ERISA client the authority to vote proxies when Edgewood determines it has a material conflict that affects its best judgment as an ERISA fiduciary, the firm will give the ERISA client the opportunity to vote the proxies themselves, or Edgewood will engage a third party to vote the proxies involved.
H. Edgewood will disclose in its Form ADV Part 2 that clients may contact the
Proxy Officer, Olivia Fleming, via e-mail at ofleming@edgewood.com or
telephone at 212-652-9100 in order to obtain information on how Edgewood
voted such client's proxies, and to request a copy of these policies and
procedures. If a client requests this information, the Proxy Officer will
prepare a written response to the client that lists, with respect to each
voted proxy that the client has inquired about, (1) the name of the issuer;
(2) the proposal voted upon and (3) how Edgewood voted the client's proxy.
I. A concise summary of these Proxy Voting Policies and Procedures will be included in Edgewood's Form ADV Part 2, and will be updated whenever these policies and procedures are changed.
J. The Proxy Officer will maintain records relating to Edgewood's proxy voting procedures. These may include electronic records. Records will be maintained and preserved for five years from the end of the fiscal year during which the last entry was made on a record, with records for the first two years kept in the firm's offices. Edgewood will retain the following records:
1) Edgewood's proxy voting policies and procedures, and any amendments thereto;
2) Proxy statements received by Edgewood concerning securities held in Edgewood accounts, provided however that Edgewood may rely on retention in the SEC EDGAR system, the CDS SEDAR system or other publicly available electronic repository for those proxy statements that are so available;
3) A record of each vote that Edgewood casts;
4) A copy of any document Edgewood created that was material to making a decision how to vote proxies, or that memorializes that decision; and
5) A copy of each written client request for information on how Edgewood voted such client's proxies, and a copyof any written response to any (written or oral) client request for information on how the firm voted its proxies.
K. Proxy Voting Guidelines
1) ELIMINATE PREEMPTIVE RIGHTS: GENERALLY IN FAVOR. Preemptive rights may result in a loss of financing flexibility and could prevent management from raising capital advantageously. There is potential for abuse if new equity securities are issued at a discount to the market price of existing securities. This may result in a transfer of value from existing to new shareholders. However, instances of abuse are unusual and there are expenses involved in issuing securities on a preemptive basis.
2) INDEMNIFICATION OF DIRECTORS, i.e., LIMITING OR ELIMINATING
LIABILITYFOR MONETARY DAMAGES FOR VIOLATING THE DUTY OF CARE:
GENERALLY IN FAVOR. Indemnification is generally necessary to attract
qualified Board nominees in a litigious corporate environment.
Monetary liability generally is not eliminated or limited for any
breach of duty of loyalty, acts or omissions not in good faith, and
any transactions in which the director derived an improper personal
benefit.
3) CUMULATIVE VOTING: GENERALLY OPPOSED. Cumulative voting may prevent the majority of shareholders from electing a majority of the Board. Cumulative voting requires fewer votes to obtain a Board seat. Therefore it promotes single interest representation on the Board, which may not represent the interest or concerns of all shareholders.
4) EXECUTIVE STOCK OPTION PLANS: GENERALLY OPPOSED IF EXERCISE PRICE IS BELOW MARKET PRICE OR IF DILUTION UNDER THE PLAN WOULD BE GREATER THAN 10%, PARTICULARLY IF THE COMPANY IS MATURE OR EXECUTIVE COMPENSATION IS EXCESSIVE. For rapidly growing, cash-short issuers where executive salaries are reasonable may approve a plan where dilution exceeds 10%.
5) SHAREHOLDER ACTION BY WRITTEN CONSENT: GENERALLY OPPOSED TO PROPOSALS TO RESTRICT OR PROHIBIT SHAREHOLDERS' ABILITY TO TAKE ACTION BY WRITTEN CONSENT. Shareholders may lose the ability to remove directors or initiate a shareholder resolution if they have to wait for the next scheduled meeting.
6) SHAREHOLDER RIGHT TO CALL A SPECIAL MEETING: GENERALLY OPPOSED TO PROPOSALS TO ELIMINATE THE RIGHT OF SHAREHOLDERS TO CALL A SPECIAL MEETING OR TO REQUIRE THE PETITION OF MORE THAN 25% OF SHAREHOLDERS TO CALL A SPECIAL MEETING. Shareholders may lose the right to remove directors or initiate a shareholder resolution if they cannot take action until the next regularly scheduled meeting. This is especially troublesome if shareholders do not have the right to act by written consent.
7) SUPER-MAJORITY VOTE REQUIREMENTS: GENERALLY OPPOSED TO PROPOSALS REQUIRING THAT A VOTE OF MORE THAN TWO-THIRDS BE REQUIRED TO AMEND ANY BYLAW OR CHARTER PROVISION, OR APPROVE A MERGER OR OTHER BUSINESS COMBINATION. Super-majority vote provisions may stifle bidder interest in the issuer and thereby devalue its stock.
8) ANTI-GREENMAIL PROVISION: GENERALLY OPPOSED. Favor equal treatment for all shareholders, but anti-greenmail provisions may severely limit management's flexibility, for example, with respect to share repurchase programs or ability to issue shares such as General Motor's Class E and H with special features.
9) APPROVAL OF POISON PILLS: GENERALLY IN FAVOR. However, Edgewood would generally be opposed when poison pills are utilized to prevent takeover bids that would be in the best interest of shareholders or when accompanied by super-majority requirements or inequitable voting provisions. Certain shareholder rights plans, however, protect the interest of shareholders by enabling the Board to respond in a considered manner to unsolicited bids.
10) BLANK-CHECK PREFERRED STOCK: GENERALLY OPPOSED. Does provide in
financing but also can be used as an entrenchment device. Can be used as a poison pill when distributed to stockholders with rights attached or can be issued with superior voting rights to friendly parties.
11) CLASSIFIED/STAGGERED BOARDS OF DIRECTORS -- GREATER-THAN-ANNUAL
ELECTION OF DIRECTORS: GENERALLY OPPOSED. Classified Boards do provide stability and continuity; but, if someone wins proxy fights and replaces a third of the directors, because of the difficulties involved in running the issuer with a Board of Directors that is a third hostile and because the vote would be seen as a loss of confidence in management, the remaining directors might put the issuer up for sale or accommodate the wishes of the dissident group. A staggered Board could mean that a director who failed to attend meetings or who voted in favor of actions that were harmful to shareholders could not be removed for up to three years.
12) MAJORITY VOTE ELECTION OF DIRECTORS: GENERALLY IN FAVOR. Permits
removal of non-performing, unpopular or ineffective directors.
13) RECAPITALIZATION PLAN - ELIMINATE INEQUITABLE VOTING RIGHTS:
GENERALLY IN FAVOR. Fair voting provisions are critical elements of shareholder ownership. One share = One vote structure promotes Management and Board accountability.
14) ESTABLISH TERM LIMITS FOR DIRECTORS: GENERALLY OPPOSED. Experience
and continuity in Board representation fosters acute and prudent oversight of Management.
15) INCREASE REQUIRED NUMBER/PERCENTAGE OF INDEPENDENT AND/OR
INDUSTRY-EXPERIENCED BOARD MEMBERS: GENERALLY IN FAVOR. Edgewood favors independent Compensation Committees and industry-experienced Board members to promote prudent management and effective Board oversight. Edgewood generally opposes arbitrary restrictions, percentages or minimum independent representation that may be impractical or potentially remove effective Board members. Anti-Trust statutes may inhibit recruitment of qualified, industry-experienced Board members. Comprehensive Board orientations can provide the requisite exposure to the business model.
16) SEPARATION OF BOARD CHAIRMAN AND CEO ROLES: GENERALLY IN FAVOR.
Separation of the primary Management (CEO) and Oversight (Board Chairman) roles promotes accountability and objective evaluation of performance.
17) INCREASE DIRECTOR / SENIOR MANAGEMENT LIABILITY: GENERALLY OPPOSED.
Management or Board liability in excess of legal or statutory requirements would disadvantage the company in attracting and retaining talented and qualified persons. Sarbanes-Oxley imposes mandatory penalties against the CEO and CFO pursuant to misstatements and omissions of material facts.
18) CONFIDENTIAL VOTING: GENERALLY IN FAVOR. Confidential voting eliminates the opportunity for management to apply pressure to Institutional shareholders with which a business relationship exists. It should be noted that the Department of Labor's "Avon Letter" and the Department of Labor's investigation of proxy voting violations in 1988 might have lessened the need for confidential voting.
19) FAIR PRICE PROVISIONS: NO GENERAL POLICY. Generally opposed when accompanied by super-majority provision, i.e., a clause requiring a super majority shareholder vote to alter or repeal the fair price provision, in excess of two-thirds. Also generally opposed if the pricing formula is such that the price required is unreasonably high. Generally in favor if provisions are designed to prevent two-tier, front-end-loaded hostile tender offer; where no shareholder wants to get caught in the second tier, so that effectively all shareholders are coerced into accepting the offer.
20) MANAGEMENT / BOARD COMPENSATION: GENERALLY OPPOSED TO EXCESSIVE,
UNEARNED OR UNWARRANTED LEADERSHIP COMPENSATION. Generally in favor of establishing reasonable or standardized compensation practices. Generally in favor of compensation reflecting or contingent on achievement of challenging performance objectives. Generally in favor of guidelines reflecting compensation in comparable leadership roles and/or compensation to internal non-managerial employees. Generally in favor of compensation in the form of restricted stock and above market options that vest with performance and/or tenure. It would be difficult for an issuer to attract, retain and motivate top managers without competitive compensation packages. Shareholder approval is appropriate to deviate from guidelines.
21) GOLDEN PARACHUTES: GENERALLY OPPOSED TO EXCESSIVE, UNEARNED OR
UNWARRANTED LEADERSHIP SEVERANCE. GENERALLY IN FAVOR OF ESTABLISHING REASONABLE OR STANDARDIZED SEVERANCE PRACTICES. Generally in favor of severance calculations reflecting past/present annual compensation and performance. It would be difficult for an issuer considered likely to be taken over to attract and retain top managers without severance packages for involuntary termination or significant reduction in compensation, duties or relocation after a change in control. Shareholder approval is appropriate to deviate from guidelines.
22) REINCORPORATION: GENERALLY IN FAVOR OF REINCORPORATION WITHIN THE
UNITED STATES TO POTENTIALLY EXPLOIT FAVORABLE REGULATORY OR TAX TREATMENT OR ENVIRONMENTAL CONDITIONS. Generally opposed to reincorporation outside of the United States. Should examine whether change of state of incorporation would increase the capacity of management to resist hostile takeovers.
23) "Say on Pay": GENERALLY IN FAVOR OF SAY ON PAY, SAY ON FREQUENCY AND
SAY ON GOLDEN PARACHUTE ISSUES. In support of annual advisory shareholder votes and in support of management compensation not deemed excessive.
THE FOLLOWING PROPOSALS ARE GENERALLY APPROVED:
1) Election of management's nominees for Directors;
2) Appointment of Auditors;
3) Change in the date or location of annual meetings;
4) For investment companies, continuation of company management, investment advisers or distribution contracts;
5) Transaction of such other business as may properly come before the meeting;
6) Receiving and/or approving financial reports;
7) Indemnification of Directors;
8) Change of control provisions;
9) Stock splits and stock dividends;
10) Equity & Incentive Plans (Including, but not limited to: Stock Incentive Plans, Restricted Stock Plans, Management Stock Ownership Plans, Senior Executive Incentive Plans, Employee Stock Purchase Plans, Long-Term Incentive Plans, Performance Incentive Plans, Non-Employee Directors Stock Compensation Plans, Share Purchase & Option Plans);
11) Authority to issue additional debt;
12) Change in the number of authorized common shares;
13) Corporate name change;
14) Change in investment company agreements with advisers;
15) Stock option plans, unless exercise price is less than the market price at the time of the grant or excessive dilution would occur under the plan;
16) Removal of a Director only for cause;
17) Recoup unearned management bonuses;
18) Waiver of preemptive rights;
19) Fair pricing amendments unless accompanied by a super-majority provision in excess of two-thirds;
20) Equal access proposals;
21) Technical amendments to by-laws or charters;
22) Share repurchases; and
23) Spin-offs.
The following proposals are GENERALLY OPPOSED:
1) Creation of a second class of stock with unequal voting rights;
2) Fair pricing provisions when accompanied by a super-majority provision in excess of two-thirds;
3) Amendment to bylaws by Board of Directors without shareholder approval;
4) Elimination of shareholder right to call a special meeting or requiring more than 25 % of shareholders to call a special meeting;
5) Elimination of shareholder action by written consent;
6) "Stakeholder" proposals;
7) Loans or guarantees of loans to Officers and Directors;
8) Super-majority provisions in excess of two-thirds;
9) A greater vote requirement to repeal a provision than to adopt it;
10) Permit cumulative voting; and
11) Preparation of reports concerning social issues (Including, but not limited to: Employment Diversity, Equitable Compensation, Employment Discrimination, Environmental Impact, BiodiversityImpact, Climate Change Science, Toxic Substances, Human Rights, Social Responsibility, Labor Ethics, Foreign Relationships/Arrangements, Animal Testing, Regulatory & Litigation Risk, Political Contributions/Affiliations, Regional/Geographical Issues, or Diseases).
WHEN THE COMMITTEE DECIDES TO VOTE AGAINST A PROPOSAL THAT IS GENERALLY APPROVED OR TO VOTE IN FAVOR OF A PROPOSAL THAT IS GENERALLY OPPOSED, THE REASON FOR THE EXCEPTION WILL BE RECORDED.
There is NO GENERAL POLICY with respect to mergers or other combinations, such proposals will be evaluated on a case-by-case basis.
STATEMENT OF ADDITIONAL INFORMATION
FMC SELECT FUND
(TICKER SYMBOL: FMSLX)
FMC STRATEGIC VALUE FUND
(TICKER SYMBOL: FMSVX)
EACH, A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
FIRST MANHATTAN CO.
This Statement of Additional Information ("SAI") is not a prospectus. It is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") as well as the FMC Select Fund (the "Select Fund") and the FMC Strategic Value Fund (the "Strategic Value Fund") (each, a "Fund" and collectively, the "Funds"), each of which is a separate series of the Trust. This SAI is incorporated by reference into and should be read in conjunction with the prospectuses dated March 1, 2013. Capitalized terms not defined herein are defined in the respective prospectuses. The financial statements with respect to the Funds for the fiscal year ended October 31, 2012, including the notes thereto and the report of Ernst & Young LLP thereon, as contained in the applicable 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the applicable Funds' 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Funds' prospectuses or respective Annual Reports free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9009 or by calling the Funds toll-free at 1-877-FMC-4099 (1-877-362-4099); copies are also available at www.firstmanhattan.com.
TABLE OF CONTENTS
THE TRUST ................................................................S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES ..........S-1 DESCRIPTION OF PERMITTED INVESTMENTS .....................................S-4 INVESTMENT LIMITATIONS ...................................................S-13 THE ADVISER ..............................................................S-14 THE PORTFOLIO MANAGERS ...................................................S-15 THE ADMINISTRATOR ........................................................S-16 THE DISTRIBUTOR ..........................................................S-17 THE TRANSFER AGENT .......................................................S-17 THE CUSTODIAN ............................................................S-18 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................S-18 LEGAL COUNSEL ............................................................S-18 TRUSTEES AND OFFICERS OF THE TRUST .......................................S-18 PURCHASING AND REDEEMING SHARES ..........................................S-28 DETERMINATION OF NET ASSET VALUE .........................................S-28 TAXES ....................................................................S-29 FUND TRANSACTIONS ........................................................S-33 PORTFOLIO HOLDINGS .......................................................S-35 DESCRIPTION OF SHARES ....................................................S-36 SHAREHOLDER LIABILITY ....................................................S-37 LIMITATION OF TRUSTEES' LIABILITY ........................................S-37 PROXY VOTING .............................................................S-37 CODES OF ETHICS ..........................................................S-37 5% AND 25% SHAREHOLDERS ..................................................S-37 APPENDIX A -- DESCRIPTION OF RATINGS .....................................A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES .......................B-1 |
March 1, 2013 FMC-SX-001-1200
THE TRUST
GENERAL. Each Fund is a separate series of the Trust. The Trust is an open-end
investment management company established under Massachusetts law as a
Massachusetts voluntary association (commonly known as a business trust) under
a Declaration of Trust dated July 18, 1991, as amended and restated February
18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust
to offer separate series ("funds") of shares of beneficial interest ("shares").
Each fund is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong solely to that
fund and would be subject to liabilities related thereto. Each Fund pays its
(i) operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses, and (ii) pro rata
share of the Fund's other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the
assets of that fund. Expenses not attributable to a specific fund are allocated
across all of the funds on the basis of relative net assets. The other funds of
the Trust are described in one or more separate Statements of Additional
Information. The Trust reserves the right to create and issue additional series
or classes of shares.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. Each Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate each Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
The Funds' investment objectives and principal investment strategies of each Fund are described in the prospectuses. The following information supplements, and should be read in conjunction with, their respective prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
FMC SELECT FUND. The investment objective of the Select Fund is to seek total return, principally through capital appreciation and, to a limited degree, through current income. The Select Fund's investment objective is fundamental and may not be changed without shareholder approval. The Select Fund invests principally in equity securities of U.S. companies with medium to large market capitalizations (in excess of $1 billion).
The equity securities in which the Select Fund may invest are common stocks, preferred stocks, and convertible securities of domestic companies, as well as warrants to purchase such securities. The Select Fund's investment adviser, First Manhattan Co. ("FMC" or the "Adviser"), may also purchase U.S. dollar-denominated equity securities (including depositary receipts) and preferred stocks (including preferred stocks convertible into common stocks) issued by foreign companies, as well as debt securities convertible into common stocks, and shares of closed-end investment companies. The Select Fund may purchase
equity securities that are traded on registered exchanges or the over-the-counter market in the United States. The Select Fund may also purchase equity securities (including depositary receipts) and preferred stocks (including depositary stocks convertible into common stocks) issued by foreign companies, as well as debt securities convertible into common stock of such companies. The Select Fund will generally invest in equity securities of domestic companies, but may also invest in equity securities of foreign companies and American Depository Receipts ("ADRs"). The Adviser expects that the Select Fund's investments in foreign companies will normally represent less than 20% of the Fund's assets.
In selecting equity securities for the Select Fund, the Adviser will not attempt to forecast either the economy or the stock market, but rather will focus its efforts on searching out investment opportunities in equity securities of companies with strong balance sheets, favorable returns on equity and businesses of which the Adviser has an understanding. The Select Fund may invest in equity securities of companies where all of these factors may not be present, but where the Adviser believe a company's shares are selling at a market valuation below their perceived intrinsic value. The Adviser will also consider dividends paid by particular issuers when selecting the Select Fund's investments.
Although the Select Fund's portfolio will normally be invested in equity securities (other than as considered appropriate for cash reserves), for temporary defensive purposes during periods when the Adviser determines that market conditions warrant, up to 100% of the Select Fund's assets may be held in cash or cash equivalents. In general, cash or cash equivalents will be held in U.S. Treasury bills, securities issued by a federal agency or a government-sponsored entity (agency securities), high quality commercial paper, certificates of deposit, money market instruments or money market funds.
FMC STRATEGIC VALUE FUND. The investment objective of the Strategic Value Fund is to seek long-term capital appreciation. The Strategic Value Fund's investment objective is fundamental and may not be changed without shareholder approval. The Strategic Value Fund invests in equity securities that the Adviser believes offer the possibility of increase in value, primarily common stocks that meet the criteria described below.
In selecting equity securities for the Strategic Value Fund, the Adviser will not attempt to forecast either the economy or the stock market, but rather will focus its efforts on searching out investment opportunities in equity securities by carefully scrutinizing financial statements with particular attention to the quality of cash flow and an evaluation of stocks selling at a discount to estimated private market values. The Adviser emphasizes companies where it perceives it has a substantial understanding of both the industry and the business in which the company operates. In addition, the Adviser will concentrate its efforts on companies where a catalyst has been identified which the Adviser believes can have a significant impact on the price of the security. Such catalysts include spin-offs, corporate restructurings, divestiture programs, share repurchases, merger and acquisition activity and significant changes in management or key personnel.
The Strategic Value Fund may invest in common stocks, preferred stocks and convertible securities of domestic companies, as well as warrants to purchase such securities that are traded on registered exchanges or the over-the-counter market in the United States. The Strategic Value Fund may also purchase equity securities (including depositary receipts) and preferred stocks (including depositary stocks convertible into common stocks) issued by foreign companies, as well as debt securities convertible into common stock of such companies. The Adviser expects that the Strategic Value Fund's investments in foreign companies will normally represent less than 20% of the Strategic Value Fund's assets.
Although the Strategic Value Fund's portfolio will normally be fully invested in equity securities (other than as considered appropriate for cash reserves), for temporary defensive purposes during periods when the Adviser determines that market conditions warrant, up to 100% of the Strategic Value Fund's assets may be held in cash or cash equivalents. In general, cash or cash equivalents will be held in U.S. Treasury bills, securities issued by a federal agency or a government-sponsored entity (agency securities), high quality commercial paper, certificates of deposit, money market instruments or money market funds.
AUXILIARY POLICIES OF THE FUNDS
Although not primary strategies employed by the Adviser in managing the Funds, the Funds may engage in a number of investment practices in order to meet their investment objectives. In this regard, the Funds may invest in variable and floating
rate obligations, enter into forward commitments, purchase securities on a when-issued basis and sell securities short against the box. The Funds may also purchase put and call options and write covered call options on fixed income and equity securities, and may enter into futures contracts (including index futures contracts), purchase options on futures contracts, and lend its securities.
Each Fund may purchase securities denominated in foreign currencies in amounts up to 20% of its total assets. The Funds do not have a corresponding limitation with respect to foreign securities denominated in U.S. dollars.
The Select Fund may also invest up to 10% of its total assets in convertible debt securities rated Caa or higher by Moody's Investors Services, Inc. ("Moody's") or CCC or higher by Standard & Poor's Corporation ("S&P"), or Fitch, Inc. While the Adviser will purchase such securities with a view to the capital appreciation potential associated with the underlying equity security, below investment-grade issues, otherwise known as "junk bonds," present special risks. See the "Description of Permitted Investments."
For temporary defensive purposes during periods when the Adviser determines that market conditions warrant, the Adviser may invest up to 100% of the Funds' assets in cash, money market instruments or money market funds.
DESCRIPTION OF PERMITTED INVESTMENTS
Each Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
AMERICAN DEPOSITARY RECEIPTS. ADRs, as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer's home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EQUITY SECURITIES. Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants to acquire common stock, securities convertible into common stock, and investments in master limited partnerships. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over
time. Fluctuations in the value of equity securities in which the Funds invest will cause the net asset value of a fund to fluctuate. The Funds purchase equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, a Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
o SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of smaller companies are often traded in the over- the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Fund will reduce the risk that it will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodity Futures Trading Commission. Each Fund may use futures contracts and related options for bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. To the extent futures and/or options on futures are employed by each Fund, such use will be in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Funds, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Funds are not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When a Fund purchases or sells a futures contract, or sells an option thereon, it is required to "cover" its position in order to limit leveraging and related risks. To cover its position, each Fund may segregate (and marked-to-market on a daily basis), cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the Investment Company Act of 1940 (the "1940 Act") or the rules and U.S. Securities and Exchange Commission ("SEC") interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund's outstanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the fund arising from such investment activities.
Each Fund may also cover its long position in a futures contract by purchasing a put option on the same futures contract with a strike price (i.e., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. Each Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. Each Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
Each Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the fund may segregate cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. Each Fund may also cover its sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. Each Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. Each Fund may also cover its sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with a Fund's use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect or no correlation between the changes in market value of the
securities held by the Fund and the prices of futures and options on futures;
(3) there may not be a liquid secondary market for a futures contract or
option; (4) trading restrictions or limitations may be imposed by an exchange;
and (5) government regulations may restrict trading in futures contracts and
options on futures. In addition, some strategies reduce the Funds' exposure to
price fluctuations, while others tend to increase its market exposure.
OPTIONS. Each Fund may purchase and write put and call options on securities, securities indices or foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) and enter into related closing transactions. A put option on a security gives the purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time during the option period. A call option on a security gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is the consideration for undertaking the obligations under the option contract.
Put and call options on indices are similar to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than the price movements in individual securities.
The initial purchase (sale) of an option contract is an "opening transaction." In order to close out an option position, each Fund may enter into a "closing transaction," which is simply the sale (purchase) of an option contract on the same security with the same exercise price and expiration date as the option contract originally opened. If a Fund is unable to effect a closing purchase transaction with respect to an option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security upon exercise.
Each Fund may purchase and write options on an exchange or over-the-counter. Over-the-counter options ("OTC options") differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available for exchange-traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information from a market maker. It is the SEC's position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand, interest rates, the pricing volatility of the underlying security and the time remaining until the expiration date.
The Fund must cover all options it writes. For example, when a Fund writes an option on a security, index or foreign currency, it will segregate or earmark liquid assets with the Fund's custodian in an amount at least equal to the market value of the option and will maintain such coverage while the option is open. A Fund may otherwise cover the transaction by means of an offsetting transaction or other means permitted by the 1940 Act or the rules and SEC interpretations thereunder.
Each Fund may trade put and call options on securities, securities indices or currencies, as the Adviser determines is appropriate in seeking the Fund's investment objective. For example, a Fund may purchase put and call options on securities or indices to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that the Fund may seek to purchase in the future. A Fund purchasing put and call options pays a premium therefor. If price movements in the underlying securities are such that exercise of the options would not be profitable for the Fund, loss of the premium paid may be offset by an increase in the value of the Fund's securities or by a decrease in the cost of acquisition of securities by the Fund.
In another instance, a Fund may write covered call options on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases in its market value. When a Fund writes an option, if the underlying securities do not increase or decrease to a price level that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised and the Fund will realize as profit the premium received for such option. When a call option written by the Fund is exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate in any increase in the price of such securities above the strike price. When a put option written by the Fund is exercised, the Fund will be required to purchase the underlying securities at a price in excess of the market value of such securities.
Additionally, a Fund may purchase and write put and call options on currencies to manage its exposure to exchange rates.
There are significant risks associated with a Fund's use of options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the movement in prices of options held by the Fund and the securities underlying them; (3) there may not be a liquid secondary market for options; and (4) while a Fund will receive a premium when it writes covered call options, it may not participate fully in a rise in the market value of the underlying security.
RESTRICTED AND ILLIQUID SECURITIES. While the Funds do not anticipate doing so, each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933 ("1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. A Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of a Fund's net assets held in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that can not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
MONEY MARKET SECURITIES. Money market securities include: short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as S&P or Moody's, or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Association ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a
custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of a Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Funds may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Funds. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. The Funds may invest in U.S. dollar-denominated obligations of domestic branches of foreign banks and foreign branches of domestic banks only when the Adviser believes that the risks associated with such investment are minimal and that all applicable quality standards have been satisfied. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with financial institutions. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a
loan that is collateralized by the security purchased. The acquisition of a
repurchase agreement may be deemed to be an acquisition of the underlying
securities as long as the obligation of the seller to repurchase the securities
is collateralized fully. Each Fund follows certain procedures designed to
minimize the risks inherent in such agreements. These procedures include
effecting repurchase transactions only with creditworthy financial institutions
whose condition will be continually monitored by the Adviser. The repurchase
agreements entered into by a Fund will provide that the underlying collateral
at all times shall have a value at least equal to 102% of the resale price
stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Funds, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of a Fund's right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sale upon a default
of the obligation to repurchase were less than the repurchase price, the Fund
could suffer a loss. It is the current policy of each Fund, not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by that Fund, amounts
to more than 15% of the Fund's total assets. The investments of each Fund in
repurchase agreements, at times, may be substantial when, in the view of the
Adviser, liquidity or other considerations so warrant.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by a Fund. A Fund's
purchase of such investment company securities results in the layering of
expenses, such that shareholders would indirectly bear a proportionate share of
the operating expenses of such investment companies, including advisory fees,
in addition to paying a Fund's expenses. Unless an exception is available,
Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more
than 3% of the voting shares of any one investment company, (ii) investing more
than 5% of its total assets in any one investment company, and (iii) investing
more than 10% of its total assets in all investment companies combined,
including its exchange-traded fund ("ETF") investments.
For hedging or other purposes, a Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Funds may invest in the ETFs in excess of the 3% limit described above, provided that the Funds otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
SHORT SALES. The Funds may engage in short sales "against the box." A Fund sells short "against the box" if, at the time of the short sale, the Fund owns or has the right to acquire an equal amount of the security being sold at no additional cost. A Fund may sell short "against the box" when the Fund wants to sell the security it owns at a current price, in order to hedge or limit the exposure of the fund's position. A short sale "against-the-box" is a taxable transaction to the Fund with respect to the securities that are sold short.
SECURITIES OF FOREIGN ISSUERS. Investments in the securities of foreign issuers may subject the Funds to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments, possible imposition of withholding taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition,
foreign issuers are, generally speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States.
The value of a Fund's investments denominated in foreign currencies will depend on the relative strengths of those currencies and the U.S. dollar, and a Fund may be affected favorably or unfavorably by changes in the exchange rates or exchange control regulations between foreign currencies and the U.S. dollar. Changes in foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by the Funds.
SECURITIES LENDING. The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Funds will not lend portfolio securities to the Adviser or their affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
A Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, a Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. Investing cash collateral subjects the Fund to market risk. The Fund remains obligated to return all collateral to the borrower under the terms of its securities lending arrangements, even if the value of investments made with the collateral decline. Accordingly, if the value of a security in which the cash collateral has been invested declines, the loss would be borne by the Fund, and the Fund may be required to liquidate other investments in order to return collateral to the borrower at the end of the loan. Each Fund will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon a Fund's ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. The Funds will segregate or earmark liquid assets with the Custodian in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Funds before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Funds generally purchase securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for their respective portfolios, a Fund may dispose of a when-issued security or forward commitment prior to settlement if deems it appropriate.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
In addition to each Fund's investment objective, the following investment limitations are fundamental, which means that a Fund cannot change them without approval by the vote of a majority of the outstanding shares of a Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of a Fund are present or represented by proxy; or (ii) more than 50% of a Fund's outstanding shares, whichever is less.
Each Fund will not:
1. Purchase securities of any issuer (except securities issued or guaranteed as to principal and interest by the United States, its agencies or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of the Fund would be invested in the securities of such issuer. This restriction applies to 75% of the Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in U.S. government securities and repurchase agreements involving such securities. For purposes of this limitation (i) utility companies will be classified according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry, (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry, and (iii) supranational entities will be considered to represent one industry.
3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of total assets. Borrowings from a bank require asset coverage of at least 300%. In the event that such asset coverage shall at any time fall below 300%, a Fund shall, within three days thereafter or such longer period as the SEC may prescribe by rules and regulations, reduce the amount of its borrowings to such an extent that the asset coverage of such borrowings shall be at least 300%. All borrowings in excess of 5% of total assets will be repaid before making additional investments and any interest paid on such borrowings will reduce income.
4. Purchase or sell real estate, real estate limited partnership interests or commodities provided that this shall not prevent a Fund from investing in readily marketable securities of issuers which can invest in real estate or commodities, institutions that issue mortgages, and real estate investment trusts which deal in real estate or interests therein, and provided further that this shall not prevent a Fund from investing in commodities contracts relating to financial instruments.
5. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling a portfolio security.
6. Issue senior securities (as defined in the 1940 Act) except as permitted by rule, regulation or order of the SEC.
7. Make loans, except that a Fund may purchase or hold debt instruments in accordance with its investment objective and policies, may lend its portfolio securities, and may enter into repurchase agreements, as described in the Prospectus and in this SAI.
NON-FUNDAMENTAL POLICIES.
The following investment limitations are non-fundamental and may be changed by the Board without shareholder approval.
Each Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer.
2. Invest in companies for the purpose of exercising control.
3. Pledge, mortgage or hypothecate assets except to secure borrowings permitted by (3) above in aggregate amounts not to exceed 10% of total assets taken at current value at the time of the incurrence of such loan.
4. Make short sales of securities, maintain a short position or purchase securities on margin, except that a Fund may obtain short-term credits as necessary for the clearance of security transactions and may sell securities short "against the box."
5. Invest its assets in securities of any investment company, except as permitted by the 1940 Act or pursuant to an order of exemption therefrom.
6. Invest in interests in oil, gas or other mineral exploration or development programs and oil, gas or mineral leases.
7. Hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets. An illiquid security is a security which cannot be disposed of in the usual course of business within seven days, at approximately the value at which a Fund has valued the instrument. Illiquid securities include repurchase agreements maturing in excess of seven days, time deposits with a withdrawal penalty, non-negotiable instruments and instruments for which no market exists.
The foregoing percentages will apply at the time of the purchase of a security.
THE ADVISER
GENERAL. First Manhattan Co. ("FMC" or the "Adviser") is a professional investment management firm organized as a limited partnership and registered with the SEC under the Investment Adviser Act of 1940. In addition to advising the Funds, FMC provides investment advisory services to individuals, partnerships, trusts, pension and other employee benefit plans, and eleemosynary and other institutions. FMC was founded in 1964. Because of the amount of their direct and indirect ownership of the Adviser's outstanding ownership interests, Mr. David S. Gottesman and Mr. Robert W. Gottesman are deemed to control the Adviser. As of December 31, 2012, the Adviser had management authority with respect to approximately $13 billion in assets. The principal business address of the Adviser is 437 Madison Avenue, New York, New York 10022. Effective March 25, 2013, the principal place of business will be 399 Park Avenue, New York, NY 10022-7001.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated May 3, 1995 (the "Advisory Agreement") with respect to the Funds. Under the Advisory Agreement, the Adviser serves as investment adviser and makes the investment decisions for the Funds and continuously reviews, supervises and administers the investment program of each Fund, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder or its reckless disregard of its obligation and duties under this Advisory Agreement.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of each Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of each Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.80% of the average daily net assets of the Select Fund and 1.00% of the average daily net assets of the Strategic Value Fund. The Adviser has voluntarily agreed to reduce fees and reimburse expenses to the extent necessary to keep total annual Fund operating expenses from exceeding 1.10% of the Select Fund's average daily net assets and 1.30% of the Strategic Value Fund's average daily net assets. The Adviser may discontinue all or a portion of these fee reductions or expense reimbursements at any time. The Adviser may, from its own resources, compensate broker-dealers whose clients purchase shares of the Funds.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the Adviser the following advisory fees:
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CONTRACTUAL FEES PAID FEES WAIVED BY ADVISER TOTAL FEES PAID (AFTER WAIVERS)
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FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
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FMC Select
Fund $1,492,597 $1,631,584 $1,666,325 $0 $0 $0 $1,492,597 $1,631,584 $1,666,325
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FMC Strategic
Value Fund $1,819,713 $2,050,118 $1,813,074 $0 $0 $0 $1,819,713 $2,050,118 $1,813,074
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THE PORTFOLIO MANAGERS
This section includes information about the Funds' respective portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates each portfolio manager for managing the Funds. Each portfolio manager's compensation consists of a fixed annual salary. For 2012, in addition to a fixed annual salary, each of Mr. Muccia, Mr. Freedberg and Mr. Lefferman received distributions with respect to their ownership interests in the Adviser. Although not limited to any specific factors, the Adviser, when considering the amount of the portfolio managers' compensation, may consider factors such as the Funds' performance or asset levels. Portfolio managers' compensation is not linked to any specific factors.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of each Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
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DOLLAR RANGE OF
NAME FUND SHARES(1)
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Timothy C. Muccia $100,001 - $500,000 (FMC Select Fund)
$50,001 - $100,000 (FMC Strategic Value Fund)
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Andrew M. Freedberg $50,001 - $100,000 (FMC Select Fund)
$50,001 - $100,000 (FMC Strategic Value Fund)
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Edward I. Lefferman $500,001 - $1,000,000 (FMC Select Fund)
$500,001 - $1,000,000 (FMC Strategic Value Fund)
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Paul E. Patrick $50,001 - $100,000 (FMC Select Fund)
$0 - $50,000 (FMC Strategic Value Fund)
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(1) Valuation date is October 31, 2012.
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OTHER ACCOUNTS. In addition to the Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
-----------------------------------------------------------------------------
NUMBER NUMBER NUMBER
OF OF OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
(MILLIONS)
-------------------------------------------------------------------------------------------------
Timothy C. Muccia 0 $0 0 $0 362(1) $952
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Andrew M. Freedberg 0 $0 0 $0 208 $344
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Edward I. Lefferman 0 $0 0 $0 100 $104
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Paul E. Patrick 0 $0 0 $0 41 $61
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(1) Includes 1 account with assets under management of $53.4 million that is subject to a performance based fee.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of a Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same or similar investment objectives as a Fund. Therefore, a potential conflict of interest may arise as a result of the identical or similar investment objectives, whereby the portfolio managers could favor one account over another. Another potential conflict could arise as a result of the portfolio managers' knowledge about the size, timing and possible market impact of Fund trades. A portfolio manager could use this information to the advantage of other accounts and to the disadvantage of a Fund. A portfolio manager may also manage an account whose investment objectives and methodologies may differ from those of the Funds, which may cause a portfolio manager to effect trading in one account that may have an adverse effect on another account, including a Fund. In addition, it is also possible that a potential conflict of interest may arise because a portfolio manager manages an account with a performance-based fee in addition to the Funds and other accounts without a performance-based fee. However, the Adviser has established policies and procedures to ensure that the purchases and sales of securities among all accounts over which it has investment management responsibilities are allocated fairly and equitably.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002, (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for each Fund whereby the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed in the following schedule:
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FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $350 million
0.10% $350 million - $500 million
0.08% $500 million - $1 billion
0.06% Over $1 billion
--------------------------------------------------------------------------------
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The minimum annual fee for each Fund shall be $75,000.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the Administrator the following administration fees:
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ADMINISTRATION FEES PAID
---------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
FMC Select Fund $222,003 $238,913 $245,701
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FMC Strategic Value Fund $216,495 $240,053 $213,858
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THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly -owned subsidiary of SEI Investments, and an affiliate of the Administration are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of each Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or with respect to each Fund, by a majority of the outstanding shares of a Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
SUB-DISTRIBUTION AGREEMENT. The Distributor has entered into a sub-distribution agreement with the Adviser pursuant to which the Adviser, a registered broker-dealer, may distribute shares of the Funds. In connection with such sub-distribution activities, the Adviser may compensate its registered representatives, and such compensation may be more or less than the compensation registered representatives receive in connection with the distribution of shares of other registered investment companies. Any such compensation is paid by the Adviser from its revenues; no distribution fees are borne by the Funds or their shareholders.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Funds' transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
U.S. Bank National Association, 800 Nicollett Mall, Minneapolis, Minnesota 55402-4302 (the "Custodian"), serves as the custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Funds. The financial statements and notes thereto incorporated by reference have been audited by Ernst & Young LLP, as indicated in their reports with respect thereto, and are incorporated by reference in reliance on the authority of their reports as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-today management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine
from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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INTERESTED TRUSTEES
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Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(08/17/46) performs various Bishop Street Funds, SEI Daily
(since 1991) services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Trust and New Covenant Funds.
Chief Executive Director of SEI Global Master Fund
Officer of SEI Alpha plc, SEI Global Assets Fund plc, SEI
Strategy Portfolios, LP, Global Investments Fund plc, SEI
June 2007 to present. Investments--Global Funds Services,
President and Director Limited, SEI Investments Global,
of SEI Opportunity Limited, SEI Investments (Europe)
Fund, L.P. to 2010. Ltd., SEI Investments--Unit Trust
Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-----------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
Consultant since 2003. Advisors' Inner Circle Fund II,
(05/26/40) (since 1991) Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust, SEI
Administrator and the Tax Exempt Trust, Adviser Managed
Distributor. Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
-----------------------------------------------------------------------------------------------------------------
S-20
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-----------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------------
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
-----------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------------------------------
Charles E. Trustee Self-Employed Current Directorships: Trustee of The
Carlbom Business Consultant, Advisors' Inner Circle Fund II and
(since 2005) Business Projects Inc., Bishop Street Funds. Director of
(08/20/34) since 1997. Oregon Transfer Co.
-----------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
Executive Officer, Advisors' Inner Circle Fund II and
(08/17/44) (since 2008) Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
-----------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of The
Jr. Consultant since Advisors' Inner Circle Fund II and
(since 2011) January 2012. Director Bishop Street Funds. Director of The
(05/28/52) of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010. Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
-----------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson since 1994. Advisors' Inner Circle Fund II,
(since 2005) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
-----------------------------------------------------------------------------------------------------------------
S-21
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-----------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------------
(03/01/42) Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
-----------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
Compliance, AARP Advisors' Inner Circle Fund II and
(01/23/43) (since 2005) Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
-----------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
Allocation, Manulife Advisors' Inner Circle Fund II and
(02/12/56) (since 2011) Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
-----------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
Practitioner since 1994. Trustee/Director of The Advisors'
(04/12/31) (since 1994) Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
-----------------------------------------------------------------------------------------------------------------
S-22
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-----------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------------
George J. Trustee Retired since January Current Directorships: Trustee/
Sullivan, Jr. 2012. Self-employed Director of State Street Navigator
(since 1999) Consultant, Newfound Securities Lending Trust, The
(11/13/42) Consultants Inc., April Advisors' Inner Circle Fund II,
Lead Independent 1997 to December Bishop Street Funds, SEI Structured
Trustee 2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-----------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Funds as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Funds provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Funds, and to exercise their business judgment in a manner that serves the best interests of the Funds' shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's
audited financial statements and considering any significant disputes between
the Trust's management and the independent registered public accounting firm
that arose in connection with the preparation of those financial statements;
(vii) considering, in consultation with the independent registered public
accounting firm and the Trust's senior internal accounting executive, if any,
the independent registered public accounting firms' reports on the adequacy of
the Trust's internal financial controls; (viii) reviewing, in consultation with
each fund's independent registered public accounting firm, major changes
regarding auditing and accounting principles and practices to be followed when
preparing each fund's financial statements; and (ix) other audit related
matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan
and Ms. Krikorian currently serve as members of the Audit Committee. Mr.
Sullivan serves as the Chairman of the Audit Committee. The Audit Committee
meets periodically, as necessary, and met four (4) times during the most
recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
--------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service one on (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service one on (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
--------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
--------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
--------------------------------------------------------------------------------------------------
Michael Lawson Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
--------------------------------------------------------------------------------------------------
S-26
|
--------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
--------------------------------------------------------------------------------------------------
(since 2005) 1998 to July 2005.
--------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(since 2006) Credit Fund, LP and SEI Alpha Strategy
(12/18/62) Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed Trust and
New Covenant Funds. Chief Compliance Officer
of SEI Opportunity Fund, L.P. until 2010.
Director of Investment Product Management and
Development, SEI Investments, since February
2003; Senior Investment Analyst -- Equity Team,
SEI Investments, from March 2000 to February
2003.
--------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(since 1999) SIMC and the Administrator since 1999. Vice
(03/28/68) President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
--------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
from 2006 to 2010. Associate at Morrison &
(07/18/77) Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
--------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
--------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(since 2009) 2003.
(8/24/80)
AML Officer
(since 2011)
--------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of each Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
Subject to the approval of the Fund, an investor may purchase shares of the Fund with liquid securities and other assets that are eligible for purchase by the Fund (consistent with the Fund's investment policies and restrictions) and that have a value that is readily ascertainable in accordance with the Fund's valuation policies. These transactions will be effected only if the Adviser deems the security to be an appropriate investment for the Fund. Assets purchased by the Fund in such a transaction will be valued in accordance with procedures adopted by the Fund. The Fund reserves the right to amend or terminate this practice at any time.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by a Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of a Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of any Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. Each of the Funds adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting each Fund and its shareholders that is intended to supplement the discussion contained in each Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of each Fund or its shareholders, and the discussion here and in each Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
Congress passed the Modernization Act on December 22, 2010 (the "RIC Mod Act") which makes certain beneficial changes for "regulated investment companies" under Subchapter M of the Code ("RICs") and their shareholders, some of which are referenced below. In general, the RIC Mod Act contains simplification provisions effective for taxable years beginning after December 22, 2010, which are aimed at preventing disqualification of a RIC for "inadvertent" failures of the asset diversification and/or qualifying income tests. Additionally, the RIC Mod Act allows capital losses to be carried forward indefinitely, and retain the character of the original loss, exempts certain RICs from the preferential dividend rule, and repealed the 60-day designation requirement for certain types of income and gains.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). Each Fund intends to qualify and elects to be treated as a RIC under Subchapter M of the Code. By following such a policy, each Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of a Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the Code, each Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of each Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and for net income derived from an interest in a qualified publicly traded partnership; (ii) at the end of each fiscal quarter of each Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership; and (iii) at the end of each fiscal quarter of each Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or
related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If a Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If a Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, that Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses. In addition, the carryover of capital losses may be limited under the general loss limitation rules if a Fund experiences an ownership change as defined in the Code.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires a Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, a Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of that year, plus certain other amounts. Each Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. A Fund may, in certain circumstances, be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the Adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of a Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. Each Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of a Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by a Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by each Fund will be eligible for the reduced maximum tax rate to individuals of 20% (lower rates apply to individuals in lower tax brackets) to the extent that the Fund receives qualified dividend income on the securities it holds and the Fund designates the distributions as qualified dividend income. Qualified dividend income is, in general, dividend income
from taxable domestic corporations and certain foreign corporations (e.g.,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, or
the stock of which is readily tradable on an established securities market in
the United States). A dividend will not be treated as qualified dividend income
to the extent that (i) the shareholder has not held the shares on which the
dividend was paid for more than 60 days during the 121-day period that begins
on the date that is 60 days before the date on which the shares become
"ex-dividend" (which is the day on which declared distributions (dividends or
capital gains) are deducted from the Fund's assets before it calculates the net
asset value) with respect to such dividend, (ii) the Fund has not satisfied
similar holding period requirements with respect to the securities it holds
that paid the dividends distributed to the shareholder), (iii) the shareholder
is under an obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to substantially similar or related property, or
(iv) the shareholder elects to treat such dividend as investment income under
section 163(d)(4)(B) of the Code. Distributions by the Fund of its net
short-term capital gains will be taxable as ordinary income. Capital gain
distributions consisting of the Fund's net capital gains will be taxable as
long-term capital gains at a maximum rate of 20%, regardless of how long the
shareholder has owned the shares. Each Fund will report annually to its
shareholders the amount of the Fund's distributions that qualifyfor the reduced
tax rates on qualified dividend income.
A Fund's dividends that are paid to a corporate shareholder and that are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If a Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in a Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of a Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
The Fund (or its administrative agent) report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders the cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to the requirement to report the gross proceeds from the sale of Fund shares, the Funds are also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares the Fund will permit Fund shareholders to elect from among several IRS-accepted cost basis methods, including the
average basis method. In the absence of an election, the Fund will use the average basis method as their default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
FOREIGN TAXES. Dividends and interests received by a Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors.
TAX TREATMENT OF COMPLEX SECURITIES. Each Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by a Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by each Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by each Fund. Similarly, foreign exchange losses realized by a Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce a Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce a Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold at a rate of 28% and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Funds may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Funds.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with
the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by a Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. A Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Funds will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When a Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including a Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or Fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or a Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of a Fund to participate in higher volume transactions will generally be beneficial to that Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT
OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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FMC Select Fund $47,252 $22,976 $$9,434
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FMC Strategic Value Fund $20,799 $4,278 $18,676
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BROKERAGE SELECTION. The Adviser expects to use its own brokerage facilities for affecting all or substantially all of the Funds' brokerage transactions. In instances where the Adviser determines that one or more brokers other than itself is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in
return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause each Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to each Fund.
To the extent that research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize a Fund's commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser in connection with a Fund or any other specific client account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, a Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Funds paid no commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Funds, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Funds for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Funds, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions effected by affiliated brokers. All amounts shown were paid to the Adviser, which is dually registered with the SEC as a broker-dealer.
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PERCENTAGE OF TOTAL
PERCENTAGE OF TOTAL BROKERAGE
AGGREGATE DOLLAR AMOUNT OF BROKERAGE TRANSACTIONS EFFECTED
BROKERAGE COMMISSIONS PAID TO COMMISSIONS PAID TO THROUGH AFFILIATED
AFFILIATED BROKERS AFFILIATED BROKERS BROKERS
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FUND 2010 2011 2012 2012 2012
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FMC Select Fund $47,252 $22,976 $9,434 100% 100%
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FMC Strategic
Value Fund $20,799 $4,278 $18,676 100% 100%
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SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of their "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Funds held during their most recent fiscal year. During the fiscal year ended October 31, 2012, the Funds did not hold any securities of regular brokers and dealers.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. The Fund may at times hold investments in short-term instruments, which are excluded for purposes of computing portfolio turnover. For the Funds' two most recently completed fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for each of the Funds were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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FMC Select Fund 26% 14%
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FMC Strategic Value Fund 6% 8%
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In light of the Adviser's investment objective of long-term capital appreciation, portfolio turnover rates for the Funds have been, and are expected to continue to be, low compared to industry averages.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of Fund shareholders and include procedures to address conflicts between the interests of the Funds' shareholders, on the one hand, and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds, their Adviser, or their principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Funds' Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Funds are required to disclose its complete portfolio holdings quarterly, within 60 days of the
end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). Each Fund will disclose a complete or summary schedule of investments (which includes each of the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. Each Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q, and each Fund's complete schedule of investments following the second and fourth fiscal quarters, is available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov and on the Funds' website at www.firstmanhattan.com. Should a Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-877-FMC-4099 (1-877-362-4099).
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the Custodian, Administrator or Transfer agent, in connection with their services to the Funds. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of a Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Funds believe that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Funds' policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Fund's shareholders and that to the extent conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than three days after the date of the information. The Funds' Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Funds require any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Funds, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Funds' policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipient of the Funds' portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related
thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by each Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review each Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-877-FMC-4099 (877-362-4099); and (ii) on the SEC's website at http://www.sec.gov.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1 (each a "Code of Ethics" and together the "Codes of Ethics"). These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, INCLUDING SECURITIES THAT MAY BE PURCHASED OR HELD BY THE FUNDS, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Funds. Persons owning of record or beneficially more than 25%
of a Fund's outstanding shares may be deemed to control the Fund within the meaning of the 1940 Act. The Trust believes that most of the shares referred to below were held by the below persons in account for their fiduciary, agency or custodial customers.
-------------------------------------------------------------------------------- FMC SELECT FUND -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- Pershing LLC 9,547,882.8130 98.05 % Attn Mutual Funds PO Box 2052 Jersey City, NJ 07303-2052 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FMC STRATEGIC VALUE FUND -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- Pershing LLC 6,571,968.1430 92.69 % Attn Mutual Funds PO Box 2052 Jersey City, NJ 07303-2052 -------------------------------------------------------------------------------- |
APPENDIX A - RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to
other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B
FIRST MANHATTAN CO.
PROXY VOTING POLICIES AND PROCEDURES --
INVESTMENT ADVISORY SERVICES FOR MUTUAL FUNDS
In response to rules adopted by the Securities and Exchange Commission ("SEC") under the Investment Advisers Act of 1940 (the "Advisers Act") pertaining to an investment adviser's fiduciary obligation to clients who have authorized the advisor to vote their proxies, First Manhattan Co., a registered investment adviser, has adopted the following proxy voting policies and procedures in connection with its rendering of investment advisory services to mutual funds:
1 INTRODUCTION
FMC has adopted and implemented policies and procedures that are reasonably designed to ensure that proxies are voted in the best interests of investment advisory clients, including fund shareholders of mutual funds advised by the firm (the "FMC Mutual Funds"), in accordance with the firm's fiduciary obligations and SEC Rule 206(4)-6 under the Advisers Act, the proxy voting requirements of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. FMC proxy voting guidelines are designed to reflect both SEC requirements applicable to investment advisers and the longstanding fiduciary standards and responsibilities relating to ERISA accounts as set forth in Department of Labor Bulletin 94-2, 29 C.F.R. 2509.94 -2 (July 29, 1994).
2. STATEMENT OF POLICIES AND PROCEDURES
FMC's policies and procedures are designed to ensure that proxy-voting decisions are made in the best interests of fund shareholders of the FMC Mutual Funds.
A. The portfolio managers for the FMC Mutual Funds follow the firm's general proxy procedures in their voting of proxies on behalf of such funds. The actual votes are processed through the FMC Mutual Funds' custodian bank (U.S. Bank National Association, at present).
B. Proxies of portfolio companies are voted subject to anyapplicable investment restrictions of the FMC Mutual Funds.
C. Proxies of portfolio companies are voted in accordance with any resolutions or other instructions approved by authorized persons of the FMC Mutual Funds.
AVAILABILITY OF POLICIES AND PROCEDURES. A shareholder of a FMC Mutual Fund may obtain a copy of our proxy voting policies and procedures by contacting the Proxy Manager (designated below) or Ms. Cheryl M. Kallem at First Manhattan Co., 437 Madison Avenue (effective March 25, 2013, 399 Park Ave.), New York, NY 10022, 212-756-3300, or by e-mailing either of them at proxymanager@firstmanhattan.com or ckallem@firstmanhattan.com.
DISCLOSURE OF VOTE. A client may obtain records on how we voted shares owned by the FMC Mutual Funds by contacting the Proxy Manager or Ms. Cheryl M. Kallem at First Manhattan Co., 437 Madison Avenue (effective March 25, 2013, 399 Park Ave.), New York, NY 10022, 212-756-3300, or by e-mailing either of them at proxymanager@firstmanhattan.com or ckallem@firstmanhattan.com. In general, the firm does not disclose to third parties how it voted a fund's proxies.
FOREIGN SECURITIES. Voting foreign securities' proxies may entail
substantial logistical issues that in turn may adversely impact FMC's
ability to vote such proxies. These issues include, but are not limited to,
(i) proxy materials being written in a foreign language, (ii) late notice
of shareholder meetings, and (iii) a requirement to vote proxies in person.
Due to these logistical issues, FMC will vote proxies for such foreign
securities on a best-efforts basis only.
3. RESPONSIBILITIES AND OVERSIGHT
DESIGNATION OF RESPONSIBILITY. FMC has designated a Proxy Manager and a Proxy Committee that have responsibility and oversight of FMC's proxy voting process. Gerry Fleites is the Proxy Manager. The Proxy Manager deals directly with third parties to ensure that proxies and related materials are forwarded to portfolio managers and works with portfolio managers to cast votes, resolve issues with the Proxy Committee and compile proxy voting reports. The Proxy Committee is composed of Suzanne Capellini, Gerry Fleites, Cheryl M. Kallem, Michael P. Helmick, Lizanne Klatsky, Neal K. Stearns and Anthony Avicolli. The Proxy Committee establishes general proxy voting polices as may be necessary and determines how such policies should be applied to specific proxy votes.
DOCUMENTATION. The Proxy Committee will have specific responsibility for the following areas:
1. developing, authorizing, implementing and updating FMC's policies and procedures; and
2. overseeing the proxy voting process.
4. PROCEDURES
The following procedures are employed to ensure that FMC receives and votes proxies in a timely manner:
A OBTAIN PROXY. FMC obtains the proxy from the custodian bank.
B. MATCH. Each proxy received is matched to the securities to be voted and a reminderissent to any custodian that has not forwarded the proxies within a reasonable time.
C. CONFLICTS OF INTEREST. We believe that there are no material conflicts between the interests of shareholders of the FMC Mutual Funds and our own insofar as proxy voting is concerned. However, potential conflicts of interest may arise between the interests of FMC and the FMC Mutual Funds. It is FMC's policy to resolve all conflicts of interest in the best interests of the FMC Mutual Funds. FMC has identified the following potential conflicts of interest:
1) where FMC manages any assets of a publicly traded company, and also holds the securities of that company or an affiliated company securities in the account of a FMC Mutual Fund;
2) where a FMC employee who serves as a portfolio manager to a FMC Mutual Fund has a client relationship with an individual who is a (i) corporate director or a candidate for a corporate directorship of a public company or (ii) senior executive of a public company, and the securities of that public company are held in the portfolio of such FMC Mutual Fund; and
3) where a FMC employee who serves as a portfolio manager to a FMC Mutual Fund is a (i) senior executive or (ii) director or a candidate for a corporate directorship of a public company, and the securities of which are held in the portfolio of such FMC Mutual Fund.
The Proxy Manager, in conjunction with the Proxy Committee, will maintain records to monitor for the above items. In the event that any of the conflicts described above should arise, the Proxy Committee will vote the applicable securities proxies pursuant to either FMC's proxy policies and procedures or FMC will vote the applicable proxies consistent with the recommendations of Egan-Jones Proxy Services ("Egan-Jones"). Additional conflicts of interest which are not described above may arise from time to time. All employees of FMC should promptly report any potential conflicts of interest to the Legal and Compliance Departments.
D. MISCELLANEOUS. Outstanding proxies for which instructions are not otherwise received will be voted by the Proxy Manager in the same manner in which the majority of the shares of such securities held in accounts of clients of FMC under the supervision of FMC portfolio managers are voted.
E. FMC has also engaged the services of Egan-Jones to provide FMC portfolio managers with reports which recommend how portfolio managers should vote on specific proxy issues with respect to individual securities held in FMC client accounts.
5. RECORDKEEPING
The Proxy Manager or his designee will arrange for the maintenance of records of proxies voted pursuant to Section 204-2 of the Advisers Act.
6. GUIDELINES FOR VOTING
Historically, FMC has general voted with management in non-controversial matters such as the unopposed election of Directors and the ratification of outside auditors. However, we exercise special scrutiny, and may not follow management's recommendation, with respect to resolutions pertaining to contested election of Directors or other similar proposals. Subject to determination by each portfolio manager based on the specific circumstances, in general FMC expects to vote in favor of the following matters:
1. Board nominations in uncontested elections
2. Annual election of Board
3. Ratification of auditors -- provided no other material services rendered by auditing firm
4. Cumulative voting
5. Confidential voting
6. Share authorizations, provided the increases are for legitimate corporate purposes and reasonable in relation to the overall capitalization structure
7. Stock splits, on same basis as above
8. Preemptive rights
9. Anti-greenmail amendments
10. Share repurchase programs
11. Executive and Director compensation plans, provided they are reasonable in relation to the industry and the performance of the company during the period in question
12. Stock option and employee stock ownership programs, provided they are 5% or less of the issued and outstanding shares and are overseen by independent board members taking into account: fair market price at time of grant; no re-pricing provisions; and grants tied to some performance criteria and not top heavily weighted in favor of senior management
13. Corporate restructuring, including mergers, spin-offs and the asset sales, provided shareholder value is enhanced
STATEMENT OF ADDITIONAL INFORMATION
HAVERFORD QUALITY GROWTH STOCK FUND
(TICKER SYMBOL: HAVGX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
HAVERFORD FINANCIAL SERVICES, INC.
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Haverford Quality Growth Stock Fund (the "Fund"). This SAI is incorporated by reference and should be read in conjunction with the prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements including the notes thereto and the report of Ernst & Young LLP thereon, as contained in the 2012 Annual Report to Shareholders are herein incorporated by reference into and deemed to be part of this SAI. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219745, Kansas City, Missouri 64121 or by calling the Fund at 1-866-301-7212.
TABLE OF CONTENTS
THE TRUST ............................................................... S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES ......... S-1 DESCRIPTION OF PERMITTED INVESTMENTS .................................... S-2 INVESTMENT LIMITATIONS .................................................. S-10 THE ADVISER ............................................................. S-11 THE PORTFOLIO MANAGERS .................................................. S-12 THE ADMINISTRATOR ....................................................... S-13 THE DISTRIBUTOR ......................................................... S-14 PAYMENTS TO FINANCIAL INTERMEDIARIES .................................... S-14 THE TRANSFER AGENT ...................................................... S-15 THE CUSTODIAN ........................................................... S-15 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................... S-15 LEGAL COUNSEL ........................................................... S-15 TRUSTEES AND OFFICERS OF THE TRUST ...................................... S-16 PURCHASING AND REDEEMING SHARES ......................................... S-25 DETERMINATION OF NET ASSET VALUE ........................................ S-26 TAXES ................................................................... S-26 FUND TRANSACTIONS ....................................................... S-31 PORTFOLIO HOLDINGS ...................................................... S-33 DESCRIPTION OF SHARES ................................................... S-34 SHAREHOLDER LIABILITY ................................................... S-34 LIMITATION OF TRUSTEES' LIABILITY ....................................... S-34 PROXY VOTING ............................................................ S-34 CODES OF ETHICS ......................................................... S-35 5% AND 25% SHAREHOLDERS ................................................. S-35 APPENDIX A -- DESCRIPTION OF RATINGS .................................... A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ...................... B-1 |
March 1, 2013 HIM-SX-001-1000
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. The Fund pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objectives and principal investment strategies are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
HAVERFORD QUALITY GROWTH STOCK FUND. The Fund seeks long-term growth of capital. This goal is fundamental, and may not be changed without the consent of shareholders. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940 (the "1940 Act").
As its principal investment strategy, the Fund invests primarily in equity securities as described in the Prospectus. Consistent with Rule 35d-1 of the 1940 Act regarding the use of certain mutual fund names, the Fund has adopted a "non-fundamental" policy to invest at least 80% of its net assets plus the amount of any borrowings for investment purposes, under normal circumstances, in equity securities. This non-fundamental policy may be changed by the Trust's Board of Trustees (the "Board") upon at least 60 days' written notice to Fund shareholders.
Although the Fund will normally be as fully invested as practicable in equity securities, as secondary investment strategies and consistent with its investment objective, the Fund may to a lesser extent invest in warrants, rights to purchase common stocks, debt securities convertible into common stocks and preferred stocks. A portion of the Fund's assets may also be invested in investment grade fixed income securities, cash and money market securities. Investment grade fixed income securities either are debt securities rated in one of the four highest rating categories ("investment grade") by a nationally recognized statistical rating organization (an "NRSRO") or that the Fund's investment adviser, Haverford Financial Services, Inc. (the "Adviser") determines are of comparable quality. The Fund may also make limited use of equity index futures contracts for liquidity
purposes. In order to generate additional income, the Fund may lend securities that it owns as well as invest in repurchase agreements.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the Fund's permitted investments and investment practices and the associated risk factors. The Fund will only invest in any of the following instruments or engage in any of the following investment practices if such investment or activity is consistent with the Fund's investment objective and as permitted by its stated policies.
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks.
Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
o SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of smaller companies are often traded in the over- the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
AMERICAN DEPOSITARY RECEIPTS. American Depositary Receipts ("ADRs"), as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository" and may be sponsored or unsponsored. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer's home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. While the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts agree to distribute notices of shareholders meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequency is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
For purposes of the Fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depositary receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers.
Investments in the securities of foreign issuers may subject the Fund to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments, possible imposition of withholding taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition, foreign issuers are, generally speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States.
REAL ESTATE INVESTMENT TRUSTS. A real estate investment trust ("REIT") is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Internal Revenue Code. The Internal Revenue Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Internal Revenue Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders. Although the REIT structure originated in the U.S., a number of countries around the world have adopted, or are considering adopting, similar REIT and REIT-like structures.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which the Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Fund invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through the Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated
in the highest short-term rating category by an NRSRO, such as Standard & Poor's Ratings Service ("S&P") or Moody's Investors Services, Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie
Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the
two federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the "Senior Preferred Stock Purchase Agreement" or
"Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury announced
that it was amending the Agreement to allow the $200 billion cap on the U.S.
Treasury's funding commitment to increase as necessary to accommodate any
cumulative reduction in net worth through the end of 2012. The unlimited support
the U.S. Treasury extended to the two companies expired at the beginning of 2013
- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit
of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal
book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their non-matured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. It is the current policy of the Fund, not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by that Fund,
amounts to more than 15% of the Fund's total assets. The investments of the
Fund in repurchase agreements, at times, may be substantial when, in the view
of the Adviser, liquidity or other considerations so warrant.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering
of expenses, such that shareholders would indirectly bear a proportionate share
of the operating expenses of such investment companies, including advisory
fees, in addition to paying the Fund's expenses. Unless an exception is
available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i)
acquiring more than 3% of the voting shares of any one investment company, (ii)
investing more than 5% of its total assets in any one investment company, and
(iii) investing more than 10% of its total assets in all investment companies
combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund's Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to its Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. The Board has adopted procedures reasonably designed to
ensure that the foregoing criteria will be met. Loan agreements involve certain
risks in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Fund will reduce the risk that it will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission ("CFTC"). The Fund may use futures contracts and related options for bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. To the extent futures and/or options on futures are employed by the Fund, such use will be in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Fund, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Fund is not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When the Fund purchases or sells a futures contract, or sells an option thereon, the Fund is required to "cover" its position in order to limit leveraging and related risks. To cover its position, the Fund may segregate (and marked-to-market on a daily basis) cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund's outstanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the Fund arising from such investment activities.
The Fund may also cover its long position in a futures contract by purchasing a put option on the same futures contract with a strike price (I.E., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. The Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
The Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. The Fund may also cover its sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. The Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with the Fund's use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and options on futures. In addition, some strategies reduce the Fund's exposure to price fluctuations, while others tend to increase its market exposure.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board of Trustees. Despite such good faith efforts to determine fair value prices, the Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon its sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Trust's Board of Trustees, the Adviser determines the liquidity of the Fund's investments. In determining the liquidity of the Fund's investments, the Adviser may consider various factors, including: (1) the frequency and volume of trades and quotations; (2) the number of dealers and prospective purchasers in the marketplace; (3) dealer undertakings to make a market; and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not hold more than 15% of its net assets in illiquid securities.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the U.S. Securities Act of
1933, as amended (the "1933 Act") or an exemption from registration. As
consistent with the Fund's investment objectives, the Fund may invest in
Section 4(2) commercial paper. Section 4(2) commercial paper is issued in
reliance on an exemption from registration under Section 4(2) of the Act and is
generally sold to institutional investors who purchase for investment. Any
resale of such commercial paper must be in an exempt transaction, usually to an
institutional investor through the issuer or investment dealers who make a
market in such commercial paper. The Trust believes that Section 4(2)
commercial paper is liquid to the extent it meets the criteria established by
the Board of Trustees of the Trust. The Trust intends to treat such commercial
paper as liquid and not subject to the investment limitations applicable to
illiquid securities or restricted securities.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
In addition to the investment objective of the Fund, the following investment limitations are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy; or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
6. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
The following limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
The Fund may not:
1. Purchase securities of any issuer (except securities of other investment companies, securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of a Fund would be invested in the securities of such issuer; or acquire more than 10% of the outstanding voting securities of any one issuer. This restriction applies to 75% of a Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements involving such securities. For purposes of this limitation, (i) utility companies will be classified according to their services, for example, gas distribution, gas transmission, electric and telephone will each be considered a separate industry; and (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry.
3. Borrow money in an amount exceeding 33 1/3% of the value of its total assets, provided that, for purposes of this limitation, investment strategies that either obligate the Fund to purchase securities or require the Fund to segregate assets are not considered to be borrowing. Asset coverage of at least 300% is required for all borrowing, except where the Fund has borrowed money for temporary purposes in an amount not exceeding 5% of its total assets.
4. Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) lend its securities.
5. Purchase or sell real estate, real estate limited partnership interests, physical commodities or commodities contracts except that the Fund may purchase commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
6. Hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
Further,
7. The Fund shall invest at least 80% of its net assets plus the amount of any borrowings for investment purposes, under normal circumstances, in equity securities. This non-fundamental policy may be changed by the Fund's Board upon at least 60 days' notice to Fund shareholders.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
THE ADVISER
GENERAL. Haverford Financial Services, Inc. ("HFS" or the "Adviser"), a Pennsylvania Corporation located at Three Radnor Corporate Center, Suite 450, Radnor, PA 19087, is a professional investment management firm registered with the SEC under the Investment Adviser Act of 1940. The Adviser was established in 2003 and is an affiliate of The Haverford Trust Company ("Haverford Trust"). Haverford Trust was founded in 1979 and offers investment management, trust and estate services and private banking. As of December 31, 2012, the Adviser had approximately $256 million in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated May 28, 2004 (the "Advisory Agreement") with respect to the Fund. Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence generally in the performance of its duties hereunder or its reckless disregard of its obligation and duties under this Agreement.
After the initial two year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.60% of the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep the Fund's net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.00% of the Fund's average daily net assets until February 28, 2014. In addition, if at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the total annual Fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. For the fiscal years ended October 31, 2010, 2011, and 2012, the Fund paid the Adviser the following advisory fees:
---------------------------------------------------------------------------------------------------------------------
CONTRACTUAL FEES PAID FEES WAIVED BY ADVISER TOTAL FEES PAID (AFTER WAIVERS)(1)
---------------------------------------------------------------------------------------------------------------------
FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
---------------------------------------------------------------------------------------------------------------------
$208,767 $424,773 $562,610 $151,962 $1,212 $0 $56,805 $423,561 $562,610
---------------------------------------------------------------------------------------------------------------------
(1) During the fiscal year ended October 31, 2012, the Adviser recovered
previously waived or reimbursed fees of $74,590.
|
PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Haverford Trust Company compensates the Fund's portfolio managers for their management of the Fund. The portfolio managers' compensation consists of a salary. The portfolio managers' overall compensation is designed to be competitive with similar investment advisers and to compensate the portfolio managers for their contributions to the Adviser and its investment products. Compensation is not based upon Fund or account performance, but is based on quantitative and qualitative factors. These may include the Adviser's and its parent's profitability, investment ideas, teamwork, leadership and overall contributions.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act").
--------------------------------------------------------------------------------
DOLLAR RANGE OF
NAME FUND SHARES (1)
--------------------------------------------------------------------------------
Joseph J. McLaughlin, Jr. $100,001 - $500,000
--------------------------------------------------------------------------------
Binney H.C. Wietlisbach $100,001 - $500,000
--------------------------------------------------------------------------------
George W. Connell None
--------------------------------------------------------------------------------
Henry B. Smith $100,001 - $500,000
--------------------------------------------------------------------------------
John H. Donaldson $100,001 - $500,000
--------------------------------------------------------------------------------
David Brune $10,001 - $50,000
--------------------------------------------------------------------------------
Timothy A. Hoyle $10,001 - $50,000
--------------------------------------------------------------------------------
Jeffrey M. Bagley $10,001 - $50,000
--------------------------------------------------------------------------------
(1) Valuation date is October 31, 2012.
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OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of October 31, 2012.
-------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
-----------------------------------------------------------------------------
NUMBER NUMBER NUMBER
OF OF OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
-------------------------------------------------------------------------------------------------
Joseph J. 0 $0 0 $0 114 $384,711,180
McLaughlin, Jr.
Binney H.C. 0 $0 0 $0 351 $584,504,847
Wietlisbach
George W. Connell 0 $0 0 $0 7 $7,603,707
Henry B. Smith 0 $0 0 $0 16 $38,973,411
John H. Donaldson 0 $0 0 $0 3 $91,,449,748
David Brune 0 $0 0 $0 445 $720,278,592
Timothy A. Hoyle 0 $0 0 $0 3 $197,243,047
Jeffrey M. Bagley 0 $0 0 $0 191 $263,120,623
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CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby a portfolio manager could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Fund. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement
dated November 14, 1991, as amended and restated, November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $250 million
--------------------------------------------------------------------------------
0.10% $250 million - $500 million
--------------------------------------------------------------------------------
0.08% Over $500 million
--------------------------------------------------------------------------------
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The Fund is subject to a minimum annual fee of $100,000. Under the terms of the Administration Agreement, this minimum annual fee will increase by $75,000 per each additional portfolio, and $15,000 for each additional class. Due to this minimum, the annual administration fee the Fund pays will exceed the above percentages at low asset levels. For the fiscal years ended October 31, 2010, 2011, and 2012, the Fund paid the following administration fees:
--------------------------------------------------------------------------------
ADMINISTRATION FEES PAID
---------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
Haverford Quality Growth
Stock Fund $100,000 $100,000 $112,442
--------------------------------------------------------------------------------
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THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment
advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
U.S. Bank National Association, 800 Nicollett Mall, Minneapolis, Minnesota 55402-4302 (the "Custodian"), acts as the custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by Ernst & Young LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-today management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, Jr., an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Chief Trust and New Covenant Funds,
Executive Officer of President and Director of SEI
SEI Alpha Strategy Structured Credit Fund, L.P. Director
Portfolios, LP, June of SEI Global Master Fund plc, SEI
2007 to present. Global Assets Fund plc, SEI Global
President and Director Investments Fund plc, SEI
of SEI Opportunity Investments--Global Funds Services,
Fund, L.P. to 2010. Limited, SEI Investments Global,
Limited, SEI Investments (Europe)
Ltd., SEI Investments--Unit Trust
Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd. and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Administrator Trust, SEI Asset Allocation Trust, SEI
and the Distributor. Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
-------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Business Current Directorships: Trustee of The
(08/20/34) (since 2005) Consultant, Business Advisors' Inner Circle Fund II and
Projects Inc. since 1997. Bishop Street Funds; Director of
Oregon Transfer Co.
-------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Executive Current Directorships: Trustee of The
(08/17/44) (since 2008) Officer, Office of Advisors' Inner Circle Fund II and
Finance, Federal Home Bishop Street Funds. Director of
Loan Banks, from 1992 Federal Home Loan Bank of
to 2007. Pittsburgh and Manna, Inc. (non-
profit developer of affordable housing
for ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
-------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since January Advisors' Inner Circle Fund II and
2012. Director of Bishop Street Funds. Director of The
Endowments and Korea Fund, Inc.
Foundations, Morningstar
Investment Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010. Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
-------------------------------------------------------------------------------------------------------------
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-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson (since 2005) since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
-------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc. from 2008 Bishop Street Funds.
to 2010. Self-Employed
Legal and Financial
Services Consultant since
2003. Counsel (in-house)
for State Street Bank
from 1995 to 2003.
-------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment Management
Services, John Hancock
Financial Services
(subsidiary of Manulife
Financial), June 2003 to
June 2010.
-------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and US Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
-------------------------------------------------------------------------------------------------------------
|
-------------------------------------------------------------------------------------------------------------
POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
George J. Sullivan, Jr. Trustee Retired since January Current Directorships:
(11/13/42) (since 1999) 2012. Self-employed Trustee/Director of State Street
Lead Independent Consultant, Newfound Navigator Securities Lending Trust,
Trustee Consultants Inc., April The Advisors' Inner Circle Fund II,
1997 to December 2011. Bishop Street Funds, SEI Structured
Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
-------------------------------------------------------------------------------------------------------------
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and considering any significant
disputes between the Trust's management and the independent registered
public accounting firm that arose in connection with the preparation of
those financial statements; (vii) considering, in consultation with the
independent registered public accounting firm and the Trust's
senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
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PENSION OR RETIREMENT ESTIMATED ANNUAL
AGGREGATE BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME COMPENSATION OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
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INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
--------------------------------------------------------------------------------
NAME AND POSITION WITH PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
DATE OF BIRTH TRUST AND LENGTH
OF TERM
--------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
--------------------------------------------------------------------------------
Michael Lawson Treasurer, Director, SEI Investments, Fund
(10/08/60) Controller and Accounting since July 2005. Manager,
Chief Financial SEI Investments, Fund Accounting at
Officer SEI Investments AVP from April 1995
(since 2005) to February 1998 and November 1998
to July 2005.
--------------------------------------------------------------------------------
Russell Emery Chief Compliance Chief Compliance Officer of SEI Structured
(12/18/62) Officer (since Credit Fund, LP and SEI Alpha Strategy
2006) Portfolios, LP since June 2007. Chief Compliance
Officer of The Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Institutional Managed
Trust, SEI Asset Allocation Trust, SEI
Institutional International Trust, SEI Institutional
Investments Trust, SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust,
Adviser Managed Trust and New Covenant Funds.
Chief Compliance Officer of SEI Opportunity
Fund, L.P. until 2010. Director of Investment
Product Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February 2003.
--------------------------------------------------------------------------------
Timothy D. Vice President and General Counsel and Secretary of SIMC
Barto Assistant Secretary and the Administrator since 2004. Vice
(03/28/68) (since 1999) President of SIMC and the
Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant
Secretary of SIMC, the Administrator
and the Distributor, and Vice President
of the Distributor, from 1999 to 2003.
--------------------------------------------------------------------------------
Dianne M. Vice President Counsel at SEI Investments since 2010.
Sulzbach and Secretary Associate at Morgan, Lewis & Bockius
(07/18/77) (since 2011) LLP from 2006 to 2010. Associate at
Morrison & Foerster LLP from 2003 to
2006. Associate at Stradley Ronon
Stevens & Young LLP from 2002 to
2003.
--------------------------------------------------------------------------------
John Munch Vice President and Attorney, SEI Investments Company,
(05/07/71) Assistant Secretary since 2001. General Counsel SEI Investments
(since 2012) Distribution Co., since 2004.
--------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments
(8/24/80) (since 2009) since 2003.
AML Officer
(since 2011)
--------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net
assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of any Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as
administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC")
The Fund intends to qualify and elects to be treated as a RIC under Subchapter M of the Code. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. If the Fund qualifies as a RIC it will not be subject to federal income taxes on the net investment income and net realized capital gains that it timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, the Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership; (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund
prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX
Notwithstanding the Distribution Requirement described above, which only requires the Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, the Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of that year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Fund may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT
The Fund's dividends that are paid to its corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
The Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Fund receives qualified dividend income on the securities
it holds and the Fund designates the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (E.G., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that: (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from the Fund's assets before it calculates the net asset value)
with respect to such dividend; (ii) the Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder); (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property; or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions by the Fund of its net short-term
capital gains will be taxable as ordinary income. Distributions reported to
Fund shareholders as capital gain dividends shall be taxable as long-term
capital gains at a maximum rate of 20%, regardless of how long the shareholder
has owned the shares. Each Fund's shareholders will be notified annually by the
Fund as to the federal tax status of all distributions made by the Fund.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
FOREIGN TAXES. Dividends and interests received by the Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors.
TAX TREATMENT OF COMPLEX SECURITIES. The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period.
Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold, at a rate of 28%, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. A Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Funds generally serve to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011, and 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
--------------------------------------------------------------------------------
AGGREGATE DOLLAR AMOUNT
OF BROKERAGE COMMISSIONS PAID
--------------------------------------------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
Haverford Quality Growth
Stock Fund $28,944 $30,580 $40,414
--------------------------------------------------------------------------------
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Fund's Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by
the Adviser in connection with the Fund or any other specific client account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Fund paid no commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act, affiliated broker-dealers are permitted to receive and retain compensation for effecting portfolio transactions for the Fund on an exchange if a written contract is in effect between the affiliate and the Fund expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011, and 2012, the Fund did not pay brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. During the fiscal year ended October 31, 2012, the Fund held securities of its "regular brokers or dealers" as follows:
-------------------------------------------------------------------------------- NAME OF BROKER/DEALER TYPE OF SECURITY HELD DOLLAR AMOUNT AT FYE -------------------------------------------------------------------------------- JP Morgan Chase Equity $3,480 -------------------------------------------------------------------------------- |
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under Securities and Exchange Commission (the "SEC") rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Fund may invest since such contracts generally have remaining maturities of less than one-year. The Fund may at times hold
investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover. For the fiscal years ended October 31, 2011 and 2012, the Fund's portfolio turnover rates were as follows:
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PORTFOLIO TURNOVER RATES
---------------------------
FUND 2011 2012
--------------------------------------------------------------------------------
Haverford Quality Growth Stock Fund 17% 26%
--------------------------------------------------------------------------------
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, on the one hand, and include procedures to address conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund, its Adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person, either directly or through reports by the Fund's Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Fund will disclose a complete or summary schedule of investments (which includes the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. The Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q, and each Fund's complete schedule of investments following the second and fourth fiscal quarter is available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holding reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. Should the Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-866-301-7212. These reports are also available, free of charge, on the Adviser's website at www.haverfordfunds.com.
In addition, the Adviser's website also provides information about the Fund's ten largest portfolio holdings, as of the end of the most recent calendar month. This information is provided at the end of each calendar month generally within two days of the month end. The information on the Adviser's website is publicly available to all categories of persons.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in connection with their services to the Fund. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of the Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Fund believes that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Fund's policies and procedures provide that the Authorized Person may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Authorized Person must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Fund's shareholders and that to the extent conflicts between the interests of the Fund's shareholders and those of the Fund's
Adviser, principal underwriter, or any affiliated person of the Fund exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than within 10 days of each calendar quarter end to ratings agencies, consultants and other qualified financial professionals or individuals. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Fund requires any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Fund, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Fund's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that portfolio with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the portfolio. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that each Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-866-301-7212; and (ii) on the SEC's website at www.sec.gov.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Administrator and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1 (each a "Code of Ethics" and together the "Codes of Ethics"). These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, including securities that may be purchased or held by the Fund, but are required to report their personal securities transactions for monitoring purposes. In addition, certain Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Fund. The Trust believes that most of the shares referred to below were held by the persons below in accounts for their fiduciary, agency or custodial customers. Persons owning of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to control the Fund within the meaning of the 1940 Act. Shareholders controlling the Fund may have a significant impact on any shareholder vote of the Fund.
-------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- HTC & CO 7,462,114.8330 77.64 ATTN TRUST OPERATIONS DEPT 3 RADNOR CORP CTR STE 450 RADNOR, PA 19087-4580 -------------------------------------------------------------------------------- HTC & CO 654,077.3020 6.81 CASH DIV ACCOUNT ATTN TRUST OPERATIONS DEPT 3 RADNOR CORP CTR STE 450 RADNOR, PA 19087-4580 -------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative.
The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
HAVERFORD FINANCIAL SERVICES
PROXY VOTING POLICY - 2013
INTENTION OF THE PROXY VOTING POLICY
Haverford Financial Services (HFS) considers the power to vote on proposals presented to shareholders through the proxy solicitation process to be an integral part of an investment manager's responsibility. HFS recognizes that certain proposals, if implemented, may have a substantial impact on the market valuation of portfolio securities and that in such situations the right to vote is considered an asset. The Proxy Voting Policy is designed to ensure that:
1. Proxies for which HFS has ultimate voting authority are voted consistently and solely in the best economic interests of the beneficiaries of these equity investments, and not in the interests of HFS or any associated parties other than the clients.
2. Any real or perceived material conflicts that may arise between the interests of HFS or any of its associate parties and those of the clients are properly addressed and resolved.
THIRD PARTY PROXY VOTING SERVICES
To assist the company in voting proxies, HFS has retained Egan-Jones Proxy
Services ("Egan-Jones"). Egan-Jones is an independent adviser that specializes
in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to HFS by Egan-Jones
include in-depth research, voting recommendations (although HFS is not
obligated to follow such recommendations), vote execution, and record keeping.
Egan-Jones also assists HFS in its reporting and record keeping relating to
proxy voting.
PROXY VOTING GUIDELINES
HFS has adopted the following specific voting guidelines:
1. HFS will vote client proxies in line with the recommendations made byEgan-Jones, except in circumstances detailed in (2) of this section. Egan-Jones' recommendations focus on voting proxies in the best economic interest of shareholders, and as such align well with the goals of HFS' clients. Egan-Jones' specific proxy voting policies are available upon request.
2. HFS' Investment Committee reserves the right to vote a proxycontrary to Egan-Jones' recommendation with a majority vote. Issues that can trigger a review by the committee for the purpose of voting against Egan-Jones are (but are not limited to):
a. Mergers and acquisitions
b. Spin-offs, split-offs, or IPOs
c. Significant alterations of the capital structure of the
company
d. Other significant corporate actions
e. Employee compensation and benefits
3. Should and real or perceived material conflicts arise between the interests of HFS or any of its associated parties and those of its clients, HFS' Investment Committee forgoes its right to vote a proxy contrary to Egan-Jones's recommendation.
STATEMENT OF ADDITIONAL INFORMATION
ICM SMALL COMPANY PORTFOLIO
(TICKER SYMBOL: ICSCX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
INVESTMENT COUNSELORS OF MARYLAND, LLC
This Statement of Additional Information ("SAI") is not a prospectus. It is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the ICM Small Company Portfolio (the "Fund"). This SAI is incorporated by reference and should be read in conjunction with the Fund's prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund for the fiscal year ended October 31, 2012, including notes thereto and the report of PricewaterhouseCoopers LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Fund's 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9009 or by calling the Fund at 1-866-234-5426.
TABLE OF CONTENTS
THE TRUST .............................................................. S-1 DESCRIPTION OF PERMITTED INVESTMENTS ................................... S-1 INVESTMENT POLICIES OF THE FUND ........................................ S-28 THE ADVISER ............................................................ S-30 PORTFOLIO MANAGERS ..................................................... S-31 THE ADMINISTRATOR ...................................................... S-32 THE DISTRIBUTOR ........................................................ S-33 PAYMENTS TO FINANCIAL INTERMEDIARIES ................................... S-33 TRANSFER AGENT ......................................................... S-34 CUSTODIAN .............................................................. S-34 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .......................... S-34 LEGAL COUNSEL .......................................................... S-34 TRUSTEES AND OFFICERS OF THE TRUST ..................................... S-34 PURCHASING AND REDEEMING SHARES ........................................ S-44 DETERMINATION OF NET ASSET VALUE ....................................... S-44 TAXES .................................................................. S-45 BROKERAGE ALLOCATION AND OTHER PRACTICES ............................... S-49 PORTFOLIO HOLDINGS ..................................................... S-51 DESCRIPTION OF SHARES .................................................. S-52 SHAREHOLDER LIABILITY .................................................. S-53 LIMITATION OF TRUSTEES' LIABILITY ...................................... S-53 PROXY VOTING ........................................................... S-53 CODES OF ETHICS ........................................................ S-53 5% AND 25% SHAREHOLDERS ................................................ S-54 APPENDIX A -- DESCRIPTION OF RATINGS ................................... A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ..................... B-1 March 1, 2013 ICM-SX-001-1200 |
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end
investment management company established under Massachusetts law as a
Massachusetts voluntary association (commonly known as a business trust) under
a Declaration of Trust dated July 18, 1991, as amended and restated February
18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust
to offer separate series ("funds") of shares of beneficial interest ("shares").
The Trust reserves the right to create and issue shares of additional funds.
Each fund is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong solely to that
fund and would be subject to liabilities related thereto. The Fund pays its (i)
operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses, and (ii) pro rata
share of the Fund's other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the
assets of that fund. Expenses not attributable to a specific fund are allocated
across all of the funds on the basis of relative net assets. The other funds of
the Trust are described in one or more separate Statements of Additional
Information. The Trust is authorized to offer shares of the Fund in
Institutional Class Shares. The Trust reserves the right to create and issue
additional classes of shares.
HISTORY OF THE FUND. The ICM Small Company Portfolio is the successor to the UAM Funds, Inc. ICM Small Company Portfolio (the "Predecessor Fund"). The Predecessor Fund was managed by Investment Counselors of Maryland, LLC ("ICM" or the "Adviser") using the same investment objective, strategies, policies and restrictions as those of the Fund. The Predecessor Fund's date of inception was April 19, 1989. The Predecessor Fund dissolved and reorganized into the ICM Small Company Portfolio on June 24, 2002. Substantially, all of the assets of the Predecessor Fund were transferred to its successor in connection with the Fund's commencement of operations on June 24, 2002.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
WHAT INVESTMENT STRATEGIES MAY THE FUND USE?
The Fund's investment objectives and principal investment strategies are described in the prospectus. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below. The following information supplements, and should be read in conjunction with, the prospectus.
DEBT SECURITIES
Corporations and governments use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
U.S. GOVERNMENT SECURITIES -- The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and Freddie Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality, as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
CORPORATE BONDS - Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Adviser will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA") - GNMA is the principal governmental guarantor of mortgage-related securities. GNMA is a wholly-owned corporation of the U.S. government within the Department of Housing and Urban Development. Securities issued by GNMA are treasury securities, which means the full faith and credit of the U.S. government backs them. GNMA guarantees the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the market value or yield of mortgage-backed securities or the value of the Fund's shares. To buy GNMA securities, the Fund may have to pay a premium over the maturity value of the underlying mortgages, which the Fund may lose if prepayment occurs.
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") - FNMA is a government-sponsored corporation owned entirely by private stockholders. FNMA is regulated by the Secretary of Housing and Urban Development. FNMA purchases conventional mortgages from a list of approved sellers and service providers, including state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Securities issued by FNMA are agency securities, which means FNMA, but not the U.S. government, guarantees their timely payment of principal and interest.
FREDDIE MAC -- Freddie Mac is stockholder-owned corporation established by the U.S. Congress to create a continuous flow of funds to mortgage lenders. Freddie Mac supplies lenders with the money to make mortgages and packages the mortgages into marketable securities. The system is designed to create a stable mortgage credit system and reduce the rates paid by homebuyers. Freddie Mac, not the U.S. government, guarantees timely payment of principal and interest.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by GNMA, FNMA and Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES -- Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. The most significant differences of mortgage-backed securities are:
o payments of interest and principal are more frequent (usually monthly); and
o falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing the Fund to reinvest the money at a lower interest rate.
In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. If the prepayment rates increase, the Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Fund may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
SHORT-TERM INVESTMENTS - To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, the Fund may invest a portion of its assets in the short-term securities listed below, U.S. government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS - The Fund will only invest in a security issued by a commercial bank if the bank:
o has total assets of at least $1 billion, or the equivalent in other currencies (based on the most recent publicly available information about the bank); and
o is a U.S. bank and a member of the Federal Deposit Insurance Corporation; or
o is a foreign branch of a U.S. bank and the Adviser believes the security is of an investment quality comparable with other debt securities that the Fund may purchase.
TIME DEPOSITS - Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation. The Fund may only purchase time deposits maturing from two business days through seven calendar days.
CERTIFICATES OF DEPOSIT - Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or savings and loan association for a definite period of time and earning a specified return.
BANKERS' ACCEPTANCE - A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods).
COMMERCIAL PAPER - Commercial paper is a short-term obligation with a maturity ranging from 1 to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. The Fund may invest in commercial paper rated A-1 or A-2 by Standard and Poor's Ratings Services ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service ("Moody's"), or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A - Ratings" for a description of commercial paper ratings.
YANKEE BONDS - Yankee bonds are dollar-denominated bonds issued inside the United States by foreign entities. Investments in these securities involve certain risks that are not typically associated with investing in domestic securities. See "Foreign Securities."
ZERO COUPON BONDS - These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with the same maturity. The Fund's investments in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its Fund securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once the
holder of the security has stripped or separated corpus and coupons, it may
sell each component separately. The principal or corpus is then sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered securities which are owned ostensibly by the bearer or holder thereof), in trust on behalf of the owners thereof. Purchasers of stripped obligations acquire, in effect, discount obligations that are economically identical to the zero coupon securities that the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," the Fund may record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
TERMS TO UNDERSTAND:
MATURITY - Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security held by the mutual fund, with the maturity of each security weighted by the percentage of the assets of the mutual fund it represents.
DURATION - Duration is a calculation that seeks to measure the price sensitivity of a debt security, or of a mutual fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration. Effective duration takes into account call features and sinking fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES - The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding period and coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument, therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
o INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (i.e., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected,
resulting in prepayments on the securities. The Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of the Fund. If left unattended, drifts in the average maturity of the Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of the Fund.
o EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause the Fund's average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of the Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term treasury securities, such as three-month treasury bills, are considered "risk free." Corporate securities offer higher yields than treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." Since an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which effects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called investment-grade because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, the Adviser may determine that it is of investment-grade. The Adviser may retain securities that are downgraded, if it believes that keeping those securities is warranted.
Debt securities rated below investment-grade ("junk bonds") are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause the Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's assessment of the issuer's financial strength. The Fund currently uses ratings compiled by Moody's, S&P and Fitch Inc. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk.
The section "Appendix A - Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
The Adviser may use ratings produced by ratings agencies as guidelines to determine the rating of a security at the time the Fund buys it. A rating agency may change its credit ratings at any time. The Adviser monitors the rating of the security and will take such action, if any, it believes appropriate when it learns that a rating agency has reduced the security's rating. The Fund is not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded below the above-stated ratings.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, an underlying economic factor, such as an interest rate or a market benchmark, such as an index. Investors can use derivatives to gain exposure to various markets in a cost efficient manner, to reduce transaction costs, alter duration or to remain fully invested. They may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates. Investing in derivatives for these purposes is known as "hedging." When hedging is successful, the Fund will have offset any depreciation in the value of its Fund securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of the Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure. To the extent that the Fund engages in hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), a Fund must either operate within certain guidelines and restrictions with respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Fund, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Fund is not subject to registration or regulation as a CPO under the CEA. As a result, the Fund will operate within certain guidelines and restrictions with respect to its use of futures, options on such futures, commodity options and certain swaps.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading and regulated by the Commodity Futures Trading Commission ("CFTC"). These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC options"). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counterparty will not fulfill its obligations under the contract.
PURCHASING PUT AND CALL OPTIONS
When the Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). The Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. The Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, the Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When the Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when the Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. The Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an over-the-counter option by entering into an offsetting transaction with the counterparty to the option.
The Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, the Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, the Fund would hope to profit by closing out the put option at a lower price. If security prices fall, the Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive the Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. The Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, the Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Fund is permitted only to write covered options. At the time of selling the call option, the Fund may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, the Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
The Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. The Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. The Fund may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to the Fund.
o COMBINED POSITIONS
The Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, the Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, the Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount).
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC.
o Do not require an initial margin deposit.
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect the Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which the Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause the Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, the Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, the Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
To the extent that the Fund engages in foreign currency hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually
negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of the Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, if the counterparty's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. The Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counterparty is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Fund's gains or losses. In order to reduce the risk associated with leveraging, the Fund may cover its current obligations under swap agreements according to guidelines established by the U.S. Securities and Exchange Commission ("SEC"). If the Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If the Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a stock, stock index or basket of stocks in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to stocks making up the index of securities without actually purchasing those stocks. Equity index swaps involve not only the risk associated with investment in the securities represented in the index, but also the risk that the performance of such securities, including dividends, will not exceed the return on the interest rate that the Fund will be committed to pay.
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, the Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if the Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, the Fund may have to pay more money than it receives. Similarly, if the Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, the Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. The Fund may enter into a
currency swap when it has one currency and desires a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance of the Fund than if it had not entered into any derivatives transactions. Derivatives may magnify the Fund's gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose the Fund to greater risks.
CORRELATION OF PRICES - The Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities the Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if the Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, the Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of the Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect the Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of the Fund's foreign-denominated investments
changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of the Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, the Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, the Fund may close out a futures contract only on the exchange the contract was initially traded. Although the Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, the Fund may not be able to close out its position. In an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, the Fund may lose money by investing in derivatives. For example, if the Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if the Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into the Fund. If the Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to the Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. The Fund may lose its margin deposits if a broker with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (i.e., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Fund may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
EQUITY SECURITIES
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the U.S. on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
COMMON STOCKS - Common stocks represent units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are described below, dividends on common stocks are not fixed but are declared at the discretion of the company's board of directors.
PREFERRED STOCKS - Preferred stocks are also units of ownership in a company. Preferred stocks normally have preference over common stock in the payment of dividends and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market values of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk.
CONVERTIBLE SECURITIES - Convertible securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of the issuer's common stock at the Fund's option during a specified time period (such as convertible preferred stocks, convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same corporation. In general, the market value of a convertible security is at least the higher of its "investment value" (i.e., its value as a fixed income security) or its "conversion value" (i.e., its value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times of steady interest rates than other types of debt securities. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics, and
other factors. Because the Fund will create synthetic convertible positions only out of high grade fixed income securities, the credit rating associated with the Fund's synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing "time value" as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss, the market price of the option component generally reflects these differences in maturities, and the Adviser takes such differences into account when evaluating such positions. When a synthetic convertible position "matures" because of the expiration of the associated option, the Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If the Fund does not so extend the maturity of a position, it may continue to hold the associated fixed income security.
REAL ESTATE INVESTMENT TRUSTS ("REITS") - A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Code. The Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which the Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Portfolio invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through the Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee,
the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
RIGHTS AND WARRANTS - A right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life, usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
RISKS OF INVESTING IN EQUITY SECURITIES:
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
SMALL AND MEDIUM-SIZED COMPANIES - Investors in small and medium-sized companies typically take on greater risk and price volatility than they would by investing in larger, more established companies. This increased risk may be due to the greater business risks of their small or medium size, limited markets and financial resources, narrow product lines and frequent lack of management depth. The securities of small and medium-sized companies are often traded in the over-the-counter market and might not be traded in volumes typical of securities traded on a national securities exchange. Thus, the securities of small and medium capitalization companies are likely to be less liquid, and subject to more abrupt or erratic market movements, than securities of larger, more established companies.
TECHNOLOGY COMPANIES - Stocks of technology companies have tended to be subject to greater volatility than securities of companies that are not dependent upon or associated with technological issues. Technology companies operate in various industries. Since these industries frequently share common characteristics, an event or issue
affecting one industry may significantly influence other, related industries. For example, technology companies may be strongly affected by worldwide scientific or technological developments and their products and services may be subject to governmental regulation or adversely affected by governmental policies.
INITIAL PUBLIC OFFERINGS ("IPOS") - The Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on the Fund with a small asset base. The impact of IPOs on the Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to the Fund for investing, particularly as the Fund's asset base grows. Because IPO shares frequently are volatile in price, the Fund may hold IPO shares for a very short period of time. This may increase the turnover of the Fund's portfolio and may lead to increased expenses for the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The Fund's investment in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which presents risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product lines.
MASTER LIMITED PARTNERSHIPS ("MLPS"). MLPs are limited partnerships or limited liability companies, whose partnership units or limited liability interests are listed and traded on a U.S. securities exchange, and are treated as publicly traded partnerships for federal income tax purposes. To qualify to be treated as a partnership for tax purposes, an MLP must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Internal Revenue Code of 1986, as amended (the "Code"). These qualifying sources include activities such as the exploration, development, mining, production, processing, refining, transportation, storage and marketing of mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. MLPs that are formed as limited liability companies generally have two analogous classes of owners, the managing member and the members. For purposes of this section, references to general partners also apply to managing members and references to limited partners also apply to members. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an equity interest of as much as 2% in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the MLP through ownership of common units and have a limited role in the MLP's operations and management.
MLPs are typically structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount ("minimum quarterly distributions" or "MQD"). Common and general partner interests also accrue arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the
partnership's cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such results benefit all security holders of the MLP.
General partner interests of MLPs are typically retained by an MLP's original sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and investors such as us. A holder of general partner interests can be liable under certain circumstances for amounts greater than the amount of the holder's investment in the general partner interest. General partner interests often confer direct board participation rights and in many cases, operating control, over the MLP. These interests themselves are not publicly traded, although they may be owned by publicly traded entities. General partner interests receive cash distributions, typically 2% of the MLP's aggregate cash distributions, which are contractually defined in the partnership agreement. In addition, holders of general partner interests typically hold incentive distribution rights ("IDRs"), which provide them with a larger share of the aggregate MLP cash distributions as the distributions to limited partner unit holders are increased to prescribed levels. General partner interests generally cannot be converted into common units. The general partner interest can be redeemed by the MLP if the MLP unitholders choose to remove the general partner, typically with a supermajority vote by limited partner unitholders.
FOREIGN SECURITIES
TYPES OF FOREIGN SECURITIES:
Foreign securities are debt and equity securities that are traded in markets outside of the U.S. The markets in which these securities are located can be developed or emerging. The Fund can invest in foreign securities in a number of ways:
o The Fund can invest directly in foreign securities denominated in a foreign currency;
o The Fund can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o The Fund can invest in investment funds.
AMERICAN DEPOSITARY RECEIPTS ("ADRS") -- ADRs, as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The
depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
The Fund may invest up to 20% of its total assets in ADRs. ADRs are certificates evidencing ownership of shares of a foreign issuer that are issued by depositary banks and generally trade on an established market, in the United States or elsewhere. Although ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies, they continue to be subject to many of the risks associated with investing directly in foreign securities.
Foreign securities, especially those of companies in emerging markets, can be riskier and more volatile than domestic securities. Adverse political and economic developments or changes in the value of foreign currency can make it harder for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties obtaining information about foreign companies can negatively affect investment decisions.
EMERGING MARKETS - An "emerging country" is generally a country that the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS - Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If the Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS - Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict control foreign investments in its securities markets. These restrictions could limit the Fund's ability to invest in a particular country or make it very expensive for the Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION - There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign companies more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Adviser anticipates that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards.
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis.
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States.
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated.
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights.
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK - While the Fund denominates its net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U. S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter- bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES - Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for the Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Fund receives from its investments. The Fund does not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS - Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
EXCHANGE-TRADED FUNDS ("ETFS")
The Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their
operation, such as advisory and custody fees. When the Fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, the Fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
INVESTMENT COMPANY SHARES
The Fund may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Fund. The Fund's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying the Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with financial institutions. A
repurchase agreement is an agreement under which a fund acquires a fixed income
security (generally a security issued by the U.S. government or an agency
thereof, a banker's acceptance, or a certificate of deposit) from a commercial
bank, broker, or dealer, and simultaneously agrees to resell such security to
the seller at an agreed upon price and date (normally, the next business day).
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement may be considered a loan that is
collateralized by the security purchased. The acquisition of a repurchase
agreement may be deemed to be an acquisition of the underlying securities as
long as the obligation of the seller to repurchase the securities is
collateralized fully. The Fund follows certain procedures designed to minimize
the risks inherent in such agreements. These procedures include effecting
repurchase transactions only with creditworthy financial institutions whose
condition will be continually monitored by the Adviser. The repurchase
agreements entered into by the Fund will provide that the underlying collateral
at all times shall have a value at least equal to 102% of the resale price
stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase
were less than the repurchase price, the Fund could suffer a loss. It is the current policy of the Fund, not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by that Fund, amounts to more than 15% of the Fund's total assets. The investments of the Fund in repurchase agreements, at times, may be substantial when, in the view of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS.
Reverse repurchase agreements are transactions in which a Fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a Fund. At the time a Fund enters into a reverse repurchase agreement, it will earmark on the books of the Fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by a Fund may increase the Fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to a Fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a Fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the Fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
RESTRICTED AND ILLIQUID SECURITIES.
While the Fund does not anticipate doing so, it may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of the Fund's net assets invested in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that can not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
SECURITIES LENDING
The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund's Board of Trustees. These loans, if and when
made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. The Board has adopted procedures reasonably designed to
ensure that the foregoing criteria will be met. Loan agreements involve certain
risks in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
SHORT SALES
DESCRIPTION OF SHORT SALES:
Selling a security short is when an investor sells a security it does not own. To sell a security short an investor must borrow the security from someone else to deliver to the buyer. The investor then replaces the security it borrowed by purchasing it at the market price at or before the time of replacement. Until it replaces the security, the investor repays the person that lent it the security for any interest or dividends that may have accrued during the period of the loan.
Investors typically sell securities short to:
o Take advantage of an anticipated decline in prices.
o Protect a profit in a security it already owns.
The Fund can lose money if the price of the security it sold short increases between the date of the short sale and the date on which the Fund replaces the borrowed security. Likewise, the Fund can profit if the price of the security declines between those dates. Because the market price of the security sold short could increase without limit, the Fund could also be subject to a theoretically unlimited loss.
To borrow the security, the Fund may be required to pay a premium, which would increase the cost of the security sold. The Fund will also incur transaction costs in effecting short sales. The Fund's gains and losses will be decreased or increased, as the case may be, by the amount of the premium, dividends, interest, or expenses the Fund may be required to pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent necessary to meet margin requirements, until the short position is closed out.
SHORT SALES AGAINST THE BOX - In addition, the Fund may engage in short sales "against the box." In a short sale against the box, the Fund agrees to sell at a future date a security that it either currently owns or has the right to acquire at no extra cost. The Fund will incur transaction costs to open, maintain and close short sales against the box. For tax purposes, a short sale against the box may be taxable event to the Fund.
RESTRICTIONS ON SHORT SALES:
The Fund will not short sell a security if:
o After giving effect to such short sale, the total market value of all securities sold short would exceed 25% of the value of the Fund's net assets.
o The market value of the securities of any single issuer that have been sold short by the Fund would exceed two percent (2%) of the value of the Fund's net assets.
o Any security sold short would constitute more than two percent (2%) of any class of the issuer's securities.
Whenever the Fund sells a security short, the Fund segregates an amount of cash or liquid securities equal to the difference between (a) the current market value of the securities sold short and (b) any cash or U.S. government securities the Fund is required to deposit with the broker in connection with the short sale (not including the proceeds from the short sale). The segregated assets are marked to market daily in an attempt to ensure that the amount deposited in the segregated account plus the amount deposited with the broker is at least equal to the current market value of the securities.
WHEN ISSUED, DELAYED -- DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities the Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. The Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
The Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When the Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, the Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because the Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. The Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments.
INVESTMENT POLICIES OF THE FUND
FUNDAMENTAL POLICIES
The following investment policies are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less. Unless otherwise noted, the Fund will determine compliance with the investment limitation percentages below (with the exception of a limitation relating to borrowing and illiquid securities) and other applicable investment requirements immediately after and as a result of its acquisition of such security or other asset. Accordingly, the Fund generally will not consider changes in values, net assets or other circumstances when determining whether the investment complies with its investment limitations. The Fund will not:
o Make any investment inconsistent with its classification as a diversified series of an open-end investment company under the 1940 Act. This restriction does not, however, apply when the Fund is classified as a non- diversified series of an open-end investment company under the 1940 Act.
o Borrow money, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in the Fund's prospectus and SAI as they may be amended from time to time.
o Issue senior securities, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction.
o Underwrite securities of other issuers, except insofar as the Fund may technically be deemed to be an underwriter under the 1933 Act in connection with the purchase or sale of its portfolio securities.
o Concentrate its investments in the securities of one or more issuers conducting their principal business activities in the same industry (other than securities issued or guaranteed by the U.S. government or its agencies or instrumentalities).
o Purchase or sell real estate, except (1) to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction, (2) that the Fund may invest in securities of issuers that deal or invest in real estate and (3) that the Fund may purchase securities secured by real estate or interests therein.
o Purchase or sell commodities or contracts on commodities except that the Fund may engage in financial futures contracts and related options and currency contracts and related options and may otherwise do so in accordance with applicable law and without registering as a commodity pool operator under the Commodity Exchange Act.
o Make loans to other persons, except that the Fund may lend its portfolio securities in accordance with applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in the Fund's prospectus and SAI as they may be amended from time to time. The acquisition of investment securities or other investment instruments shall not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
In addition to the investment objective of the Fund, the following investment limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval.
The Fund may:
o not purchase securities of any issuer (except securities of other
investment companies, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements
involving such securities) if, as a result, more than 5% of the total
assets of a Fund would be invested in the securities of such issuer; or
(ii) acquire more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets.
o not borrow money, except that (1) the Fund may borrow from banks (as defined in the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33 1/3 % of its total assets (including the amount borrowed), (2) the Fund may borrow up to an additional 5% of its total assets for temporary purposes, (3) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, and (4) the Fund may purchase securities on margin and engage in short sales to the extent permitted by applicable law.
Notwithstanding the investment restrictions above, the Fund may not borrow amounts in excess of 33(1)/3 % of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. The Fund will not purchase securities while borrowings are outstanding except to exercise prior commitments and to exercise subscription rights.
o purchase and sell currencies or securities on a when-issued, delayed delivery or forward-commitment basis.
o purchase and sell foreign currency, purchase options on foreign currency and foreign currency exchange contracts.
o invest in the securities of foreign issuers.
o purchase shares of other investment companies to the extent permitted by applicable law. The Fund may, notwithstanding any fundamental policy or other limitation, invest all of its investable assets in securities of a single open-end management investment company with substantially the same investment objectives, policies and limitations.
The 1940 Act currently permits the Fund to invest up to 10% of its total assets in the securities of other investment companies. However, the Fund may not invest more than 5% of its total assets in the securities of any one investment company or acquire more than 3% of the outstanding securities of any one investment company, unless permissible under the 1940 Act and the rules and promulgations thereunder.
o invest in illiquid and restricted securities to the extent permitted by applicable law.
The Fund intends to follow the policies of the SEC as they are adopted from time to time with respect to illiquid securities, including (1) treating as illiquid securities that may not be disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued the investment on its books; and (2) limiting its holdings of such securities to 15% of net assets.
o write covered call options and may buy and sell put and call options.
o enter into repurchase agreements.
o lend portfolio securities to registered broker-dealers or other institutional shareholders. These loans may not exceed 33 1/3 % of the Fund's total assets taken at market value. In addition, the Fund must receive at least 100% collateral.
o sell securities short and engage in short sales "against the box."
o enter into swap transactions.
Further, the Fund may not change its investment strategy to invest at least 80% of its net assets, plus any borrowings for investment purposes, in companies with small market capitalizations at the time of initial purchase, without 60 days' prior written notice to shareholders.
THE ADVISER
INVESTMENT ADVISER. Investment Counselors of Maryland, LLC, a Delaware limited liability company located at 803 Cathedral Street, Baltimore, Maryland 21201, serves as the Fund's investment adviser. The Adviser manages and supervises the investment of the Fund's assets on a discretionary basis. As of December 31, 2012, the Adviser had approximately $2.1 billion in assets under management. The Adviser and its predecessor, Investment Counselors of Maryland, Inc. (the "Former Adviser"), have provided investment management services to corporations, foundations, endowments, pensions and profit sharing plans, trusts, estates and other institutions and individuals since 1972. The Adviser is owned in part by the Former Adviser and ICM Management LLC, a company wholly-owned by seven officers of the Adviser. Old Mutual (US) Holdings Inc. ("Old Mutual US") through its ownership of the Former Adviser retains an ownership interest in the Adviser.
Old Mutual US is a holding company incorporated in Delaware in December 1980 (under the name United Asset Management Corporation) for the purpose of acquiring and owning firms engaged primarily in institutional investment management. In September 2000, Old Mutual plc purchased all of the shares of United Asset Management Corporation. Subsequently, the name of the United Asset Management Corporation was changed to Old Mutual (US) Holdings Inc. Currently, Old Mutual US has a number of affiliates who are SEC registered investment advisers. The affiliated firms provide investment management services to private accounts, mutual funds and other institutional and sophisticated investors. Investment strategies employed and securities selected by affiliated firms are separately chosen by each of them. Several affiliated firms also act as investment advisers to separate series or funds in the Trust. Old Mutual US is a subsidiary of OM Group (UK) Limited which is a subsidiary of Old Mutual plc, a financial services company based in the United Kingdom.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated June 24, 2002, as amended (the "Advisory Agreement") with respect to the Fund. Under the Advisory Agreement, the Adviser serves as investment adviser and makes the investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder or its reckless disregard of its obligation and duties thereunder. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.70% of the average daily net assets of the Fund. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Adviser the following advisory fees:
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FEES PAID
-----------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
ICM Small Company Portfolio $9,243,973 $10,021,414 $8,334,316
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|
PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Fund is managed by a team of portfolio managers who are each responsible for researching investment opportunities for the Fund. Each team member also manages separately managed accounts that share the same investment objective as the Fund and are managed in tandem with the Fund.
Each team member receives an annual salary and discretionary cash bonus from the Adviser. The portfolio managers' compensation is not linked to the Fund's or separate accounts' performance. Instead, bonuses are determined based on the Adviser's overall profitability, which may relate to the Fund and/or separate accounts' asset levels, as well as other factors. These factors may include a team member's investment ideas and strategies, and overall contribution to the success of the Adviser and its investment products. In addition to salary and bonuses, five of the Fund's team members (portfolio managers Heaphy, Wooten, Merwitz and Jacapraro, and analyst Matthew Fleming), are members of ICM Management LLC, which owns a portion of the Adviser. Through these interests, Mssrs. Heaphy, Wooten, Merwitz, Jacapraro and Fleming also receive a 1/7 interest of the Adviser's income distributions to ICM Management LLC.
FUND SHARES OWNED BY THE PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES(1) -------------------------------------------------------------------------------- William V. Heaphy $500,001 - $1,000,000 -------------------------------------------------------------------------------- Simeon F. Wooten, III $100,001 - $500,000 -------------------------------------------------------------------------------- Gary J. Merwitz $10,001 - $50,000 -------------------------------------------------------------------------------- Robert F. Jacapraro $50,001 - $100,000 -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
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TOTAL
NUMBER OF TOTAL ASSETS NUMBER OF ASSETS NUMBER OF TOTAL ASSETS
NAME ACCOUNTS (MILLIONS) ACCOUNTS (MILLIONS) ACCOUNTS(*) (MILLION)
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William V. 0 $0 0 $0 6 $739
Heaphy
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Simeon F. 0 $0 0 $0 6 $739
Wooten, III
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Robert F. 0 $0 0 $0 6 $739
Jacapraro
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Gary J. Merwitz 0 $0 0 $0 6 $739
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|
* Includes 1 account with assets under management of $506 million that is subject to a performance-based advisory fee.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts include separately managed small cap portfolios (the "Small Cap
Portfolios"). The Small Cap Portfolios have the same investment objective as the Fund and are managed in tandem with the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio managers could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Fund. In addition, it is also possible that a potential conflict of interest may arise because the portfolio managers manage an account with a performance-based management fee in addition to the Fund and other accounts without a performance-based fee. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. The Portfolio and the Administrator are parties to an Administration Agreement under which the Administrator provides management and administrative services for an annual fee equal to the higher of $125,000 for one portfolio, $245,000 for two portfolios, plus $75,000 per additional portfolio, plus $15,000 per additional class or:
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FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.10% First $250 million
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0.08% $250 million - $500 million
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0.07% $500 million - $750 million
--------------------------------------------------------------------------------
0.04% Over $750 million
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|
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following administration fees:
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ADMINISTRATION FEES PAID
---------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
ICM Small Company Portfolio $853,229 $897,644 $801,395
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|
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
CUSTODIAN
Union Bank of California, National Association, 475 Sansome Street, 15th Floor, San Francisco, California 94111 (the "Custodian"), serves as the custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
For the fiscal year ending October 31, 2013, Deloitte & Touche LLP serves as the
independent registered public accounting firm for the Fund.
PricewaterhouseCoopers LLP, previously served as independent registered public
accounting firm for the Fund. The financial statements and notes thereto
incorporated by reference have been audited by PricewaterhouseCoopers LLP, as
indicated in their report with respect thereto, and are incorporated by
reference hereto in reliance upon the authority of said firm as experts in
giving said reports.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-today management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the
chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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INTERESTED TRUSTEES
-----------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of
(08/17/46) Board of Trustees(1) present; currently The Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited,
SEI Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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William M. Trustee(1) Self-Employed Current Directorships: Trustee of
Doran (since 1991) Consultant since 2003. The Advisors' Inner Circle Fund II,
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S-36
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------
(05/26/40) Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust,
Administrator and the SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
Management (UK) Limited. Director
of the Distributor since 2003.
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INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------------------------
Charles E. Trustee Self-Employed Current Directorships: Trustee of
Carlbom (since 2005) Business Consultant, The Advisors' Inner Circle Fund II
(08/20/34) Business Projects Inc., and Bishop Street Funds. Director of
since 1997. Oregon Transfer Co.
-----------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of
(08/17/44) (since 2008) Executive Officer, The Advisors' Inner Circle Fund II
Office of Finance, and Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
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Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of
Jr. (since 2011) Consultant since The Advisors' Inner Circle Fund II
(05/28/52) January 2012. Director and Bishop Street Funds. Director of
of Endowments and The Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
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S-37
|
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
-----------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Current Directorships: Trustee of
Johnson (since 2005) Investor since 1994. The Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
-----------------------------------------------------------------------------------------------------------
Betty L. Trustee Vice President, Current Directorships: Trustee of
Krikorian (since 2005) Compliance, AARP The Advisors' Inner Circle Fund II
(01/23/43) Financial Inc., from and Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
-----------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of
(02/12/56) (since 2011) Allocation, Manulife The Advisors' Inner Circle Fund II
Asset Management and Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010
to May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock
Financial Services
(subsidiary of Manulife
Financial), June 2003
to June 2010.
-----------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
-----------------------------------------------------------------------------------------------------------
S-38
|
-----------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
-----------------------------------------------------------------------------------------------------------
George J. Trustee Retired since January Current Directorships: Trustee/
Sullivan, Jr. (since 1999) 2012. Self-employed Director of State Street Navigator
(11/13/42) Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II,
1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
-----------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's independent registered public accounting firm and whether to terminate this
relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence; (iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities; (iv) serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
--------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
SpecA(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
----------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
----------------------------------------------------------------------------------------------------
Michael President Director of Client Service, SEI Investments
Beattie (since 2011) Company, since 2004.
(03/13/65)
----------------------------------------------------------------------------------------------------
Michael Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Lawson Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) (since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
----------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed Trust
and New Covenant Funds. Chief Compliance
Officer of SEI Opportunity Fund, L.P. until
2010. Director of Investment Product
Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February
2003.
----------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(03/28/68) (since 1999) SIMC and the Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from
1999 to 2003.
----------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
(07/18/77) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
----------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
----------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
----------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all of the funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the
Administrator, market prices for most securities held by the Fund are provided
daily by third-party independent pricing agents that are approved by the Board.
The valuations provided by third-party independent pricing agents are reviewed
daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elects to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. If the Fund qualifies as a RIC it will not be subject to federal income taxes on the net investment income and net realized capital gains that it distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, the Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in qualified publicly traded partnerships ("Qualifying Income Test"); (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships ("Asset Diversification Test").
If the Fund fails to satisfy the Qualifying Income or Asset Diversification Tests in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from
the lower tax rates available to qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
The Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires the Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, the Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of that year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Fund may, in certain circumstances, be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. The Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to individuals of 20% (lower rates apply to individuals in lower income brackets) to the extent that the Fund receives qualified dividend income on the securities it holds and the Fund designates the distribution as qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (e.g., foreign corporations incorporated in a possession of the United States or in certain countries with a comprehensive tax treaty with the United States, or the stock of which is readily tradable on an established securities market in the United States). A dividend will not be treated as qualified dividend income to the extent that (i) the shareholder has not held the shares on which the dividend was paid for more than 60 days during the 121-day period that begins on the date that is 60 days before the date on which the shares become "ex-dividend" (which is the day on which declared distributions (dividends or capital gains) are deducted from the Fund's assets before it calculates the net asset value) with respect to such dividend (and the Fund also satisfies those holding period requirements with respect to the securities it holds that paid the dividends distributed to the shareholder), (ii) the shareholder is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to substantially similar or related property, or (iii) the shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions by the Fund of its net short-term capital gains will be taxable as ordinary income. Distributions reported to Fund shareholders as capital gain dividends shall be taxable as long-term capital gains at a maximum rate of 20%, regardless of how long the shareholder has owned the shares.
The Fund will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Fund.
The Fund's dividends that are paid to its corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be re-characterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a new 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
FOREIGN TAXES. Dividends and interests received by a Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors.
TAX TREATMENT OF COMPLEX SECURITIES. The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund intends to distribute all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold at a rate of 28%, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF
BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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ICM Small Company Portfolio $1,851,935 $2,117,567 $1,096,752
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.
To the extent that research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Fund paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR AMOUNT OF TRANSACTIONS
TOTAL DOLLAR AMOUNT OF BROKERAGE INVOLVING BROKERAGE COMMISSIONS FOR
FUND COMMISSIONS FOR RESEARCH SERVICES RESEARCH SERVICES
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ICM Small Company Portfolio $826,128 $375,938,066
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BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that it held during its most recent fiscal year. As of October 31, 2012, the Fund did not hold any securities of regular brokers and dealers.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. The Fund may at times hold investments in short-term instruments, which are excluded for purposes of computing portfolio turnover. For the Fund's two most recently completed fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for the Fund were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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ICM Small Company Portfolio 30% 19%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund, its Adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Fund's Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Fund discloses a complete or summary schedule of investments (which includes the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. The Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q and the Fund's complete schedule of investments following the 2nd and 4th fiscal quarters, is available in the Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed
to Fund shareholders but are available, free of charge, on the EDGAR database
on the SEC's website at www.sec.gov. Should the Fund include only a Summary
Schedule rather than a complete schedule of investments in its Semi-Annual and
Annual Reports, its Form N-CSR will be available without charge, upon request,
by calling 1-866-234-5426. These reports are also available, free of charge, on
the ICM Portfolio's website at www.icomd.com. In addition, the Fund generally
publishes a complete list of its portfolio holdings on a monthly basis, as of
the end of the previous month. For example, the Fund's investments as of the
end of January would ordinarily be published at the end of February. The Fund
also publishes a list of its ten largest portfolio holdings, and the percentage
of the Fund's assets that each of these holdings represents, on a monthly
basis, ten (10) days after the end of the month. The portfolio information
described above can be found on the internet at http://aicfundholdings.com/icm.
This information will generally remain available until it is replaced by new
portfolio holdings information as described above. The Adviser may exclude any
portion of the Fund's portfolio holdings from publication when deemed to be in
the best interest of the Fund.
Certain portfolio holdings information for the Fund is available on the Fund's website - www.icomd.com - by clicking on the "ICM Small Company Portfolio" section of the homepage. A complete list of portfolio holdings for the Fund as of the end of the most recently completed calendar quarter is found under the "Quarterly Reports" section. The portfolio holdings information available on the Fund's website includes an alphabetical list of the securities owned by the Fund, but does not include the percentage of the Fund's overall portfolio represented by a particular security. The portfolio holdings information on the Fund's website is generally made available within fifteen days after the close of the most recently completed calendar quarter and will remain available until the information is updated following the close of the next quarter.
The Adviser's website also provides information about the Fund's complete portfolio holdings, including some or all of the following: security description, ticker, security identification number, price per share, par value, and interest rate updated as of the end of the most recent calendar quarter (i.e., each March 31, June 30, September 30, and December 31). This information on the website is provided within 15 days of the end of each calendar quarter. The information on the Adviser's website is publicly available to all categories of persons.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the Custodian, Administrator or Transfer Agent, in connection with their services to the Fund.
The Fund's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipients of the Fund's portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration
received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-866-234-5426; and (ii) on the SEC's website at http://www.sec.gov.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, INCLUDING SECURITIES THAT MAY BE PURCHASED OR HELD BY THE FUND, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Fund. The Fund believes that most of the shares referred to below were held by the persons listed below in accounts for their fiduciary, agency or custodial customers. Any shareholder listed below as owning of record or beneficially 25% or more of the outstanding shares of the Fund may be presumed to "control" (as that term is defined in the 1940 Act) the Fund. Shareholders controlling the Fund could have the ability to vote a majority of the shares of the Fund on any matter requiring the approval of Fund shareholders.
-------------------------------------------------------------------------------- ICM SMALL COMPANY PORTFOLIO -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- National Financial Services LLC 9,239,969.5760 21.88% For the Exclusive Benefit of our Customers 200 Liberty St Mutual Fund Dept 5th Floor New York, NY 10281-1003 -------------------------------------------------------------------------------- Charles Schwab & Co Inc. 6,528,080.2320 15.46% Special Custody Reinvest Account For the Exclusive Benefit of Customers 101 Montgomery St San Francisco, CA 94104-4151 -------------------------------------------------------------------------------- JP Morgan Chase As Trustee FBO 3,441,332.4510 8.15% Southwest Airlines Co. 401(k) Plan 11500 Outlook St Overland Park, KS 66211-1804 -------------------------------------------------------------------------------- Major League Baseball Players 2,328,481.3050 5.51% Benefit Plan c/o Investment Counselors of Maryland Attn William Collins 200 Newport Avenue Ext Quincy, MA 02171-2102 -------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater then in the "aaa" and "aa" classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each rating classification: the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DEBT RATINGS - TAXABLE DEBT & DEPOSITS GLOBALLY
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the
country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
SHORT-TERM RATINGS
SHORT-TERM PRIME RATING SYSTEM - TAXABLE DEBT & DEPOSITS GLOBALLY
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institution) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
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following characteristics:
o Leading market positions in well-established industries.
o Conservative capitalization structure with moderate reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
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NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S RATING SERVICES
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. Accordingly, in the case of junior debt, the rating may not conform exactly to the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, CCC, CC AND C
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial , or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to non-payment.
C A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preffered stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking or a similar action if payments on an obligation are jeopardised.
N.R. This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant speculative characteristics. Ratings of 'B-1', 'B-2', and 'B-3' may be assigned to indicate finer distinctions within the 'B' category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term obligation rated 'B-1' is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation rated 'B-2' is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated 'B-3' is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C A short-term obligation rated 'C' is currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardised.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
FITCH INC. RATINGS
INTERNATIONAL LONG-TERM CREDIT RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings:
INVESTMENT GRADE
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. 'A' ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category
SPECULATIVE GRADE
BB: Speculative.
'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative.
o For issuers and performing obligations, 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
o For individual obligations, may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of 'R1' (outstanding).
CCC: For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. o For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of 'R2' (superior), or 'R3' (good) or 'R4' (average).
CC: For issuers and performing obligations, default of some kind appears probable.
o For individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of 'R4' (average) or 'R5' (below average).
Grade C: For issuers and performing obligations, default is imminent.
o For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor recoveries. Such obligations would possess a Recovery Rating of 'R6' (poor).
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated 'D' upon a default. Defaulted and distressed obligations typically are rated along the continuum of 'C' to 'B' ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation's documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the 'B' or 'CCC-C' categories.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for US public finance, in line with industry standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
RD Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
Notes to Long-term and Short-term ratings: The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' Long-term rating category, to categories below 'CCC', or to Short-term ratings other than 'F1'. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are 'stable' could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
Program ratings (such as those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, i.e. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.
Variable rate demand obligations and other securities which contain a short-term 'put' or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.
Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.
Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.
Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.
'PIF': Paid-in --Full; denotes a security that is paid-in-full, matured, called, or refinanced.
'NR' indicates that Fitch Ratings does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
INVESTMENT COUNSELORS OF MARYLAND, LLC
PROXY VOTING POLICY AND PROCEDURE
Investment Counselors of Maryland, LLC (ICM) as Adviser to the ICM Small Company Portfolio assumes a fiduciary responsibility to vote proxies in the best interest of the shareholders of the Portfolio. So that it may fulfill these fiduciary responsibilities to the Portfolio and its shareholders, ICM has adopted and implemented these written policies and procedures reasonably designed to ensure that it votes proxies in the best interest of the Portfolio and its shareholders.
PROXY VOTING GUIDELINES AND POLICIES
ICM acknowledges it has a duty of care that requires it to monitor corporate events and vote proxies of the companies held in the Portfolio. ICM has determined that the best and most efficient way to exercise this duty is to engage the services of a third party proxy advisory and voting service. To that effect, ICM has engaged the ISS and MSCI Brand, a leading company in this field, to provide research on proxy issues and to recommend how ICM should vote on the specific issues contained in the proxies for the companies held in the Portfolio.
ICM has determined that ISS's Proxy Voting Policies and Guidelines represent a very reasoned approach to the primary goal of enhancing long-term shareholder value and ensuring, as best as possible, that the companies owned by the Portfolio are adhering to leading corporate governance practices. In light of this determination, ICM has adopted these policies and guidelines as its own, and a copy of these policies and guidelines is attached.
These policies and guidelines are not rigid policy positions and most issues are decided on a case-by-case basis. ICM's experience with ISS's advisory service has demonstrated to ICM that ISS's recommendations are consistent and well reasoned.
CONFLICTS OF INTEREST
Occasions may arise during the voting process in which the best interest of the Portfolio and its shareholders conflicts with ICM's interests. Conflicts of interest generally include (i) business relationships where ICM has a substantial business relationship with, or is actively soliciting business from, a company soliciting proxies, or (ii) personal or family relationships whereby an employee of ICM has a family member or other personal relationship who is affiliated with a company soliciting proxies, such as a spouse who serves as a director of a public company. A conflict could also exist if a substantial business relationship exists with a proponent or opponent of a particular initiative.
If ICM learns that a conflict of interest exists, the Proxy Coordinator will prepare a report to the Proxy Committee that identifies; (i) the details of the conflict of interest, (ii) whether or not the conflict is material; and (iii) procedures to ensure that ICM makes proxy voting decisions based on the best interest of the Portfolio and its shareholders. If ICM determines that a material conflict of interest exists, ICM will disclose the conflict to the Board of Directors (the Board) of the Advisors' Inner Circle Fund or their appointed representatives and vote the proxy as directed by the Board or its representative. ICM also recognizes that ISS itself may encounter potential conflicts of interest which would preclude ISS from issuing vote recommendations and voting the Portfolio's proxies. In those very rare cases, ICM would instruct ISS how to vote those particular proxies.
ICM believes that by consistently applying our voting policies and guidelines and by informing the Portfolio's shareholders and the managements of companies owned by the Portfolio of those policies, potential conflicts of interest can be minimized.
VOTING PROCESS
ICM has instructed the Portfolio's custodian to forward or have forwarded the Portfolio's proxy ballots to ISS for voting and record keeping purposes. The Portfolio will have a separate account at ISS so that ISS can identify the proxies being voted on behalf of the Portfolio. ISS is periodically informed of the securities held in the Portfolio so that ISS can match the proxy ballots with the Portfolio holdings.
Exhibit A
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Institutional Shareholder Services Inc.
Copyright [C] 2012 by ISS
www. issgovernance.com
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ISS' 2013 U.S. PROXY VOTING CONCISE GUIDELINES
THE POLICIES CONTAINED HEREIN ARE A SAMPLING OF SELECT, KEY PROXY VOTING
GUIDELINES AND ARE NOT EXHAUSTIVE. A FULL LISTING OF ISS' 2013 PROXY VOTING
GUIDELINES CAN BE FOUND AT
HTTP://WWW.ISSGOVERNANCE.COM/FILES/2013ISSUSSUMMARYGUIDELINES.PDF
ROUTINE/MISCELLANEOUS
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors unless any of the following apply:
o An auditor has a financial interest in or association with the company, and is therefore not independent;
o There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company's financial position;
o Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees > audit fees + audit-related fees + tax compliance/preparation fees.
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BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be determined CASE-BY-CASE.
Four fundamental principles apply when determining votes on director nominees:
1. Board Accountability
2. Board Responsiveness
3. Director Independence
4. Director Competence
1. BOARD ACCOUNTABILITY
Vote AGAINST(1) or WITHHOLD from the entire board of directors (except new nominees(2), who should be considered CASE-BY-CASE) for the following:
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PROBLEMATIC TAKEOVER DEFENSES
CLASSIFIED BOARD STRUCTURE:
1.1. The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
DIRECTOR PERFORMANCE EVALUATION:
1.2. The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company's four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company's five-year total shareholder return and operational metrics. Problematic provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director elections or
a majority vote standard with no plurality carve-out for contested
elections;
o The inability of shareholders to call special meetings;
o The inability of shareholders to act by written consent;
o A dual-class capital structure; and/or
o A non--shareholder-approved poison pill.
POISON PILLS:
1.3. The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote AGAINST or WITHHOLD from nominees every year until this
feature is removed;
1.4. The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill, including any "short-term"
pill (12 months or less), without shareholder approval. A commitment or
policy that puts a newly adopted pill to a binding shareholder vote may
potentially offset an adverse vote recommendation. Review such companies
with classified boards every year, and such companies with annually elected
boards at least once every three years, and vote AGAINST or WITHHOLD votes
from all nominees if the company still maintains a non-shareholder-approved
poison pill; or
1.5. The board makes a material adverse change to an existing poison pill
without shareholder approval.
Vote CASE-BY-CASE on all nominees if:
1.6. The board adopts a poison pill with a term of 12 months or less
("short-term pill") without shareholder approval, taking into account the
following factors:
o The date of the pill's adoption relative to the date of the next
meeting of shareholders - i.e. whether the company had time to put the
pill on ballot for shareholder ratification given the circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
PROBLEMATIC AUDIT-RELATED PRACTICES
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Generally vote AGAINST or WITHHOLD from the members of the Audit Committee if:
1.7. The non-audit fees paid to the auditor are excessive (see discussion
under "AUDITOR RATIFICATION");
1.8. The company receives an adverse opinion on the company's financial
statements from its auditor; or
1.9. There is persuasive evidence that the Audit Committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and potentially the full board if:
1.10.Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence and duration, as well as the company's efforts at remediation or corrective actions, in determining whether WITHHOLD/AGAINST votes are warranted.
PROBLEMATIC COMPENSATION PRACTICES/PAY FOR PERFORMANCE MISALIGNMENT
In the absence of an Advisory Vote on Executive Compensation ballot item or in egregious situations, vote AGAINST or WITHHOLD from the members of the Compensation Committee and potentially the full board if:
1.11. There is a significant misalignment between CEO pay and company
performance (PAY FOR PERFORMANCE);
1.12. The company maintains significant PROBLEMATIC PAY PRACTICES;
1.13. The board exhibits a significant level of POOR COMMUNICATION AND
RESPONSIVENESS to shareholders;
1.14. The company fails to submit one-time TRANSFERS OF STOCK OPTIONS to a
shareholder vote; or
1.15. The company fails to fulfill the terms of a BURN RATE COMMITMENT made
to shareholders.
Vote CASE-BY-CASE on Compensation Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:
1.16. The company's previous say-on-pay proposal received the support of less than 70 percent of votes cast, taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major institutional
investors regarding the issues that contributed to the low
level of support;
o Specific actions taken to address the issues that
contributed to the low level of support;
o Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which would
warrant the highest degree of responsiveness.
GOVERNANCE FAILURES
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors individually, committee members, or the entire board, due to:
1.17. Material failures of governance, stewardship, risk oversight(3), or fiduciary responsibilities at the company;
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1.18 Failure to replace management as appropriate; or
1.19 Egregious actions related to a director's service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.
2. BOARD RESPONSIVENESS
Vote AGAINST or WITHHOLD from individual directors, committee members, or the entire board of directors as appropriate if:
2.1. For 2013, the board failed to act(4) on a shareholder proposal that
received the support of a majority of the shares outstanding the
previous year;
2.2. For 2013, the board failed to act on a shareholder proposal that
received the support of a majority of shares cast in the last year and
one of the two previous years;
2.3. For 2014, the board failed to act on a shareholder proposal that
received the support of a majority of the shares cast in the previous
year;
2.4. The board failed to act on takeover offers where the majority of
shares are tendered;
2.5. At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the issue(s) that caused the high withhold/against
vote; or
2.6. The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received the majority of
votes cast at the most recent shareholder meeting at which
shareholders voted on the say-on-pay frequency.
Vote CASE-BY-CASE on the entire board if:
2.7. The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received a plurality, but
not a majority, of the votes cast at the most recent shareholder
meeting at which shareholders voted on the say-on-pay frequency,
taking into account:
o The board's rationale for selecting a frequency that is different
from the frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a
history of problematic compensation practices; and
o The previous year's support level on the company's say-on-pay
proposal.
3. DIRECTOR INDEPENDENCE
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the CATEGORIZATION OF DIRECTORS) when:
3.1. The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
o The subject matter of the proposal;
o The level of support and opposition provided to the resolution in
past meetings;
o Disclosed outreach efforts by the board to shareholders in the wake
of the vote;
o Actions taken by the board in response to its engagement with
shareholders;
o The continuation of the underlying issue as a voting item on the
ballot (as either shareholder or management proposals); and
o Other factors as appropriate.
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3.2. The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
3.3. The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such a
committee; or
3.4. Independent directors make up less than a majority of the directors.
4. DIRECTOR COMPETENCE
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS:
4.1. Generally vote AGAINST or WITHHOLD from directors (except new nominees, who should be considered CASE-BY- CASE(5) ) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting (when the total of all meetings is
three or fewer).
4.2. If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote AGAINST or WITHHOLD from the director(s) in question.
OVERBOARDED DIRECTORS:
Vote AGAINST or WITHHOLD from individual directors who:
4.3. Sit on more than six public company boards; or
4.4. Are CEOs of public companies who sit on the boards of more than two public companies besides their own -- withhold only at their outside boards(6).
>>>>>>>>
PROXY ACCESS
ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach in evaluating these proposals.
Vote CASE-BY-CASE on proposals to enact proxy access, taking into account, among other factors:
Exhibit A
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Institutional Shareholder Services Inc.
Copyright [C] 2012 by ISS
www. issgovernance.com
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ISS' 2013 U.S. PROXY VOTING CONCISE GUIDELINES
THE POLICIES CONTAINED HEREIN ARE A SAMPLING OF SELECT, KEY PROXY VOTING
GUIDELINES AND ARE NOT EXHAUSTIVE. A FULL LISTING OF ISS' 2013 PROXY VOTING
GUIDELINES CAN BE FOUND AT
HTTP://WWW.ISSGOVERNANCE.COM/FILES/2013ISSUSSUMMARYGUIDELINES.PDF
ROUTINE/MISCELLANEOUS AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors unless any of the following apply:
o An auditor has a financial interest in or association with the company, and is therefore not independent;
o There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company's financial position;
o Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees > audit fees + audit-related fees + tax compliance/preparation fees.
>>>>>>>>>
BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be determined CASE-BY-CASE.
Four fundamental principles apply when determining votes on director nominees:
1. Board Accountability
2. Board Responsiveness
3. Director Independence
4. Director Competence
1. BOARD ACCOUNTABILITY
Vote AGAINST(1) or WITHHOLD from the entire board of directors (except new nominees(2), who should be considered CASE-BY-CASE) for the following:
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PROBLEMATIC TAKEOVER DEFENSES
CLASSIFIED BOARD STRUCTURE:
1.1. The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
DIRECTOR PERFORMANCE EVALUATION:
1.2. The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company's four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company's five-year total shareholder return and operational metrics. Problematic provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director elections or
a majority vote standard with no plurality carve-out for contested
elections;
o The inability of shareholders to call special meetings;
o The inability of shareholders to act by written consent;
o A dual-class capital structure; and/or
o A non--shareholder-approved poison pill.
POISON PILLS:
1.3. The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote AGAINST or WITHHOLD from nominees every year until this
feature is removed;
1.4. The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill, including any "short-term"
pill (12 months or less), without shareholder approval. A commitment or
policy that puts a newly adopted pill to a binding shareholder vote may
potentially offset an adverse vote recommendation. Review such companies
with classified boards every year, and such companies with annually elected
boards at least once every three years, and vote AGAINST or WITHHOLD votes
from all nominees if the company still maintains a non-shareholder-approved
poison pill; or
1.5. The board makes a material adverse change to an existing poison pill
without shareholder approval.
Vote CASE-BY-CASE on all nominees if:
1.6. The board adopts a poison pill with a term of 12 months or less
("short-term pill") without shareholder approval, taking into account the
following factors:
o The date of the pill's adoption relative to the date of the next
meeting of shareholders - i.e. whether the company had time to put the
pill on ballot for shareholder ratification given the circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
PROBLEMATIC AUDIT-RELATED PRACTICES
(2) A "new nominee" is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the nominee joined the board before or after the problematic action transpired, the nominee will be considered a "new nominee" if he or she joined the board within the 12 months prior to the upcoming shareholder meeting.
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Generally vote AGAINST or WITHHOLD from the members of the Audit Committee if:
1.7. The non-audit fees paid to the auditor are excessive (see discussion
under "AUDITOR RATIFICATION");
1.8. The company receives an adverse opinion on the company's financial
statements from its auditor; or
1.9. There is persuasive evidence that the Audit Committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and potentially the full board if:
1.10.Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence and duration, as well as the company's efforts at remediation or corrective actions, in determining whether WITHHOLD/AGAINST votes are warranted.
PROBLEMATIC COMPENSATION PRACTICES/PAY FOR PERFORMANCE MISALIGNMENT
In the absence of an Advisory Vote on Executive Compensation ballot item or in egregious situations, vote AGAINST or WITHHOLD from the members of the Compensation Committee and potentially the full board if:
1.11. There is a significant misalignment between CEO pay and company
performance (PAY FOR PERFORMANCE);
1.12. The company maintains significant PROBLEMATIC PAY PRACTICES;
1.13. The board exhibits a significant level of POOR COMMUNICATION AND
RESPONSIVENESS to shareholders;
1.14. The company fails to submit one-time TRANSFERS OF STOCK OPTIONS to a
shareholder vote; or
1.15. The company fails to fulfill the terms of a BURN RATE COMMITMENT made
to shareholders.
Vote CASE-BY-CASE on Compensation Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:
1.16. The company's previous say-on-pay proposal received the support of less than 70 percent of votes cast, taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major institutional
investors regarding the issues that contributed to the low
level of support;
o Specific actions taken to address the issues that
contributed to the low level of support;
o Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which would
warrant the highest degree of responsiveness.
GOVERNANCE FAILURES
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors individually, committee members, or the entire board, due to:
1.17. Material failures of governance, stewardship, risk oversight(3), or fiduciary responsibilities at the company;
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1.18 Failure to replace management as appropriate; or
1.19 Egregious actions related to a director's service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.
2. BOARD RESPONSIVENESS
Vote AGAINST or WITHHOLD from individual directors, committee members, or the entire board of directors as appropriate if:
2.1. For 2013, the board failed to act(4) on a shareholder proposal that
received the support of a majority of the shares outstanding the
previous year;
2.2. For 2013, the board failed to act on a shareholder proposal that
received the support of a majority of shares cast in the last year and
one of the two previous years;
2.3. For 2014, the board failed to act on a shareholder proposal that
received the support of a majority of the shares cast in the previous
year;
2.4. The board failed to act on takeover offers where the majority of
shares are tendered;
2.5. At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the issue(s) that caused the high withhold/against
vote; or
2.6. The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received the majority of
votes cast at the most recent shareholder meeting at which
shareholders voted on the say-on-pay frequency.
Vote CASE-BY-CASE on the entire board if:
2.7. The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received a plurality, but
not a majority, of the votes cast at the most recent shareholder
meeting at which shareholders voted on the say-on-pay frequency,
taking into account: o The board's rationale for selecting a frequency
that is different from the frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a
history of problematic compensation practices; and
o The previous year's support level on the company's say-on-pay
proposal.
3. DIRECTOR INDEPENDENCE
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the CATEGORIZATION OF DIRECTORS) when:
3.1. The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
o The subject matter of the proposal;
o The level of support and opposition provided to the resolution in
past meetings;
o Disclosed outreach efforts by the board to shareholders in the wake
of the vote;
o Actions taken by the board in response to its engagement with
shareholders;
o The continuation of the underlying issue as a voting item on the
ballot (as either shareholder or management proposals); and
o Other factors as appropriate.
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3.2. The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
3.3. The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such a
committee; or
3.4. Independent directors make up less than a majority of the directors.
4. DIRECTOR COMPETENCE
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS:
4.1. Generally vote AGAINST or WITHHOLD from directors (except new nominees, who should be considered CASE-BY- CASE(5) ) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting (when the total of all meetings is
three or fewer).
4.2. If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote AGAINST or WITHHOLD from the director(s) in question.
OVERBOARDED DIRECTORS:
Vote AGAINST or WITHHOLD from individual directors who:
4.3. Sit on more than six public company boards; or
4.4. Are CEOs of public companies who sit on the boards of more than two public companies besides their own-- withhold only at their outside boards(6).
>>>>>>>>>
PROXY ACCESS
ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach in evaluating these proposals.
Vote CASE-BY-CASE on proposals to enact proxy access, taking into account, among other factors:
(5) For new nominees only, schedule conflicts due to commitments made prior to
their appointment to the board are considered if disclosed in the proxy or
another SEC filing.
(6) Although all of a CEO's subsidiary boards will be counted as separate
boards, ISS will not recommend a withhold vote from the CEO of a parent company
board or any of the controlled (>50 percent ownership) subsidiaries of that
parent, but will do so at subsidiaries that are less than 50 percent controlled
and boards outside the parent/subsidiary relationships.
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o Company-specific factors; and
o Proposal-specific factors, including:
o The ownership thresholds proposed in the resolution (i.e. ,
percentage and duration);
o The maximum proportion of directors that shareholders may
nominate each year; and
o The method of determining which nominations should appear on the
ballot if multiple shareholders submit nominations.
>>>>>>
PROXY CONTESTS--VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE-BY-CASE on the election of directors in contested elections, considering the following factors:
o Long-term financial performance of the target company relative to its
industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved
(both slates);
o Stock ownership positions.
When the addition of shareholder nominees to the management card ("proxy access nominees") results in a number of nominees on the management card which exceeds the number of seats available for election, vote CASE-BY-CASE considering the same factors listed above.
>>>>>>
SHAREHOLDER RIGHTS & DEFENSES
POISON PILLS- MANAGEMENT PROPOSALS TO RATIFY POISON PILL
Vote CASE-BY-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the
board refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or seek
a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company's existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
>>>>>>
POISON PILLS- MANAGEMENT PROPOSALS TO RATIFY A PILL TO PRESERVE NET OPERATING LOSSES (NOLS)
Vote AGAINST proposals to adopt a poison pill for the stated purpose of protecting a company's net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
Vote CASE-BY-CASE on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
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o The ownership threshold to transfer (NOL pills generally have a
trigger slightly below 5 percent);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision, or commitment to
cause expiration of the pill upon exhaustion or expiration of NOLs);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance
concerns; and
o Any other factors that may be applicable.
>>>>>>
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally vote AGAINST management and shareholder proposals to restrict or prohibit shareholders' ability to act by written consent.
Generally vote FOR management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
o Shareholders' current right to act by written consent;
o The consent threshold;
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous
shareholder proposals.
Vote CASE-BY-CASE on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:
o An unfettered(7) right for shareholders to call special meetings at a
10 percent threshold;
o A majority vote standard in uncontested director elections;
o No non-shareholder-approved pill; and
o An annually elected board.
>>>>>>
CAPITAL/RESTRUCTURING
COMMON STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.
Vote AGAINST proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.
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Vote CASE-BY-CASE on all other proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized shares during the last three
years
o The Current Request:
o Disclosure in the proxy statement of the specific purposes of
the proposed increase;
o Disclosure in the proxy statement of specific and severe risks
to shareholders of not approving the request; and
o The dilutive impact of the request as determined by an allowable
increase calculated by ISS (typically 100 percent of existing
authorized shares) that reflects the company's need for shares
and total shareholder returns.
>>>>>>
DUAL CLASS STRUCTURE
Generally vote AGAINST proposals to create a new class of common stock unless:
o The company discloses a compelling rationale for the dual-class
capital structure, such as:
o The company's auditor has concluded that there is substantial
doubt about the company's ability to continue as a going concern;
or
o The new class of shares will be transitory;
o The new class is intended for financing purposes with minimal or no
dilution to current shareholders in both the short term and long term;
and
o The new class is not designed to preserve or increase the voting
power of an insider or significant shareholder.
>>>>>>
PREFERRED STOCK AUTHORIZATION
Vote FOR proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support.
Vote AGAINST proposals at companies with more than one class or series of preferred stock to increase the number of authorized shares of the class or series of preferred stock that has superior voting rights.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of preferred stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized preferred shares during the
last three years;
o The Current Request:
o Disclosure in the proxy statement of the specific purposes
for the proposed increase;
o Disclosure in the proxy statement of specific and severe
risks to shareholders of not approving the request;
o In cases where the company has existing authorized
preferred stock, the dilutive impact of the request as
determined by an allowable increase calculated by ISS
(typically 100 percent of existing authorized shares) that
reflects the company's need for shares and total shareholder
returns; and
o Whether the shares requested are blank check preferred
shares that can be used for antitakeover purposes.
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>>>>>>
MERGERS AND ACQUISITIONS
Vote CASE-BY-CASE on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:
o VALUATION - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale.
o MARKET REACTION - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
o STRATEGIC RATIONALE - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions.
o NEGOTIATIONS AND PROCESS - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (E. G. , full auction, partial auction, no auction) can also affect shareholder value.
o CONFLICTS OF INTEREST - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
o GOVERNANCE - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
>>>>>>
COMPENSATION
EXECUTIVE PAY EVALUATION
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
1. Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;
2. Avoid arrangements that risk "pay for failure": This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
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3. Maintain an independent and effective compensation committee: This principle promotes oversightof executive pay programs by directors with appropriateskills, knowledge,experience,and a soundprocessfor compensation decision- making (E.G., including access to independent expertise and advice when needed);
4. Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;
5. Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers' pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.
ADVISORY VOTES ON EXECUTIVE COMPENSATION--MANAGEMENT PROPOSALS (MANAGEMENT SAY-ON-PAY)
Vote CASE-BY-CASE on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
Vote AGAINST Advisory Votes on Executive Compensation (Management Say-on-Pay--MSOP) if:
o There is a significant misalignment between CEO pay and company
performance (PAY FOR PERFORMANCE);
o The company maintains significant problematic pay practices;
o The board exhibits a significant level of poor communication and
responsiveness to shareholders.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee and potentially the full board if:
o There is no MSOP on the ballot, and an AGAINST vote on an MSOP is
warranted due to pay for performance misalignment, problematic pay
practices, or the lack of adequate responsiveness on compensation
issues raised previously, or a combination thereof;
o The board fails to respond adequately to a previous MSOP proposal
that received less than 70 percent support of votes cast;
o The company has recently practiced or approved problematic pay
practices, including option repricing or option backdating; or
o The situation is egregious.
Vote AGAINST an equity plan on the ballot if:
o A pay for performance misalignment is found, and a significant
portion of the CEO's misaligned pay is attributed to
non-performance-based equity awards, taking into consideration:
o Magnitude of pay misalignment;
o Contribution of non-performance-based equity grants to overall
pay; and
o The proportion of equity awards granted in the last three fiscal
years concentrated at the named executive officer (NEO) level.
PRIMARY EVALUATION FACTORS FOR EXECUTIVE PAY
PAY-FOR-PERFORMANCE EVALUATION
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 index, this analysis considers the following:
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1. Peer Group(8) Alignment:
o The degree of alignment between the company's TSR rank and the
CEO's total pay rank within a peer group, as measured over
one-year and three-year periods (weighted 40/60);
o The multiple of the CEO's total pay relative to the peer group
median.
2. Absolute Alignment -- the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years -- i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of non-Russell 3000 index companies, misaligned pay and performance are otherwise suggested, our analysis may include any of the following qualitative factors, if they are relevant to the analysis to determine how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
o The ratio of performance- to time-based equity awards;
o The overall ratio of performance-based compensation;
o The completeness of disclosure and rigor of performance goals;
o The company's peer group benchmarking practices;
o Actual results of financial/operational metrics, such as growth
in revenue, profit, cash flow, etc., both absolute and relative
to peers;
o Special circumstances related to, for example, a new CEO in the
prior FY or anomalous equity grant practices (e.g., bi-annual
awards);
o Realizable pay compared to grant pay; and
o Any other factors deemed relevant.
PROBLEMATIC PAY PRACTICES
The focus is on executive compensation practices that contravene the global pay
principles, including:
o Problematic practices related to non-performance-based compensation
elements;
o Incentives that may motivate excessive risk-taking; and
o Options Backdating.
PROBLEMATIC PAY PRACTICES RELATED TO NON-PERFORMANCE-BASED COMPENSATION ELEMENTS
Pay elements that are not directly based on performance are generally evaluated CASE-BY-CASE considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
o Repricing or replacing of underwater stock options/SARS without prior
shareholder approval (including cash buyouts and voluntary surrender
of underwater options);
o Excessive perquisites or tax gross-ups, including any gross-up
related to a secular trust or restricted stock vesting;
o New or extended agreements that provide for:
o CIC payments exceeding 3 times base salary and
average/target/most recent bonus;
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o CIC severance payments without involuntary job loss or
substantial diminution of duties ("single" or "modified single"
triggers);
o CIC payments with excise tax gross-ups (including "modified"
gross-ups).
INCENTIVES THAT MAY MOTIVATE EXCESSIVE RISK-TAKING
o Multi-year guaranteed bonuses;
o A single or common performance metric used for short- and long-term
plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o Mega annual equity grants that provide unlimited upside with no
downside risk.
Factors that potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.
OPTIONS BACKDATING
The following factors should be examined CASE-BY-CASE to allow for distinctions to be made between "sloppy" plan administration versus deliberate action or fraud:
o Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant date changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o Corrective actions taken by the board or compensation committee, such
as canceling or re-pricing backdated options, the recouping of option
gains on backdated grants; and
o Adoption of a grant policy that prohibits backdating, and creates a
fixed grant schedule or window period for equity grants in the future.
BOARD COMMUNICATIONS AND RESPONSIVENESS
Consider the following factors CASE-BY-CASE when evaluating ballot items related to executive pay on the board's responsiveness to investor input and engagement on compensation issues:
o Failure to respond to majority-supported shareholder proposals on
executive pay topics; or
o Failure to adequately respond to the company's previous say-on-pay
proposal that received the support of less than 70 percent of votes
cast, taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major institutional
investors regarding the issues that contributed to the low
level of support;
o Specific actions taken to address the issues that
contributed to the low level of support;
o Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which would
warrant the highest degree of responsiveness.
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FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION ("SAY WHEN ON PAY")
Vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.
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VOTING ON GOLDEN PARACHUTES IN AN ACQUISITION, MERGER, CONSOLIDATION, OR PROPOSED SALE Vote CASE-BY- CASE on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers rather than focusing primarily on new or extended arrangements.
Features that may result in an AGAINST recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):
o Single- or modified-single-trigger cash severance;
o Single-trigger acceleration of unvested equity awards;
o Excessive cash severance (>3x base salary and bonus);
o Excise tax gross-ups triggered and payable (as opposed to a provision
to provide excise tax gross-ups);
o Excessive golden parachute payments (on an absolute basis or as a
percentage of transaction equity value); or
o Recent amendments that incorporate any problematic features (such as
those above) or recent actions (such as extraordinary equity grants)
that may make packages so attractive as to influence merger agreements
that may not be in the best interests of shareholders; or
o The company's assertion that a proposed transaction is conditioned on
shareholder approval of the golden parachute advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company's advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
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EQUITY-BASED AND OTHER INCENTIVE PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits repricing;
o A pay-for-performance misalignment is found;
o The company's three year burn rate exceeds the burn rate cap of its
industry group;
o The plan has a liberal change-of-control definition; or
o The plan is a vehicle for problematic pay practices.
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SOCIAL/ENVIRONMENTAL ISSUES
Global Approach
Issues covered under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short term or long term.
Generally vote CASE-BY-CASE, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder value, and in addition the following will also be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or government regulation;
o If the company has already responded in an appropriate and sufficient
manner to the issue(s) raised in the proposal;
o Whether the proposal's request is unduly burdensome (scope,
timeframe, or cost) or overly prescriptive;
o The company's approach compared with any industry standard practices
for addressing the issue(s) raised by the proposal;
o If the proposal requests increased disclosure or greater
transparency, whether or not reasonable and sufficient information is
currently available to shareholders from the company or from other
publicly available sources; and
o If the proposal requests increased disclosure or greater
transparency, whether or not implementation would reveal proprietary
or confidential information that could place the company at a
competitive disadvantage.
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POLITICAL SPENDING & LOBBYING ACTIVITIES
Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as:
o There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
o The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs)
are strictly voluntary and prohibit coercion.
Vote AGAINST proposals to publish in newspapers and other media the company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Generally vote FOR proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities. However, the following will be considered:
o The company's current disclosure of policies and oversight mechanisms
related to its direct political contributions and payments to trade
associations or other groups that may be used for political purposes,
including information on the types of organizations supported and the
business rationale for supporting these organizations; and
o Recent significant controversies, fines, or litigation related to the
company's political contributions or political activities.
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Vote AGAINST proposals barring the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering:
o The company's current disclosure of relevant policies and oversight
mechanisms;
o Recent significant controversies, fines, or litigation regarding the
company's lobbying-related activities; and
o The impact that the public policy issues in question may have on the
company's business operations, if specific public policy issues are
addressed.
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FOREIGN PRIVATE ISSUERS LISTED ON U.S. EXCHANGES
Vote AGAINST (or WITHHOLD from) non-independent director nominees at companies which fail to meet the following criteria: a majority-independent board, and the presence of an audit, a compensation, and a nomination committee, each of which is entirely composed of independent directors.
Where the design and disclosure levels of equity compensation plans are comparable to those seen at U.S. companies, U.S. compensation policy will be used to evaluate the compensation plan proposals. In all other cases, equity compensation plans will be evaluated according to ISS International Proxy Voting Guidelines.
All other voting items will be evaluated using ISS International Proxy Voting Guidelines.
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.
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ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.
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STATEMENT OF ADDITIONAL INFORMATION
LOOMIS SAYLES FULL DISCRETION INSTITUTIONAL SECURITIZED FUND
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
LOOMIS, SAYLES & COMPANY, L.P.
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Loomis Sayles Full Discretion Institutional Securitized Fund (the "Fund"). This SAI is incorporated by reference into and should be read in conjunction with the Fund's prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund for the fiscal period ended October 31, 2012, including notes thereto and the report of PricewaterhouseCoopers LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Fund's 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report, free of charge by calling the Fund at 1-800-343-2029.
TABLE OF CONTENTS
THE TRUST ............................................................... S-1 DESCRIPTION OF PERMITTED INVESTMENTS .................................... S-1 INVESTMENT LIMITATIONS .................................................. S-20 THE ADVISER ............................................................. S-22 THE PORTFOLIO MANAGERS .................................................. S-23 THE ADMINISTRATOR ....................................................... S-25 THE DISTRIBUTOR ......................................................... S-25 THE TRANSFER AGENT ...................................................... S-26 THE CUSTODIAN ........................................................... S-26 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................... S-26 LEGAL COUNSEL ........................................................... S-26 TRUSTEES AND OFFICERS OF THE TRUST ...................................... S-26 PURCHASING AND REDEEMING SHARES ......................................... S-37 DETERMINATION OF NET ASSET VALUE ........................................ S-37 TAXES ................................................................... S-38 FUND TRANSACTIONS ....................................................... S-42 PORTFOLIO HOLDINGS ...................................................... S-44 DESCRIPTION OF SHARES ................................................... S-45 SHAREHOLDER LIABILITY ................................................... S-45 LIMITATION OF TRUSTEES' LIABILITY ....................................... S-46 PROXY VOTING ............................................................ S-46 CODES OF ETHICS ......................................................... S-47 5% AND 25% SHAREHOLDERS ................................................. S-47 APPENDIX A -- DESCRIPTION OF RATINGS .................................... A-1 |
March 1, 2013
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. Each fund of the Trust pays its: (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses; and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. Under the Declaration of Trust, the Trustees have the power to liquidate the Fund without shareholder approval. While the Trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
NON-DIVERSIFICATION. The Fund is non-diversified, as that term is defined in the 1940 Act, which means that a relatively high percentage of assets of the Fund may be invested in the obligations of a limited number of issuers. Although the Adviser does not intend to invest more than 5% of the Fund's assets in any single issuer (with the exception of securities which are issued or guaranteed by a national government), the value of the shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence than the shares of a diversified investment company would be. The Fund intends to satisfy the diversification requirements necessary to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), which requires that the Fund be diversified (i.e., will not invest more than 5% of its assets in the securities of any one issuer) with respect to 50% of its assets.
DESCRIPTION OF PERMITTED INVESTMENTS
The Fund's investment objective and principal investment strategies are described in the Prospectus. The following are descriptions of the permitted investments and investment practices of the Fund and the associated risk factors. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
EQUITY SECURITIES
TYPES OF EQUITY SECURITIES:
PREFERRED STOCKS - Preferred stocks are also units of ownership in a company. Preferred stocks normally have preference over common stock in the payment of dividends and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk.
CONVERTIBLE SECURITIES - Convertible securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of the issuer's common stock at the Fund's option during a specified time period (such as convertible preferred stocks, convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same corporation. In general, the market value of a convertible security is at least the higher of its "investment value" (i.e., its value as a fixed income security) or its "conversion value" (i.e., its value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times of steady interest rates than other types of debt securities. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics, and other factors. Because the Fund will create synthetic convertible positions only out of high grade fixed income securities, the credit rating associated with the Fund's synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing "time value" as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss, the market price of the option component generally reflects these differences in maturities, and the Adviser takes such differences into account when evaluating such positions. When a synthetic convertible position "matures" because of the expiration of the associated option, the Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If the Fund does not so extend the maturity of a position, it may continue to hold the associated fixed income security.
Real Estate Investment Trusts ("REITs"). A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Code. The Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which the Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Portfolio invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through the Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments
RIGHTS AND WARRANTS - A right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life of usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants
are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
RISKS OF INVESTING IN EQUITY SECURITIES:
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in general financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
FIXED INCOME SECURITIES
Fixed income securities, otherwise known as debt securities, consistent primarily of debt obligations issued by governments, corporations, municipalities and other borrowers, and also include structured securities that provide for participation interests in debt obligations. Issuers use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
U.S. GOVERNMENT SECURITIES -- The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are
issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Association ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o TREASURY INFLATION-PROTECTED SECURITIES ("TIPS"). TIPS are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. The interest rate on TIPS is fixed at issuance, but over the life of the bond this interest may be paid on an increasing or decreasing principal value that has been adjusted for inflation. Although repayment of the original bond principal upon maturity is guaranteed, the market value of TIPS is not guaranteed, and will fluctuate.
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their non-matured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities or to the value of the Fund's shares.
CORPORATE BONDS -- Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
MORTGAGE-BACKED SECURITIES -- The Fund may invest in mortgage-backed securities, including commercial and nonagency residential mortgage-backed securities. Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated. Investing in mortgage-backed securities involves the risks typically associated with investing in traditional fixed income securities (including interest rate and credit risk) and certain additional risks and special considerations (including the risk of principal prepayment and the risk of investing in real estate). Further, non-agency mortgage backed securities are issued by private banks and financial companies, and are not associated with a government agency.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Fund's investment adviser will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
RISKS OF MORTGAGE-BACKED SECURITIES -- Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways, the most significant differences of mortgage-backed securities are:
o payments of interest and principal are more frequent (usually monthly); and
o falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing the Fund to reinvest the money at a lower interest rate.
In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. The rate of prepayments on underlying mortgages affects the price and volatility of a mortgage-backed security, and may have the effect of shortening or extending the effective maturity beyond what was anticipated. If the prepayment rates increase, the Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many mortgage-backed securities, which in turn lengthen their duration, known as extension risk.
CREDIT CRISIS LIQUIDITY RISK. Certain types of credit instruments, such as investments in CDOs, high-yield bonds, debt issued in leveraged buyout transactions, mortgage- and asset-backed securities, and short-term asset-backed commercial paper, became very illiquid in the latter half of 2007. General market uncertainty and consequent re-pricing of risk led to market imbalances of sellers and buyers, which in turn resulted in significant valuation uncertainties in mortgage and credit-related securities and other instruments. These conditions resulted, and in many cases continue to result in, greater volatility, less liquidity, widening credit spreads and a lack of price transparency, with many instruments remaining illiquid and of uncertain value. Such market conditions, and the above factors, may make valuation uncertain and/or result in sudden and significant valuation declines.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS") -- An ARM, like a traditional mortgage security, is an interest in a pool of mortgage loans that provides investors with payments consisting of both principal and interest as mortgage loans in the underlying mortgage pool are paid off by the borrowers. ARMs have interest rates that are reset at periodic intervals, usually by reference to some interest rate index or market interest rate. Although the rate adjustment feature may act as a buffer to reduce sharp changes in the value of adjustable rate securities, these securities are still subject to changes in value based on changes in market interest rates or changes in the issuer's creditworthiness. Since the interest rates are reset only periodically, changes in the interest rate on ARMs may lag behind changes in prevailing market interest rates. In addition, some ARMs (or the underlying mortgages) are subject to caps or floors that limit the maximum change in interest rate during a specified period or over the life of the security. As a result, changes in the interest rate on an ARM may not fully reflect changes in prevailing market interest rates during certain periods. Because of the resetting of interest rates, ARMs are less likely than non-adjustable rate securities of comparable quality and maturity to increase significantly in value when market interest rates fall. In addition, the Fund will not benefit from increases in interest rates to the extent that interest rates rise to the point where they cause the current coupon of the underlying ARM to exceed a cap rate for a particular mortgage.
MORTGAGE PASS-THROUGH SECURITIES -- The Fund may invest in mortgage pass-through securities. In the basic mortgage pass-through structure, mortgages with similar issuer, term and coupon characteristics are collected and aggregated into a "pool" consisting of multiple mortgage loans. The pool is assigned a CUSIP number and undivided interests in the pool are traded and sold as pass-through securities. The holder of the security is entitled to a pro rata share of principal and interest payments (including unscheduled prepayments) from the pool of mortgage loans.
An investment in a specific pool of pass-through securities requires an analysis of the specific prepayment risk of mortgages within the covered pool (since mortgagors typically have the option to prepay their loans). The level of prepayments on a pool of mortgage securities is difficult to predict and can impact the subsequent cash flows and value of the mortgage pool. In addition, when trading specific mortgage pools, precise execution, delivery and settlement
arrangements must be negotiated for each transaction. These factors combine to make trading in mortgage pools somewhat cumbersome.
Most transactions in mortgage pass-through securities occur through the use of "to-be-announced" or "TBA transactions." "TBA" refers to a commonly used mechanism for the forward settlement of U.S. agency mortgage pass-through securities, and not to a separate type of mortgage-backed security. TBA transactions generally are conducted in accordance with widely-accepted guidelines which establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA transaction, the buyer and seller decide on general trade parameters, such as agency, settlement date, par amount, and price. The actual pools delivered generally are determined two days prior to settlement date. The Fund may use TBA transactions in several ways. For example, the Fund may enter into TBA agreements and "roll over" such agreements prior to the settlement date stipulated in such agreements. This type of TBA transaction is sometimes known as a "TBA roll." In a "TBA roll" the Fund generally will sell the obligation to purchase the pools stipulated in the TBA agreement prior to the stipulated settlement date and will enter into a new TBA agreement for future delivery of pools of mortgage pass-through securities. In addition, the Fund may enter into TBA agreements and settle such transactions on the stipulated settlement date by accepting actual receipt or delivery of the pools of mortgage pass-through securities stipulated in the TBA agreement.
Default by or bankruptcy of a counterparty to a TBA transaction would expose the Fund to possible loss because of adverse market action, expenses or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA transaction. To minimize this risk, the Fund will enter into TBA transactions only with established counterparties (such as major broker-dealers) and the Adviser will monitor the creditworthiness of such counterparties. The Fund's use of "TBA rolls" may cause the Fund to experience higher portfolio turnover, higher transaction costs and to pay higher capital gain distributions to shareholders (which may be taxable).
The Fund intends to invest cash pending settlement of any TBA transactions in money market instruments, repurchase agreements, commercial paper (including asset-backed commercial paper) or other high-quality, liquid short-term instruments, which may include money market funds affiliated with the Adviser.
STRIPPED MORTGAGE-BACKED SECURITIES - Stripped mortgage-backed securities are derivative multiple-class mortgage-backed securities. Stripped mortgage-backed securities usually have two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. Typically, one class will receive some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In extreme cases, one class will receive all of the interest ("interest only" or "IO" class) while the other class will receive the entire principal ("principal only" or "PO" class). The cash flow and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs and could cause the total loss of investment. Slower than anticipated prepayments of principal may adversely affect the yield to maturity of a PO. The yields and market risk of interest only and principal only stripped mortgage-backed securities, respectively, may be more volatile than those of other fixed income securities, including traditional mortgage-backed securities.
ASSET-BACKED SECURITIES -- These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk. Asset-backed securities are also subject to extension risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such
receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Fund may also invest in residual interests in asset-backed securities, which is the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
As with mortgage-backed securities, the market for asset-backed securities has recently experienced high volatility and a lack of liquidity. As a result, the value of many of these securities has significantly declined. There can be no assurance that these markets will become more liquid or less volatile, and it is possible that the value of these securities could decline further.
GENERAL CONSIDERATIONS RELATING TO INVESTMENTS IN UNDERLYING PROPERTIES IN A SINGLE STATE - While the Fund does not expect to invest in single state pools of mortgages, underlying properties of mortgages of certain states may represent a significant percentage of the underlying mortgages in which the Fund invests as a whole. When the Fund invests in this manner, it is subject to the risk that the economy of the states in which it invests, and the value of properties within the states, may decline. Investing significantly in securities the values of which are economically tied to a single state means that the Fund is more exposed to negative political or economic events affecting that state than a fund that invests more widely. Certain states have experienced significant declines in property values in recent years.
SPECIAL CONSIDERATIONS RELATING TO INVESTMENT IN UNDERLYING PROPERTIES IN CALIFORNIA -- The Fund may invest more than 25% of its assets in pools of mortgages the underlying properties of which are located in California. As a result, the Fund may be more vulnerable to unfavorable developments in California than funds that invest a lesser percent of their assets in securities with exposure to the California housing, property and mortgage markets, and the economy as a whole. The State of California's economic outlook reports that housing in the State, while stabilizing, still has issues to work through in the mortgage markets. California's housing market recovery has been hindered by continued problems in the mortgage market. More than 346,000 notices of default and 192,000 foreclosures were recorded during the 2009-10 fiscal year. The Mortgage Bankers' Association estimates that almost 12% of all mortgages in the state are seriously delinquent (payment 60+ days past due or in the foreclosure process.) Home prices were relatively weak during the first half of the 2010-11 fiscal year, but this was largely the result of expiring federal tax credits for new home purchases. Home sales dropped off dramatically in the first quarter of the 2010-11 fiscal year, which also brought home prices down slightly. The decline in home prices increased the affordability of housing in California, and in December 2010, California saw an increase in home sales by more than 15% over November. The State's housing permits averaged 3,512 residential units per month during the first five months of the 2010-11 fiscal year--well below the 2005 peak--but the number for December 2010 rose to 5,699. However, this increase may have occurred in response to changes in the building code that went into effect on January 1, 2011.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA") -- GNMA is the principal governmental guarantor of mortgage-related securities. GNMA is a wholly owned corporation of the U.S. government within the Department of Housing and Urban Development. Securities issued by GNMA are treasury securities, which means the full faith and credit of the U.S. government backs them. GNMA guarantees the timely payment of principal and interest on securities
issued by institutions approved by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the market value or yield of mortgage-backed securities or the value of the Fund's shares. To buy GNMA securities, the Fund may have to pay a premium over the maturity value of the underlying mortgages, which the Fund may lose if prepayment occurs.
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") -- FNMA is a
government-sponsored corporation owned entirely by private stockholders. FNMA
is regulated by the Secretary of Housing and Urban Development. FNMA purchases
conventional mortgages from a list of approved sellers and service providers,
including state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Securities issued by FNMA are agency securities, which means FNMA, but not the
U.S. government, guarantees their timely payment of principal and interest.
FREDDIE MAC -- Freddie Mac is stockholder-owned corporation established by the U.S. Congress to create a continuous flow of funds to mortgage lenders. Freddie Mac supplies lenders with the money to make mortgages and packages the mortgages into marketable securities. The system is designed to create a stable mortgage credit system and reduce the rates paid by homebuyers. Freddie Mac, not the U.S. government, guarantees timely payment of principal and interest.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS -- Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by GNMA, FNMA & Freddie Mac because they are not guaranteed by a government agency.
SHORT-TERM INVESTMENTS -- To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, the Fund may invest a portion of its assets in the short-term securities listed below, U.S. government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS
The Fund may invest in obligations issued by banks and other savings
institutions. Investments in bank obligations include obligations of domestic
branches of foreign banks and foreign branches of domestic banks. Such
investments in domestic branches of foreign banks and foreign branches of
domestic banks may involve risks that are different from investments in
securities of domestic branches of U.S. banks. These risks may include future
unfavorable political and economic developments, possible withholding taxes on
interest income, seizure or nationalization of foreign deposits, currency
controls, interest limitations, or other governmental restrictions which might
affect the payment of principal or interest on the securities held by the Fund.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks. Bank
obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are
considered to be illiquid securities.
COMMERCIAL PAPER -- Commercial paper is a short-term obligation with a maturity ranging from one to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. The Fund may invest in commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A -- Ratings" for a description of commercial paper ratings.
YANKEE BONDS -- Yankee bonds are dollar-denominated bonds issued inside the United States by foreign entities. Investments in these securities involve certain risks that are not typically associated with investing in domestic securities. See "Foreign Securities."
STEP COUPON SECURITIES -- The Fund may invest in step-coupon securities. Step-coupon securities trade at a discount from their face value and pay coupon interest. The coupon rate is low for an initial period and then increases to a higher coupon rate thereafter. Market values of these types of securities generally fluctuate in response to changes in interest rates to a greater degree than conventional interest-paying securities of comparable term and quality. Under many market conditions, investments in such securities may be illiquid, making it difficult for the Fund to dispose of them or determine their current value.
ZERO COUPON BONDS -- These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with the same maturity. The Fund's investments in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its Fund securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once the
holder of the security has stripped or separated corpus and coupons, it may
sell each component separately. The principal or corpus is then sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (I.E., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of
the owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," the Fund can record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
TERMS TO UNDERSTAND:
MATURITY -- Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
The Fund that invests in debt securities has no real maturity. Instead, it calculates its weighted average maturity. This number is an average of the stated maturity of each debt security held by the Fund, with the maturity of each security weighted by the percentage of the assets of the Fund it represents.
DURATION -- Duration is a calculation that seeks to measure the price sensitivity of a debt security, or the Fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration. Effective duration takes into account call features and sinking Fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. Thus, the higher the duration, the more volatile the security. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES -- The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding period and coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument, therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
o INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (i.e., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected, resulting in prepayments on the securities. The Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of the Fund. If left unattended, drifts in the average maturity of the Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of the Fund.
o EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause the Fund's average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of the Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term treasury
securities, such as three-month treasury bills, are considered "risk free." Corporate securities offer higher yields than treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." Since an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which affects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called investment-grade because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, the Fund's investment managers may determine that it is of investment-grade. The Fund's investment managers may retain securities that are downgraded, if it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influence their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause the Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
The Fund may invest in securities of any credit quality, including securities that are rated below investment grade, but seeks to maintain a minimum average portfolio quality of B- or higher as determined at the time of purchase. When assessing the credit quality of the Fund's portfolio, the Fund uses ratings from S&P, Moody's and Fitch, Inc. or another SEC recognized Nationally Recognized Statistical Rating Organization ("NRSRO"). If the ratings assigned to a security are not the same, the highest rating of S&P, Moody's and/or Fitch will be used. If a security is not rated by S&P, Moody's or Fitch, the highest rating of another SEC recognized NRSRO will be used. No more than 30% of the Fund's market value determined at the time of purchase may be invested in securities only rated by another SEC recognized NRSRO. If a security is not rated by any SEC-recognized NRSRO, an equivalent rating determined by Loomis, Sayles & Company, L.P. (the "Adviser"), the Fund's investment adviser, will be used. No more than 10% of the Fund's market value determined at the time of purchase may be invested in investments not rated by any SEC recognized NRSRO.
A rating agency may change its credit ratings at any time. The Fund's investment managers monitor the rating of the security and will take such action, if any, it believes appropriate when it learns that a rating agency has reduced the security's rating. The Fund is not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded below the above-stated ratings.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's current assessment of the issuer's financial strength. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk. Ratings assigned by the rating agencies are based upon an analysis completed at the time of the rating of the obligor's ability to pay interest and repay principal, typically relying to a large extent on historical data, which may not accurately represent present or future circumstances. A credit rating is not a statement of fact or a recommendation to purchase, sell or hold a debt obligation. Also, credit quality can change suddenly and unexpectedly, and credit ratings may not reflect the issuer's current financial condition or events since the security was last rated. Rating agencies may have a financial interest in generating business, including from the arranger
or issuer of the security that normally pays for that rating, and providing a low rating might affect the rating agency's prospects for future business. While rating agencies have policies and procedures to address this potential conflict of interest, there is a risk that these policies will fail to prevent a conflict of interest from impacting the rating. Additionally, legislation has recently been enacted in an effort to reform rating agencies. Rules have also recently been adopted by the SEC to require rating agencies to provide additional disclosure and reduce conflicts of interest, and further reform has been proposed. It is uncertain how such legislation or additional regulation might impact the ratings agency business and the investment manager's use of ratings in its investment process.
The section "Appendix A -- Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
FOREIGN SECURITIES
TYPES OF FOREIGN SECURITIES:
Foreign securities are debt and equity securities that are traded or issued in markets outside of the U.S. The markets in which these securities are located can be developed or emerging. The Fund can invest in foreign securities in a number of ways, including:
o The Fund can invest directly in foreign securities denominated in a foreign currency;
o The Fund can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o The Fund can invest in investment funds.
AMERICAN DEPOSITARY RECEIPTS ("ADRS") - ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS - An "emerging country" is generally a country that the World Bank and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 150 countries that the international financial community generally considers to be emerging or developing countries, approximately 50 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
SOVEREIGN DEBT OBLIGATIONS - Sovereign debt obligations are issued or guaranteed by foreign governments or their agencies. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and pay interest when due, and may require renegotiation or reschedule of debt payments. In addition, prospects for repayment of principal and payment of interest may depend on political as well as economic factors. Although some sovereign debt, such as Brady Bonds, is collateralized by U.S. Government securities, repayment of principal and payment of interest is not guaranteed by the U.S. Government.
INVESTMENT FUNDS - Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If the Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS - Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict or control foreign investments in its securities markets. These restrictions could limit the Fund's ability to invest in a particular country or make it very expensive for the Fund to invest in that country. Some countries require prior governmental approval, while others limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION - There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign companies more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Adviser anticipates that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o Are generally more volatile than, and not as developed or efficient as, those in the United States;
o Have substantially less volume;
o Trade securities that tend to be less liquid and experience rapid and erratic price movements;
o Have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o Employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o May have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o Foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards.
o Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis.
o In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated.
o Economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights.
o Restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK -- If the Fund invests in foreign securities denominated in foreign currencies, it will be subject to foreign currency risk. While the Fund denominates its net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. A change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank
market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES - Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for the Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Fund receives from its investments. The Fund does not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS - If the Fund invests in securities in emerging markets, it will be subject to risks not typically associated with domestic securities. Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it more difficult for the Fund to sell its securities and could reduce the value of your shares. Differences in tax and accounting standards and difficulties in obtaining information about foreign companies can negatively affect investment decisions. Unlike more established markets, emerging markets may have governments that are less stable, markets that are less liquid and economies that are less developed.
Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Rating Services ("S&P") or Moody's Investor Services, Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; U.S. dollar denominated money market obligations of foreign banks or of foreign branches or subsidiaries of U.S. banks; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Description of Ratings" to this SAI.
STRUCTURED NOTES. The Fund may invest in a broad category of instruments known as "structured notes." These instruments are debt obligations issued by industrial corporations, financial institutions or governmental or international agencies. Traditional debt obligations typically obligate the issuer to repay the principal plus a specified rate of interest. Structured notes, by contrast, obligate the issuer to pay amounts of principal or interest that are determined by reference to changes in some external factor or factors, or the principal and interest rate may vary from the stated rate because of changes in these factors. For example, the issuer's obligations could be determined by reference to changes in the value of a commodity (such as gold or oil) or commodity index, a foreign currency, an index of securities (such as the S&P 500 Index) or an interest rate (such as the U.S. Treasury bill rate). In some cases, the issuer's obligations are determined by reference to changes over time in the difference (or "spread") between two or more external factors (such as the U.S.
prime lending rate and the total return of the stock market in a particular country, as measured by a stock index). In some cases, the issuer's obligations may fluctuate inversely with changes in an external factor or factors (for example, if the U.S. prime lending rate goes up, the issuer's interest payment obligations are reduced). In some cases, the issuer's obligations may be determined by some multiple of the change in an external factor or factors (for example, three times the change in the U.S. Treasury bill rate). In some cases, the issuer's obligations remain fixed (as with a traditional debt instrument) so long as an external factor or factors do not change by more than the specified amount (for example, if the value of a stock index does not exceed some specified maximum), but if the external factor or factors change by more than the specified amount, the issuer's obligations may be sharply reduced.
Structured notes can serve many different purposes in the management of the Fund. For example, they can be used to increase the Fund's exposure to changes in the value of assets that the Fund would not ordinarily purchase directly (such as currencies traded in a market that is not open to U.S. investors). They can also be used to hedge the risks associated with other investments the Fund holds. For example, if a structured note has an interest rate that fluctuates inversely with general changes in a country's stock market index, the value of the structured note would generally move in the opposite direction to the value of holdings of stocks in that market, thus moderating the effect of stock market movements on the value of the Fund's portfolio as a whole.
RISKS. Structured notes involve special risks. As with any debt obligation, structured notes involve the risk that the issuer will become insolvent or otherwise default on its payment obligations. This risk is in addition to the risk that the issuer's obligations (and thus the value of the Fund's investment) will be reduced because of adverse changes in the external factor or factors to which the obligations are linked. The value of structured notes will in many cases be more volatile (that is, will change more rapidly or severely) than the value of traditional debt instruments. Volatility will be especially high if the issuer's obligations are determined by reference to some multiple of the change in the external factor or factors. Many structured notes have limited or no liquidity, so that the Fund would be unable to dispose of the investment prior to maturity. As with all investments, successful use of structured notes depends in significant part on the accuracy of the Investment Adviser's analysis of the issuer's creditworthiness and financial prospects, and of the Investment Adviser's forecast as to changes in relevant economic and financial market conditions and factors. In instances where the issuer of a structured note is a foreign entity, the usual risks associated with investments in foreign securities (described below) apply. Structured notes may be considered derivative securities.
CREDIT LINKED NOTES - A credit linked note ("CLN") is a type of structured note issued by a special purpose entity (the "Note Issuer") whose value is linked to an underlying reference asset (the "Reference Instrument"). Credit linked notes typically provide periodic payments of interest as well as payment of principal upon maturity, the value of which is tied to the underlying reference asset. The purchaser of the CLN (the "Note Purchaser") invests a par amount and receives a payment during the term of the CLN that equals a fixed or floating rate of interest equivalent to a high rated funded asset (such as a bank certificate of deposit) plus an additional premium that relates to taking on the credit risk of the Reference Instrument. Upon maturity of the CLN, the Note Purchaser will receive a payment equal to (i) the original par amount paid to the Note Issuer, if there is neither a designated event of default (an "Event of Default") with respect to the Reference Instrument nor a restructuring of the issuer of the Reference Instrument (a "Restructuring Event") or (ii) the value of the Reference Instrument, if an Event of Default or Restructuring Event has occurred. Depending upon the terms of the CLN, it is also possible that the Note Purchaser may be required to take physical delivery of the Reference Instrument in the event of an Event of Default or a Restructuring Event. Most CLNs use a corporate bond (or a portfolio of corporate bonds) as the Reference Instrument(s). However, almost any type of fixed income security (including foreign government securities) or derivative contract (such as a credit default swap) can be used as the Reference Instrument.
Investments in credit-linked notes are subject to the risk of loss of the principal investment and/or periodic interest payments expected to be received from an investment in a credit-linked note in the event that one or more of the underlying obligations of a note default or otherwise become non-performing. To the extent the Fund invests in a credit-linked note that represents an interest in a single issuer or limited number of issuers, a credit event with respect to that issuer or limited number of issuers presents a greater risk of loss to the Fund than if the credit-linked note represented an interest in underlying obligations of multiple issuers.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. It is the current policy of the Fund not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% of the Fund's total assets. The investments of the
Fund in repurchase agreements, at times, may be substantial when, in the view
of the Adviser, liquidity or other considerations so warrant. The Fund will not
invest more than 33 1/3% of its assets in repurchase agreements.
REVERSE REPURCHASE AGREEMENT. The Fund may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Generally, the effect of such a transaction is that the Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Fund intends to use the reverse repurchase technique only when it will be advantageous to the Fund. The Fund will in each instance establish a segregated account with the Trust's custodian bank in which the Fund will maintain cash or cash equivalents or other portfolio securities equal in value to the Fund's obligations in respect of reverse repurchase agreements. The Fund will not invest more than 33 1/3% of its assets in reverse repurchase agreements.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to its Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. The Fund will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value
of the securities rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. In such instances, the Adviser will vote the securities in accordance with its proxy voting policies and procedures. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon the Fund's ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering
of expenses, such that shareholders would indirectly bear a proportionate share
of the operating expenses of such investment companies, including advisory
fees, in addition to paying the Fund's expenses. Unless an exception is
available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i)
acquiring more than 3% of the voting shares of any one investment company, (ii)
investing more than 5% of its total assets in any one investment company, and
(iii) investing more than 10% of its total assets in all investment companies
combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Claymore, Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise complies with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of the Fund's net assets invested in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from
registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
VARIABLE AND FLOATING RATE INSTRUMENTS. Certain of the obligations purchased by the Fund may carry variable or floating rates of interest, may involve a conditional or unconditional demand feature and may include variable amount master demand notes. Such instruments bear interest at rates that are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such securities.
WHEN ISSUED, DELAYED -- DELIVERY AND FORWARD TRANSACTIONS. A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities the Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. The Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
The Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When the Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, the Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because the Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. The Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments, such Fund's liquidity and the ability of the Adviser to manage it might be affected in the event its commitments to purchase "when-issued" securities ever exceed 25% of the value of its total assets.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time; provided, however, that the Fund will concentrate its investments in the asset-backed securities, commercial mortgage-backed securities and residential mortgage backed securities group of industries.
2. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
In addition to the investment objective of the Fund, the following limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
o The Fund may not hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
o The Fund may not change its investment strategy to invest at least 80% of its net assets (plus any borrowings for investment purposes) in mortgage-backed and other asset-backed securities, without 60 days' prior written notice to shareholders. For purposes of compliance with this policy, the Fund takes in account investments in structured notes that are expected to provide economic exposure equivalent to securitized assets in which the Fund may invest directly.
o The Fund may not borrow money in an amount exceeding 33 1/3% of the value of its total assets, provided that investment strategies which either obligate the Fund to purchase securities or require the Fund to cover a position by segregating assets or entering into an offsetting position shall not be subject to this limitation. To the extent that its borrowings exceed 5% of its assets: (i) all borrowings will be repaid before the Fund makes additional investments; and (ii) asset coverage of at least 300% is required.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries, with certain exceptions. The Fund will concentrate its investments in the asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities group of industries. This means the Fund will invest more than 25% of its assets, collectively, in this group. The Fund's investments in any single industry in the group, however, may, at any time, be less than 25% of assets, provided that its investments in any one or more of the industries in the group, in the aggregate, continues to represent at least 25% of assets.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Fund's current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The 1940 Act does not directly restrict an investment company's
ability to invest in real estate, but does require that every investment
company have a fundamental investment policy governing such investments. The
Fund will not purchase or sell real estate, except that the Fund may purchase:
(i) marketable securities issued by companies which own or invest in real
estate (including REITs).
COMMODITIES. The 1940 Act does not directly restrict an investment company's ability to invest in commodities, but does require that every investment company have a fundamental investment policy governing such investments. The Fund will not purchase or sell physical commodities or commodities contracts, except that the Fund may purchase: (i) marketable securities issued by companies which own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
THE ADVISER
GENERAL. Loomis, Sayles & Company, L.P. (the "Adviser"), a Delaware limited partnership formed in 1926, located at One Financial Center, Boston, Massachusetts 02111-2621, is a professional investment management firm registered with the SEC under the Investment Advisers Act of 1940. The Adviser is a subsidiary of Natixis US, which is part of Natixis Global Asset Management. As of December 31, 2012, the Adviser had approximately $186.1 billion in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated June 20, 2011 (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall indemnify and hold the Fund harmless from losses arising out of, among other
things, the Adviser's breach of the Advisory Agreement or improper investments made by the Adviser.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. The Advisory Agreement provides that the Adviser will not charge the Fund an investment advisory fee or any other fee for those services or for bearing those expenses. Similarly, the Adviser receives an advisory fee directly from institutional advisory clients whose assets it advises under a separate investment management agreement. The Fund does pay other expenses of the Fund such as administration fees, custody fees and general operating expenses. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep total annual Fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 0.20% of the Fund's average daily net assets.
During the fiscal period from December 15, 2011 (commencement of Fund operations) to October 31, 2012, the Fund paid the Adviser $0 in advisory fees. The Adviser additionally reimbursed fees of $307,998 for the Fund to maintain the stated expense cap under its contractual expense limitation agreement with the Fund.
THE PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser believes that portfolio manager compensation should be driven primarily by the delivery of consistent and superior long-term performance for its clients. Portfolio manager compensation is made up of three main components -- base salary, variable compensation and a long-term incentive program. Although portfolio manager compensation is not directly tied to assets under management, a portfolio manager's base salary and/or variable compensation potential may reflect the amount of assets for which the manager is responsible relative to other portfolio managers. The Adviser also offers a profit sharing plan. Base salary is a fixed amount based on a combination of factors including industry experience, firm experience, job performance and market considerations. Variable compensation is an incentive-based component and generally represents a significant multiple of base salary. It is based on four factors --investment performance, profit growth of the firm, profit growth of the manager's business unit and team commitment. Investment performance is the primary component and generally represents at least 60% of the total for fixed income managers and 70% for equity managers. The other three factors are used to determine the remainder of variable compensation, subject to the discretion of the Chief Investment Officer (CIO) and senior management. The CIO and senior management evaluate these other factors annually.
While mutual fund performance and asset size do not directly contribute to the compensation calculation, investment performance for fixed income managers is measured by comparing the performance of the firm's institutional composite (pre-tax and net of fees) in the manager's style to the performance of an external benchmark and a customized peer group. The customized peer group is created by the Adviser and is made up of institutional managers in the particular investment style. A manager's relative performance for the past five years is used to calculate the amount of variable compensation payable due to performance. To ensure consistency, the Adviser analyzes a rolling three year performance metric for the most recent eight quarters:, this approach allows the Adviser to examine each manager's performance over the last five years. If a manager is responsible for more than one product, the rankings of each product are weighted based on relative asset size of accounts represented in each product.
The Adviser uses both an external benchmark and a customized peer group as a point of comparison for fixed income
manager performance because it believes they represent an appropriate combination of the competitive fixed income product universe and the investment styles offered by the firm.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES(1) -------------------------------------------------------------------------------- Alessandro Pagani None -------------------------------------------------------------------------------- Stephen L'Heureux None -------------------------------------------------------------------------------- Dmitri Rabin None -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Fund, certain portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below is subject to a performance-based advisory fee. The information below is provided as of October 31, 2012.
REGISTERED OTHER POOLED
INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------- ------------------------- -------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
NAME ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
------------ --------- --------------- --------- --------------- --------- ---------------
Alessandro
Pagani 2 $920.56 1 $149.71 7 $1.17
------------ --------- --------------- --------- --------------- --------- ---------------
Stephen 1 $227.63 0 $0 3 $0.27
L'Heureux
------------ --------- --------------- --------- --------------- --------- ---------------
Dmitri Rabin 1 $227.63 0 $0 5 $0.61
------------ --------- --------------- --------- --------------- --------- ---------------
|
CONFLICTS OF INTERESTS. Conflicts of interest may arise in the allocation of investment opportunities and the allocation of aggregated orders between the Fund and other accounts managed by the Adviser (including institutional accounts, mutual funds, hedge funds and affiliated accounts). The Adviser potentially could give favorable treatment to some accounts for a variety of reasons, including favoring large accounts, accounts that pay higher fees, accounts that pay performance-based fees, accounts of affiliated companies and accounts in which the portfolio manager has an interest. Such favorable treatment could lead to more favorable investment opportunities or allocations for some accounts. The Adviser makes investment decisions for all accounts based on each account's availability of other comparable investment opportunities and the Adviser's desire to treat all accounts fairly and equitably over time. The Adviser maintains trade allocation and aggregation policies and procedures to address these potential conflicts. Conflicts of interest also may arise to the extent a portfolio manager short sells a stock in one client account but holds that stock long in other accounts, including the Fund, or sells a stock for some accounts while buying the stock for others, and through the use of "soft dollar arrangements," which are discussed in the section "Fund Transactions."
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have
entered into an administration agreement dated November 14, 1991, as amended
and restated November 12, 2002 (the "Administration Agreement").
Under the Administration Agreement, the Administrator provides the Trust with
administrative services, including regulatory reporting and all necessary
office space, equipment, personnel and facilities. Pursuant to a schedule to
the Administration Agreement, the Administrator also serves as the shareholder
servicing agent for the Fund whereby the Administrator provides certain
shareholder services to the Fund.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $500 million
--------------------------------------------------------------------------------
0.10% $500 million - $1 billion
--------------------------------------------------------------------------------
0.08% Over $1 billion
--------------------------------------------------------------------------------
|
The foregoing fee is subject to a minimum annual fee of $125,000 for the Loomis, Sayles & Company, L.P. fund complex, and is applicable to each portfolio within the fund complex.
o For each additional class of shares of a fund established after the initial (1) class of shares per fund, the minimum annual fee will be increased by $20,000.
For the fiscal year ended October 31, 2012, the Fund paid the following administration fees:
------------------------------------------------------------------------------------------------------------
FUND CONTRACTUAL FEES WAIVED BY TOTAL FEES PAID (AFTER
ADMINISTRATION FEES ADMINISTRATOR WAIVERS)
PAID
------------------------------------------------------------------------------------------------------------
2012(1) 2012(1) 2012(1)
------------------------------------------------------------------------------------------------------------
Loomis Sayles Full Discretion $160,216 $0 $160,216
Institutional Securitized Fund
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|
(1) Represents the period from December 15, 2011 (commencement of Fund operations) to October 31, 2012.
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.
THE TRANSFER AGENT
State Street Bank & Trust Company, State Street Financial Center, One Lincoln Street, Boston, MA 02111 (the "Transfer Agent"), serves as transfer agent and Boston Financial Data Services, Inc. ("BFDS") serves as the servicing agent for the Fund under transfer agency agreements with the Trust. The structure of the fee agreement with the Transfer Agent is based upon the size, type and number of accounts and transactions made by shareholders. The Fund compensates BFDS for its services.
THE CUSTODIAN
Union Bank, N.A., 475 Sansome Street, 15th Floor, San Francisco, California 94111 (the "Custodian"), serves as the custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700, Philadelphia, PA 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares)
overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
-------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
-------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
Board of Trustees(1) present; currently Advisors' Inner Circle Fund II, Bishop
(08/17/46) performs various Street Funds, SEI Daily Income Trust, SEI
(since 1991) services on behalf of Institutional International Trust, SEI
SEI Investments for Institutional Investments Trust, SEI
which Mr. Nesher is Institutional Managed Trust, SEI Liquid
compensated. Asset Trust, SEI Asset Allocation Trust,
President and Director SEI Tax Exempt Trust, Adviser Managed
of SEI Structured Trust and New Covenant Funds. Director of
Credit Fund, LP. SEI Global Master Fund plc, SEI Global
President and Chief Assets Fund plc, SEI Global Investments
Executive Officer of Fund plc, SEI Investments--Global Funds
SEI Alpha Strategy Services, Limited, SEI Investments Global,
Portfolios, LP, June Limited, SEI Investments (Europe) Ltd.,
2007 to present. SEI Investments--Unit Trust Management
President and Director (UK) Limited, SEI Multi-Strategy Funds
of SEI Opportunity PLC, SEI Global Nominee Ltd and SEI
Fund, L.P. to 2010. Alpha Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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S-28
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POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
-------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
Consultant since 2003. Advisors' Inner Circle Fund II, Bishop
(05/26/40) (since 1991) Partner at Morgan, Street Funds, SEI Daily Income Trust, SEI
Lewis & Bockius LLP Institutional International Trust, SEI
(law firm) from 1976 to Institutional Investments Trust, SEI
2003. Counsel to the Institutional Managed Trust, SEI Liquid
Trust, SEI Investments, Asset Trust, SEI Asset Allocation Trust,
SIMC, the SEI Tax Exempt Trust, Adviser Managed
Administrator and the Trust and New Covenant Funds. Director of
Distributor. SEI Alpha Strategy Portfolios, LP. Director
of SEI Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global, Limited,
SEI Investments (Asia), Limited, SEI Asset
Korea Co., Ltd., SEI Global Nominee Ltd.
and SEI Investments -- Unit Trust
Management (UK) Limited. Director of the
Distributor since 2003.
-------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Current Directorships: Trustee of The
Business Consultant, Advisors' Inner Circle Fund II and Bishop
(08/20/34) (since 2005) Business Projects Inc., Street Funds. Director of Oregon Transfer
since 1997. Co.
-------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
Executive Officer, Advisors' Inner Circle Fund II and Bishop
(08/17/44) (since 2008) Office of Finance, Street Funds. Director of Federal Home
Federal Home Loan Loan Bank of Pittsburgh, Manna, Inc. (non-
Banks, from 1992 to profit developer of affordable housing for
2007. ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
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S-29
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POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
-------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
Consultant since Advisors' Inner Circle Fund II and Bishop
(05/28/52) (since 2011) January 2012. Director Street Funds. Director of The Korea Fund,
of Endowments and Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
-------------------------------------------------------------------------------------------------------------
Mitchell A. Johnson Trustee Retired. Private Current Directorships: Trustee of The
Investor since 1994. Advisors' Inner Circle Fund II, Bishop
(03/01/42) (since 2005) Street Funds, SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Institutional
International Trust, SEI Institutional
Managed Trust, SEI Institutional
Investments Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds. Director of
SEI Alpha Strategy Portfolios, LP. Director
of Federal Agricultural Mortgage
Corporation (Farmer Mac) since 1997.
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Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
Compliance, AARP Advisors' Inner Circle Fund II and Bishop
(01/23/43) (since 2005) Financial Inc., from Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
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S-30
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POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE PAST 5
BIRTH OF TERM IN THE PAST 5 YEARS YEARS
-------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
Allocation, Manulife Advisors' Inner Circle Fund II and Bishop
(02/12/56) (since 2011) Asset Management Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
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James M. Storey Trustee Attorney, Solo Current Directorships: Trustee/Director of
Practitioner since 1994. The Advisors' Inner Circle Fund II, Bishop
(04/12/31) (since 1994) Street Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust, SEI
Institutional International Trust, SEI
Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid
Asset Trust, SEI Asset Allocation Trust, SEI
Tax Exempt Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
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George J. Sullivan, Jr. Trustee Retired since January Current Directorships: Trustee/ Director of
2012. Self-employed State Street Navigator Securities Lending
(11/13/42) (since 1999) Consultant, Newfound Trust, The Advisors' Inner Circle Fund II,
Consultants Inc., April Bishop Street Funds, SEI Structured Credit
Lead Independent 1997 to December Fund, LP, SEI Daily Income Trust, SEI
Trustee 2011. Institutional International Trust, SEI
Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid
Asset Trust, SEI Asset Allocation Trust,
SEI Tax Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed Trust and
New Covenant Funds. Member of the
independent review committee for SEI's
Canadian-registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the
1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
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INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified
public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and considering any significant
disputes between the Trust's management and the independent registered
public accounting firm that arose in connection with the preparation of
those financial statements; (vii) considering, in consultation with the
independent registered public accounting firm and the Trust's senior
internal accounting executive, if any, the independent registered public
accounting firms' reports on the adequacy of the Trust's internal financial
controls; (viii) reviewing, in consultation with each fund's independent
registered public accounting firm, major changes regarding auditing and
accounting principles and practices to be followed when preparing each
fund's financial statements; and (ix) other audit related matters. Messrs.
Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms.
Krikorian currently serve as members of the Audit Committee. Mr. Sullivan
serves as the Chairman of the Audit Committee. The Audit Committee meets
periodically, as necessary, and met four (4) times during the most recently
completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause,
Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
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PENSION OR RETIREMENT ESTIMATED ANNUAL
AGGREGATE BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME COMPENSATION OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
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NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
-------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
-------------------------------------------------------------------------------------------------------
Michael Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Lawson Financial Officer since July 2005. Manager, SEI Investments,
Fund Accounting at SEI Investments AVP from
(10/08/60) (since 2005) April 1995 to February 1998 and November
1998 to July 2005.
-------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(since 2006) Credit Fund, LP and SEI Alpha Strategy
(12/18/62) Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed Trust
and New Covenant Funds. Chief Compliance
Officer of SEI Opportunity Fund, L.P. until
2010. Director of Investment Product
Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February
2003.
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S-35
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NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
-------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(since 1999) SIMC and the Administrator since 1999. Vice
(03/28/68) President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
-------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
from 2006 to 2010. Associate at Morrison &
(07/18/77) Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
-------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
-------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(since 2009) 2003.
(8/24/80)
AML Officer
(since 2011)
-------------------------------------------------------------------------------------------------------
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PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Shares may only be purchased through an investment advisory agreement with the Adviser.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
This general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY. The Fund intends to qualify and elect to be treated as a "regulated investment company" ("RIC") under Subchapter M of the Code. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which they may be subject. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to be taxable as a RIC, the Fund must distribute at least 90% of their net investment income (which, includes dividends, taxable interest, and the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities, or foreign currencies, or certain other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stocks, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership (the "Qualifying Income Test"); (ii) at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount that does not exceed 5% of the value of the Fund's assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of the Fund's assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer or the securities (other than the securities of another RIC) of two or more issuers that the Fund controls and that are engaged in the same, similar or related trades or business, or the securities of one or more qualified publicly traded partnerships (the "Diversification Test"). Although the Fund intends to distribute substantially all of their net investment income and may distribute their capital gains for any taxable year, the Fund will be subject to federal income taxation to the extent any such income or gains are not distributed.
If the Fund fails to qualify for any taxable year as a RIC, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and such distributions generally will be taxable to shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits. In this event, distributions generally will be eligible for the dividend-received deduction for corporate shareholders and for the lower capital gains rates on qualified dividend income for individual shareholders to the extent they would qualify if the Fund was a regular corporation. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC. If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect. These relief procedures impose monetary penalties in lieu of subjecting all of the income of such a RIC to regular corporate income tax rates for the year of the failure to meet the RIC qualification tests.
For taxable years beginning after December 22, 2010, the Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
FEDERAL EXCISE TAX. If the Fund fails to distribute in a calendar year at least 98% of its ordinary income for the year and 98.2% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses) for the one-year period ending October 31 of that year (and any retained amount from the prior calendar year on which the Fund paid no federal income tax), the Fund will be subject to a nondeductible 4% Federal excise tax on the undistributed amounts. The Fund intends to make sufficient distributions to avoid imposition of this tax, or to retain, at most their net capital gains and pay tax thereon.
DISTRIBUTIONS TO SHAREHOLDERS. The Fund may derive capital gains and losses in connection with sales or other dispositions of their portfolio of securities. Distributions of net short-term capital gains will be taxable to you as ordinary income. Distributions of net long-term capital gains will be taxable to you as long-term capital gain regardless of how long you have held your shares. Distributions of dividends will be taxed as ordinary income except that distributions of qualified dividend income will be taxed at the lower capital gains rates available for individual shareholders.
Certain distributions by the Fund may be eligible for the reduced maximum tax rate to individuals of 20% (lower rates apply to individuals in lower tax brackets) to the extent that the Fund receives qualified dividend income on the securities it holds and the Fund designates the distributions as qualified dividend income. A distribution from the Fund generally qualifies as qualified dividend income to the extent it is designated as such by the Fund and was distributed from dividends received by the Fund from taxable domestic corporations and certain qualified foreign corporations, subject to limitations including holding period limitations, imposed on the Fund and its shareholders. Capital gain distributions consisting of the Fund's net capital gains will be taxable as long-term capital gains at a maximum rate of 20%.
The Fund will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Fund.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
In the case of corporate shareholders, Fund distributions (other than capital gains distributions) generally qualify for the dividend-received deduction to the extent such distributions are so designated and do not exceed the gross amount of qualifying dividends received by the Fund for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
SALES, EXCHANGES, OR REDEMPTIONS. Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Fund (or its administrative agent) must report to the IRS and furnish to Fund shareholders the cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares the Fund will permit Fund shareholders to elect from among several IRS-accepted cost basis methods, including the average basis. In the absence of an election, the Fund will use the first-in, first-out method as their default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them. The requirement to report only the gross proceeds from the sale of Fund shares continues to apply to all Fund shares acquired through December 31, 2011, and sold on and after that date.
In certain cases, the Fund will be required to withhold at a rate of 28% and remit to the United States Treasury, back up withholding on any distributions paid to a shareholder who (1) has failed to provide a correct taxpayer identification number, (2) is subject to backup withholding by the Internal Revenue Service ("IRS"), (3) has not certified to the Fund that such shareholder is not subject to backup withholding, or (4) has failed to certify that he or she is a U.S. citizen or U.S. resident alien.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of Fund shares).
The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses. In turn, those rules may affect the amount, timing or character of the income distributed to you by the Fund.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, the Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because the Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxed to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
If the Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies" or "PFIC," the Fund will be subject to one of the following special tax regimes: (i) the Fund will be liable for federal income tax, and an additional interest charge, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund is able and elect to treat a PFIC as a "qualifying electing fund" or "QEF," the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the PFIC, whether or not such earnings or gains are distributed to the Fund; or (iii) annually the Fund may be entitled to mark-to-market shares of the PFIC, and in such event, would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
The Fund may invest in REITs. Investments in REIT equity securities may require the Fund to accrue and distribute income not yet received. To generate sufficient cash to make the requisite distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. The Fund's investments in REIT equity securities may at other times result in the Fund's receipt of cash in excess of the REIT's earnings if the Fund distributes these amounts, these distributions could constitute a return of capital to Fund shareholders for federal income tax purposes. Dividends received by the Fund from a REIT generally will not constitute qualified dividend income and will not qualify for the dividends received deduction.
Certain tax-exempt shareholders, including qualified pension plans, individual
retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt
entities, generally are exempt from federal income taxation except with respect
to their unrelated business taxable income ("UBTI"). Under current law, the Fund
generally serves to block UBTI from being realized by its tax-exempt
shareholders. However, notwithstanding the foregoing, the tax-exempt shareholder
could realize UBTI by virtue of an investment in the Fund where, for example:
(i) the Fund invests in residual interests of Real Estate Mortgage Investment
Conduits (REMICs); (ii) the Fund invests in a REIT that is a taxable mortgage
pool (TMP) or that has a subsidiary that is TMP or that invests in the residual
interest of a REMIC; or (iii)shares in the Fund constitute debt-financed
property in the hands of the tax-exempt shareholder within the meaning of
section 514(b) of the Code. Charitable remainder trusts are subject to special
rules and should consult their tax advisor. The IRS has issued guidance with
respect to these issues and prospective shareholders, especially charitable
remainder trusts, are encouraged to consult with their tax advisors regarding
these issues.
FOREIGN TAXES. Dividends and interest received by the Fund may be subject to income, withholding or other taxes imposed by foreign countries and United States possessions that would reduce the yield on the Fund's securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors. If more than 50% of the value of the Fund's total assets at the close of its taxable year consists of stock or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that will enable shareholders, in effect, to receive the benefit of the foreign tax credit with respect to any foreign and United States possessions income taxes paid by the Fund. Pursuant to the election, the Fund will treat those taxes as dividends paid to its shareholders. Each shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating the foreign tax credit (subject to significant limitations) against the shareholder's federal income tax. If the Fund makes the election, it will report annually to its shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and United States possessions.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
Under U.S. Treasury regulations, generally, if an individual shareholder recognizes a loss of $2 million or more or a corporate shareholder recognizes a loss of $10 million or more, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. It is expected that the Fund will not be liable for any corporate excise, income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes. Distributions by the Fund to shareholders and the ownership of shares may be subject to state and local taxes. Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a fund. Investment in Ginnie Mae or Fannie Mae securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, they will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal period from December 15, 2011 (commencement of Fund operations) to October 31, 2012, the Fund did not pay any brokerage commissions on portfolio transactions.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Fund's Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser in connection with the Fund or any other specific client account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not
fall within the safe harbor of Section 28(e).
For the fiscal period from December 15, 2011 (commencement of Fund operations) to October 31, 2012, the Fund did not pay any commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal period from December 15, 2011 (commencement of Fund operations) to October 31, 2012, the Fund did not pay any brokerage commissions on portfolio transactions effected through affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. During the fiscal year ended October 31, 2012, the Fund held the following securities of "regular brokers and dealers:"
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FUND NAME OF ISSUER TYPE OF SECURITY DOLLAR AMOUNT
AT FISCAL
YEAR END
--------------------------------------------------------------------------------------------
Loomis Sayles Full Discretion JP Morgan Chase Debt $12,599,000
Institutional Securitized Fund --------------------------------------------------------
Citigroup Debt $10,212,000
--------------------------------------------------------------------------------------------
Morgan Stanley Debt $16,592,000
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PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the greater of the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. The Fund may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover.
For the fiscal year ended October 31, 2012, the Fund's portfolio turnover rate was as follows:
(1) Represents the period between December 15, 2011 (commencement of Fund operations) and October 31, 2012.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter or any affiliated person of the Fund, its Adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer (the "Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the
foregoing principles. The Authorized Person reports at least quarterly to the Board regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31 and October 31). The Fund discloses a complete schedule of investments in each Semi-Annual Report and Annual Report to Fund shareholders or, following the first and third fiscal quarters, in quarterly holdings reports filed with the SEC on Form N-Q. Semi-Annual and Annual Reports are distributed to Fund shareholders. Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders, but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. In addition, the Fund's complete portfolio holdings are available to institutional advisory clients of the Adviser ("eligible investors") on a monthly basis, within 10 days of the end of each month, on the internet, by logging on to eService on the "Client Login" page at www.loomissayles.com. Eligible investors may obtain login information by contacting their Loomis Sayles client service manager.
The Fund's policies and procedures provide that the Authorized Persons, may authorize disclosure of portfolio holdings information to third parties at differing times and/or with different lag times then the information posted to the internet; provided that the recipient is, either by contractual agreement or otherwise by law, (i) required to maintain the confidentiality of the information and (ii) prohibited from using the information to facilitate or assist in any securities transactions or investment program. No compensation or other consideration is paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information. The Fund will review a third party's request for portfolio holdings information to determine whether the third party has legitimate business objectives in requesting such information.
The Trust's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
In addition, the Fund's service providers, such as the Custodian, Administrator and Transfer Agent, may receive portfolio holdings information as frequently as daily in connection with their services to the Fund. In addition to any contractual provisions relating to confidentiality of information that may be included in the service providers contract with the Trust, these arrangements impose obligations on the Fund's service providers that would prohibit them from disclosing or trading on the Fund's non-public information. Financial printers and pricing information vendors may receive portfolio holdings information, as necessary, in connection with their services to the Fund.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or class of shares. All consideration received by the Trust for shares of any additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Fund's shares, when issued, are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the Trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures ("Procedures"). Decisions made by the Adviser regarding the voting of proxies shall be made solely in the interest of the Fund and its shareholders. The exclusive purpose shall be to provide benefits to the shareholders of the Fund by considering those factors that affect the value of the securities. The Adviser shall exercise its fiduciary responsibilities to vote proxies with respect to the Fund's investments that are managed by the Adviser in a prudent manner in accordance with its Procedures. Proposals that, in the opinion of the Adviser, are in the best interests of shareholders are generally voted "for" and proposals that, in the judgment of the Adviser, are not in the best interests of shareholders are generally voted "against." The Adviser is responsible for maintaining certain records and reporting to the Board in connection with the voting of proxies. Upon request, for reasonable periodic review as well as annual reporting to the SEC, the Adviser shall make available to the Fund or the Fund's administrator, the records and information maintained by the Adviser under its Procedures.
The Adviser uses the services of third parties ("Proxy Voting Services") to research and administer the vote on proxies for those accounts and funds for which the Adviser has voting authority. The Adviser's research and recommendation Proxy Voting Service provides vote recommendations or analysis to the Adviser based on the Proxy Voting Service's own research. The Adviser will generally follow its Procedures with input from the Proxy Voting Service unless the Adviser's Proxy Committee (the "Proxy Committee") determines that the client's best interests are served by voting otherwise.
All issues presented for shareholder vote will be considered under the oversight of the Proxy Committee. All non-routine issues will be directly considered by the Proxy Committee and, when necessary, the equity analyst following the company or the portfolio manager of the Fund, and will be voted in the best investment interests of the Fund. All routine "for" and "against" issues will be voted according to the Adviser's Procedures approved by the Proxy Committee unless special factors require that they be considered by the Proxy Committee and, when necessary, the equity analyst following the company or the portfolio manager of the Fund. The Adviser's Proxy Committee has established these routine policies in what it believes are the best investment interests of its clients.
The specific responsibilities of the Proxy Committee include (1) the
development, authorization, implementation and update of the Procedures,
including an annual review of the Procedures, existing voting guidelines and
the proxy voting process in general, (2) oversight of the proxy voting process,
including oversight of the vote on proposals according to the predetermined
policies in the Procedures, directing the vote on proposals where there is
reason not to vote according to the predetermined policies in the Procedures or
where proposals require special consideration, and consultation with the
portfolio managers and analysts for the Fund when necessary or appropriate and
(3) engagement and oversight of third-party vendors, including the Proxy Voting
Services.
The Adviser has established several policies to ensure that proxies are voted in its clients' best interest and are not affected by any possible conflicts of interest. First, except in certain limited instances, the Adviser votes in accordance with its pre-determined policies set forth in the Procedures. Second, where these Procedures allow for discretion, the Adviser will generally consider the recommendations of its research and recommendation Proxy Voting Service in making its voting decisions. However, if the Proxy Committee determines that the Proxy Voting Service's recommendation is not in the best interest of its clients, then the Proxy Committee may use its discretion to vote against the Proxy Voting Service's recommendation, but only after taking the following steps: (1) conducting a review for any material conflict of interest the Adviser may have and, (2) if any material conflict is found to exist, excluding anyone at the Adviser who is subject to that conflict of interest from participating in the voting decision in any way. However, if deemed necessary or appropriate by the Proxy Committee after full prior disclosure of any conflict, that person may provide information, opinions or recommendations on any proposal to the Proxy Committee. In such event the Proxy Committee will make reasonable efforts to obtain and consider, prior to directing any vote information, opinions or recommendations from or about the opposing position on any proposal. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-800-343-2029; and (ii) on the SEC's website at http://www.sec.gov.
CODE OF ETHICS
The Board on behalf of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Administrator and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to engage in personal transactions, but are required to report their personal securities transactions for monitoring purposes. Certain Access Persons are prohibited from engaging in personal securities transactions in securities that are held by the Fund. In addition, all Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Fund. Any shareholder listed below as owning, of record or beneficially, more than 25% of the Fund's outstanding shares may be deemed to "control" the Fund within the meaning of the 1940 Act. The Trust believes that most of the shares referred to below were held by the persons listed below in account for their fiduciary, agency or custodial customers. Shareholders controlling the Fund may have a significant impact on any shareholder vote of the Fund.
-------------------------------------------------------------------------------------------------------- LOOMIS SAYLES FULL DISCRETION SECURITIZED FUND -- INSTITUTIONAL CLASS SHARES -------------------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------------------------------- Loomis Sayles MultiSector Full Discretion Trust 2,409,226.863 10.78 One Financial Center Boston, MA 02111-2621 -------------------------------------------------------------------------------------------------------- Arkansas Teachers Retirement System 2,392,049.388 10.71 1400 West Third St Little Rock, AR 72201-1889 -------------------------------------------------------------------------------------------------------- Transamerica Life Insurance Co 1,735,054.713 7.77 1150 S Olive St Los Angeles, CA 90015-2211 -------------------------------------------------------------------------------------------------------- Blue Cross Blue Shield of Michigan 1,701,868.322 7.62 600 East Lafayette Ste 1800 Detroit , MI 48226-2998 -------------------------------------------------------------------------------------------------------- Kentucky Retirement Systems Pension 1,455,831.945 6.52 The Pension Plan 1260 Louisville Rd Frankfort, KY 40601-6157 -------------------------------------------------------------------------------------------------------- North Dakota State Investment Board 1,366,878.561 6.12 1930 Burnt Boat Dr PO Box 7100 Bismarck, ND 58507-7100 -------------------------------------------------------------------------------------------------------- Pension Fund of the Christian Church (Disciples of Christ) 1,235,928.174 5.53 Inc. 130 E Washington St Indianapolis, IN 46204-3645 -------------------------------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
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following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
- Well-established access to a range of financial markets and assured sources of alternate liquidity.
The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S SHORT-TERM MIG/VMIG RATINGS - US TAX-EXEMPT MUNICIPALS. There are four rating categories for short-term obligations that define an investment grade situation. These are designated Moody's Investment Grade as MIG 1 (best quality) through MIG 4 (adequate quality). Short-term obligations of speculative quality are designated SG.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents an evaluation of the degree of risk associated with scheduled principal and interest
payments, and the other represents an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
Issues that are subject to a periodic reoffer and resale in the secondary market in a "Dutch auction" are assigned a long-term rating based only on Moody's assessment of the ability and willingness of the issuer to make timely principal and interest payments. Moody's expresses no opinion as to the ability of the holder to sell the security in a secondary market "Dutch auction." Such issues are identified by the insertion of the words "Dutch auction" into the name of the issue.
Issues or the features associated with MIG or VMIG ratings are identified by date of issue, date of maturity or maturities or rating expiration date and description to distinguish each rating from other ratings. Each rating designation is unique with no implication as to any other similar issue of the same obligor. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issue's specific structural or credit features.
MIG1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
MIG4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
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An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for it's refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a plus
(+) designation.
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SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE AND STRUCTURED FINANCE BOND RATINGS
S&P
Standard & Poor's--A brief description of the applicable rating symbols of Standard & Poor's and their meanings (as published by Standard & Poor's) follows:
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA
An obligation rated 'AA' differs from the highest-rated obligations only to a
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A
An obligation rated 'A' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC, and C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated
'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C
A 'C' rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of
the documents, or obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment default. Among
others, the 'C' rating may be assigned to subordinated debt, preferred stock or
other obligations on which cash payments have been suspended in accordance with
the instrument's terms or when preferred stock is the subject of a distressed
exchange offer, whereby some or all of the issue is either repurchased for an
amount of cash or replaced by other instruments having a total value that is
less than par.
D
An obligation rated 'D' is in payment default. The 'D' rating category is used
when payments on an obligation, including a regulatory capital instrument, are
not made on the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such
grace period. The 'D' rating also will be used upon the filing of a bankruptcy
petition or the taking of similar action if payments on an obligation are
jeopardized. An obligation's rating is lowered to 'D' upon completion of a
distressed exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other instruments having a
total value that is less than par.
Plus (+) or minus (-)
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
NR
This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular obligation as a matter of policy.
sf
The (sf) subscript is assigned to all issues and issuers to which a regulation,
such as the European Union Regulation on Credit Rating Agencies, requires the
assignment of an additional symbol which distinguishes a structured finance
instrument or obligor (as defined in the regulation) from any other instrument
or obligor. The addition of this subscript to a credit rating does not change
the definition of that rating or our opinion about the issue's or issuer's
creditworthiness.
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB-rating.
MOODY'S
Moody's Investors Service, Inc.--A brief description of the applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings (as published by Moody's) follows:
Moody's ratings on long-term structured finance obligations primarily address the expected credit loss an investor might incur on or before the legal final maturity of such obligations vis-[]-vis a defined promise.
As such, these ratings incorporate Moody's assessment of the default probability and loss severity of the obligations. Such obligations generally have an original maturity of one year or more, unless explicitly noted.
Moody's credit ratings address only the credit risks associated with the obligations; other non-credit risks have not been addressed, but may have a significant effect on the yield to investors. Moody's differentiates its ratings assigned to structured finance obligations by adding an (sf) indicator to all structured finance ratings.
Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts,
senior bank obligations and insurance company senior policyholder and claims
obligations with an original maturity in excess of one year. Obligations
relying upon support mechanisms such as letters-of-credit and bonds of
indemnity are excluded unless explicitly rated. Obligations of a branch of a
bank are considered to be domiciled in the country in which the branch is
located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer. NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for Bank Deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by actions of the government controlling the currency of denomination. In addition, risks associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer's branch is located are not incorporated into Moody's short-term debt ratings.
Moody's makes no representation that rated bank or insurance company obligations are exempt from the registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within the parenthesis beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
AAA: HIGHEST CREDIT QUALITY.
'AAA' ratings denote the lowest expectation of default risk. They are assigned
only in cases of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events.
AA: VERY HIGH CREDIT QUALITY.
'AA' ratings denote expectations of very low default risk. They indicate very
strong capacity for payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A: HIGH CREDIT QUALITY.
'A' ratings denote expectations of low default risk. The capacity for payment
of financial commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to adverse business or economic conditions than is the case
for higher ratings.
BBB: GOOD CREDIT QUALITY.
'BBB' ratings indicate that expectations of default risk are currently low. The
capacity for payment of financial commitments is considered adequate but
adverse business or economic conditions are more likely to impair this
capacity.
BB: SPECULATIVE.
'BB' ratings indicate an elevated vulnerability to default risk, particularly
in the event of adverse changes in business or economic conditions over time.
B: HIGHLY SPECULATIVE.
'B' ratings indicate that material default risk is present, but a limited
margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is vulnerable to deterioration in the
business and economic environment.
CCC: SUBSTANTIAL CREDIT RISK.
Default is a real possibility.
CC: VERY HIGH LEVELS OF CREDIT RISK.
Default of some kind appears probable.
C: EXCEPTIONALLY HIGH LEVELS OF CREDIT RISK.
Default appears imminent or inevitable.
D: DEFAULT.
Indicates a default. Default generally is defined as one of the following:
o failure to make payment of principal and/or interest under
the contractual terms of the rated obligation;
o the bankruptcy filings, administration, receivership,
liquidation or other winding-up or cessation of the business
of an issuer/obligor; or
o the coercive exchange of an obligation, where creditors were
offered securities with diminished structural or economic
terms compared with the existing obligation.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of
default is considerably less than for lower-rated issues. However, there are
significant uncertainties that could affect the ability to adequately service
debt obligations. Issues rated B show a higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could negatively affect the payment of interest and principal on a
timely basis.
DBRS
Description of Long-Term Debt Ratings
SYMBOL CREDIT QUALITY AAA Highest AA Superior |
A Satisfactory BBB Adequate BB Speculative B Highly Speculative CCC Very Highly Speculative CC Very Highly Speculative C Very Highly Speculative D In Arrears |
The DBRS long-term debt rating scale is meant to give an indication of the risk that a borrower will not fulfill its full obligations in a timely manner, with respect to both interest and principal commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity. Each rating category is denoted by the subcategories "high" and "low". The absence of either a "high" or "low" designation indicates the rating is in the "middle" of the category. The AAA and D categories do not utilize "high", "middle", and "low" as differential grades.
AAA Long-term debt rated AAA is of the highest credit quality, with exceptionally strong protection for the timely repayment of principal and interest. Earnings are considered stable, the structure of the industry in which the entity operates is strong, and the outlook for future profitability is favourable. There are few qualifying factors present that would detract from the performance of the entity. The strength of liquidity and coverage ratios is unquestioned and the entity has established a credible track record of superior performance. Given the extremely high standard that DBRS has set for this category, few entities are able to achieve a AAA rating.
AA Long-term debt rated AA is of superior credit quality, and protection of interest and principal is considered high. In many cases they differ from long-term debt rated AAA only to a small degree. Given the extremely restrictive definition DBRS has for the AAA category, entities rated AA are also considered to be strong credits, typically exemplifying above average strength in key areas of consideration and unlikely to be significantly affected by reasonably foreseeable events.
A Long-term debt rated A is of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than that of AA rated entities. While "A" is a respectable rating, entities in this category are considered to be more susceptible to adverse economic conditions and have greater cyclical tendencies than higher-rated securities.
BBB Long-term debt rated BBB is of adequate credit quality. Protection of interest and principal is considered acceptable, but the entity is fairly susceptible to adverse changes in financial and economic conditions, or there may be other adverse conditions present which reduce the strength of the entity and its rated securities.
BB Long-term debt rated BB is defined to be speculative and non investment-grade, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. Entities in the BB range typically have limited access to capital markets and additional liquidity support. In many cases, deficiencies in critical mass, diversification, and competitive strength are additional negative considerations.
B Long-term debt rated B is considered highly speculative and there is a reasonably high level of uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.
CCC CC C Long-term debt rated in any of these categories is very highly speculative and is in danger of default of interest and principal. The degree of adverse elements present is more severe than long-term debt rated B. Long-term debt rated below B often have features which, if not remedied, may lead to default. In practice, there is little difference between these three categories, with CC and C normally used for lower ranking debt of companies for which the senior debt is rated in the CCC to B range.
D A security rated D implies the issuer has either not met a scheduled payment of interest or principal or that the issuer has made it clear that it will miss such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is suspended, discontinued, or reinstated by DBRS.
Description of Commercial Paper & Short-Term Debt Ratings
SYMBOL CREDIT QUALITY R-1 (high) Highest R-1 (middle) Superior R-1 (low) Satisfactory R-2 (high) Upper End of Adequate R-2 (middle) Adequate R-2 (low) Lower End of Adequate R-3 Lowest End of Adequate R-4 Speculative R-5 Highly Speculative D In Arrears |
The DBRS short-term debt rating scale is meant to give an indication of the risk that a borrower will not fulfill its near-term debt obligations in a timely manner. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity.
R-1 (high) Short-term debt rated R-1 (high) is of the highest credit quality, and indicates an entity possessing unquestioned ability to repay current liabilities as they fall due. Entities rated in this category normally maintain strong liquidity positions, conservative debt levels, and profitability that is both stable and above average. Companies achieving an R-1 (high) rating are normally leaders in structurally sound industry segments with proven track records, sustainable positive future results, and no substantial qualifying negative factors. Given the extremely tough definition DBRS has established for an R-1 (high), few entities are strong enough to achieve this rating.
R-1 (middle) Short-term debt rated R-1 (middle) is of superior credit quality and, in most cases, ratings in this category differ from R-1 (high) credits by only a small degree. Given the extremely tough definition DBRS has established for the R-1 (high) category, entities rated R-1 (middle) are also considered strong credits, and typically exemplify above average strength in key areas of consideration for the timely repayment of short-term liabilities.
R-1 (low) Short-term debt rated R-1 (low) is of satisfactory credit quality. The overall strength and outlook for key liquidity, debt, and profitability ratios is not normally as favourable as with higher rating categories, but these considerations are still respectable. Any qualifying negative factors that exist are considered manageable, and the entity is normally of sufficient size to have some influence in its industry.
R-2 (high) Short-term debt rated R-2 (high) is considered to be at the upper end of adequate credit quality. The ability to repay obligations as they mature remains acceptable, although the overall strength and outlook for key liquidity, debt and profitability ratios is not as strong as credits rated in the R-1 (low) category. Relative to the latter category, other shortcomings often include areas such as stability, financial flexibility, and the relative size and market position of the entity within its industry.
R-2 (middle) Short-term debt rated R-2 (middle) is considered to be of adequate credit quality. Relative to the R-2 (high) category, entities rated R-2 (middle) typically have some combination of higher volatility, weaker debt or liquidity positions, lower future cash flow capabilities, or are negatively impacted by a weaker industry. Ratings in this category would be more vulnerable to adverse changes in financial and economic conditions.
R-2 (low) Short-term debt rated R-2 (low) is considered to be at the lower end of adequate credit quality, typically having some combination of challenges that are not acceptable for an R-2 (middle) credit. However, R-2 (low) ratings still display a level of credit strength that allows for a higher rating than the R-3 category, with this distinction often reflecting the issuer's liquidity profile.
R-3 Short-term debt rated R-3 is considered to be at the lowest end of adequate credit quality, one step up from being speculative. While not yet defined as speculative, the R-3 category signifies that although repayment is still expected, the certainty of repayment could be impacted by a variety of possible adverse developments, many of which would be outside of the issuer's control. Entities in this area often have limited access to capital markets and may also have limitations in securing alternative sources of liquidity, particularly during periods of weak economic conditions
R-4 Short-term debt rated R-4 is speculative. R-4 credits tend to have weak liquidity and debt ratios, and the future trend of these ratios is also unclear. Due to its speculative nature, companies with R-4 ratings would normally have very limited access to alternative sources of liquidity. Earnings and cash flow would typically be very unstable, and the level of overall profitability of the entity is also likely to be low. The industry environment may be weak, and strong negative qualifying factors are also likely to be present.
R-5 Short-term debt rated R-5 is highly speculative. There is a reasonably high level of uncertainty as to the ability of the entity to repay the obligations on a continuing basis in the future, especially in periods of economic recession or industry adversity. In some cases, short term debt rated R-5 may have challenges that if not corrected, could lead to default.
D A security rated D implies the issuer has either not met a scheduled payment or the issuer has made it clear that it will be missing such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is suspended, discontinued, or reinstated by DBRS.
DESCRIPTION OF COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS") RATINGS
REALPOINT
Realpoint is a rating agency primarily focused on evaluating the credit risk in commercial mortgage-backed securities (CMBS) transactions. While Realpoint may evaluate other types of asset-backed securities from time to time in accordance with Realpoint policies and procedures, the definitions and descriptions below focus on CMBS analysis. Realpoint's determination to review a CMBS transaction is performed on a case by case basis in accordance with Realpoint's policies and procedures set forth on Realpoint's website at www.realpoint.com, including the "Realpoint Analysis and Considerations" link on Realpoint's website.
Types of Rating Opinions
1. Letter-Grade Credit Rating. A Realpoint letter-grade credit rating is only an opinion on the ability of the collateral to support timely interest payments and to repay principal by the rated final distribution date according to the terms of the transaction and subject to the various qualifications, caveats and considerations enumerated in the respective ratings letters, pre-sale report, deal report and/or Realpoint's website at www.realpoint.com, including the "Realpoint Analysis and Considerations" link on this website.
Realpoint utilizes a set of letter ratings ranging from 'AAA' to 'D' to express its opinion on the credit quality of a security based on Realpoint's policies and procedures. The definitions for Realpoint's letter-grade ratings are as follows:
AAA
A rating of 'AAA' is the highest letter-grade rating assigned by Realpoint.
Securities rated 'AAA' have an extremely strong ability to make timely interest
payments and ultimate principal payments on or prior to a rated final
distribution date.
AA
A rating of 'AA' indicates the securities have a very strong ability to make
timely interest and ultimate principal payments on or prior to a rated final
distribution date.
A
A rating of 'A' indicates the securities have a strong ability to make timely
interest and ultimate principal payments on or prior to a rated final
distribution date, but that ability could be influenced by adverse changes in
circumstances or conditions, such as adverse business or economic conditions.
BBB
A rating of 'BBB' indicates the securities should be able to meet their
obligation to make timely payments of interest and ultimate payment of
principal on or prior to a rated final distribution date, but that ability
could be impacted by adverse changes in circumstances or conditions, such as
adverse business or economic conditions.
BB
A rating of 'BB' indicates the securities should be able to meet their
obligation to make timely payments of interest and ultimate payment of
principal on or prior to a rated final distribution date in the absence of
various adverse circumstances or conditions such as adverse business or
economic conditions. The vulnerability of securities rated 'BB' to the
previously mentioned conditions is greater than higher rated securities.
B
A rating of 'B' indicates a default has not yet occurred but the securities are
vulnerable to a challenging or changes in environment, conditions
orcircumstances. Securities rated 'B' are more vulnerable to nonpayment of
timely interest and ultimate payment of principal on or prior to a rated final
distribution date than higher rated securities.
CCC
A rating of 'CCC' indicates a material likelihood of default in the long term
(generally, twenty-four months or longer). Forecasted or actual losses may
erode, but have not yet eliminated, credit support provided by subordinate
securities.
CC and C
Beginning in 2009, no ratings are issued by Realpoint in the 'CC' or 'C'
category.
D
A rating of 'D' indicates a default has occurred or there is a substantial
likelihood of default in the short term (generally, within twenty-four months).
Forecasted losses are expected to reduce and/or actual losses have reduced the
principal balance of the 'D' rated security. In addition, forecasted or actual
losses have eliminated credit support provided by subordinate securities. For
purposes of the above, the following terms shall have the following meanings:
"default" shall generally include one or more of the below: (i) failure to pay
(1) timely interest and/or (2) principal on the securities, and/or (ii) any
bankruptcy, administration, receivership, winding up, liquidation or other
termination of the business of the issuer. "rated final distribution date"
typically is the rated final distribution date or term of similar import used
in the related offering documents for the respective transaction or otherwise
enumerated in the related Realpoint report for such transaction. "forecasted
losses" generally include one or more of the below: (i) projected losses
resulting from specially serviced loans, and/or (ii) projected losses due to a
decline in current appraisal values, and/or (iii) projected losses due to
anticipated payment defaults on any loans.
N. R. (non-rated)
A 'N.R.' designation is issued by Realpoint for situations where Realpoint (i)
is not rating the security and (ii) in accordance with Realpoint policies and
procedures, determines to expressly provide a N.R. designation.
+/- Gradations Realpoint also provides finer gradations of the ratings ranging from 'AA' to 'CCC' by adding a plus or minus sign to indicate relative strength within the rating categories.
2. Rating Outlooks. A Realpoint rating outlook is only an opinion regarding the future trends for the rated security over the next six to twelve months and is subject to the various qualifications, caveats and considerations enumerated in the respective deal report and/or Realpoint's website at WWW.REALPOINT.COM, including the "Realpoint Analysis and Considerations" link on this website. The types of rating outlooks and related meanings are enumerated below and subject to Realpoint's policies and procedures:
PERFORM. The security has performed as expected in terms of credit-risk characteristics. Considerations to determine if performance is "as expected" may include: (i) a review of forecasted credit support movement to determine whether such support has increased less than 10% or decreased less than 10-20%; and/or (ii) a review of forecasted subordinate dollar loss (SDL) to determine whether a security has a SDL between 25-50%.
OUTPERFORM. The security has performed better than expected in terms of
credit-risk characteristics when compared to both issuance and the last review.
The respective class exhibits characteristics that signify decreased credit
risk and may be a candidate for an upgrade.
Such characteristics may include actual or forecasted credit-support level
increases and/or the overall strong performance of the underlying collateral.
Considerations to determine if performance is "better than expected" may
include: (i) a review of forecasted credit support movement to determine
whether such support has increased by 10% or more; and/or (ii) a review of SDL
to determine whether the security has a SDL of less than 25%.
UNDERPERFORM. The security has performed worse than expected in terms of credit-risk characteristics when compared to both issuance and last review. The respective class exhibits characteristics that result in increased credit risk and may be a candidate for a downgrade or has the risk for potential loss. Such characteristics may include actual or forecasted credit-support level declines and/or the overall weak performance of the underlying collateral. Considerations to determine if performance is "worse than expected" may include: (i) a review of forecasted credit support movement to determine whether such support has declined by (a) 10% or more due to forecasted losses on specially serviced loans, or (b) 20% or more when including expected value deficiencies from loans indentified by Realpoint has High Risk Loans in accordance with Realpoint's policies and procedures; (ii) whether a security will suffer interest shortfalls of 25% or more of interest due on such security for three or more months; and/or (iii) a review of SDL to determine whether the security has a SDL of at least 25-50% or more.
STATEMENT OF ADDITIONAL INFORMATION
LSV VALUE EQUITY FUND
(TICKER SYMBOL: LSVEX)
LSV CONSERVATIVE VALUE EQUITY FUND
(TICKER SYMBOL: LSVVX)
LSV CONSERVATIVE CORE EQUITY FUND
(TICKER SYMBOL: LSVPX)
LSV SMALL CAP VALUE FUND
(TICKER SYMBOL: LSVQX)
EACH, A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
LSV ASSET MANAGEMENT
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the LSV Value Equity Fund, the LSV Conservative Value Equity Fund, the LSV Conservative Core Equity Fund and the LSV Small Cap Value Fund (each, a "Fund," and collectively, the "Funds"). This SAI is incorporated by reference and should be read in conjunction with each Fund's prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements and notes thereto with respect to each Fund are contained in the 2012 Annual Report to Shareholders and are herein incorporated by reference into and deemed to be part of this SAI. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Funds' prospectuses free of charge by calling 1-888-FUND-LSV.
TABLE OF CONTENTS
THE TRUST ................................................................ S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES .......... S-1 DESCRIPTION OF PERMITTED INVESTMENTS ..................................... S-2 INVESTMENT LIMITATIONS ...................................................S-10 THE ADVISER ..............................................................S-13 PORTFOLIO MANAGERS .......................................................S-14 THE ADMINISTRATOR ........................................................S-15 THE DISTRIBUTOR ..........................................................S-16 PAYMENTS TO FINANCIAL INTERMEDIARIES .....................................S-16 THE TRANSFER AGENT .......................................................S-17 THE CUSTODIAN ............................................................S-17 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................S-17 LEGAL COUNSEL ............................................................S-17 TRUSTEES AND OFFICERS OF THE TRUST .......................................S-17 PURCHASING AND REDEEMING SHARES ..........................................S-27 DETERMINATION OF NET ASSET VALUE .........................................S-27 TAXES ....................................................................S-28 FUND TRANSACTIONS ........................................................S-32 PORTFOLIO HOLDINGS .......................................................S-34 |
TABLE OF CONTENTS
(continued)
PAGE
DESCRIPTION OF SHARES S-36
SHAREHOLDER LIABILITY S-36
LIMITATION OF TRUSTEES' LIABILITY S-36
PROXY VOTING S-36
CODE OF ETHICS S-36
5% AND 25% SHAREHOLDERS S-37
APPENDIX A -- DESCRIPTION OF RATINGS A-1
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES B-1
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March 1, 2013 LSV-SX-002-1500
THE TRUST
GENERAL. Each Fund is a series of the Trust. The Trust is an open-end
investment management company established under Massachusetts law as a
Massachusetts voluntary association (commonly known as a business trust) under
a Declaration of Trust dated July 18, 1991, as amended and restated February
18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust
to offer separate series ("funds") of shares of beneficial interest ("shares").
The Trust reserves the right to create and issue shares of additional funds.
Each fund is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong solely to that
fund and would be subject to liabilities related thereto. Each Fund pays its
(i) operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses, and (ii) pro rata
share of the Fund's other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the
assets of that fund. Expenses not attributable to a specific fund are allocated
across all of the funds on the basis of relative net assets. The other funds of
the Trust are described in one or more separate Statements of Additional
Information.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. Each Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate each Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objectives and principal investment strategies are described in the prospectuses. The following information supplements, and should be read in conjunction with, the prospectuses. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
Each Fund seeks long-term growth of capital. This goal is fundamental, and may not be changed without the consent of shareholders. There can be no assurance that a Fund will be able to achieve its investment objective. Each Fund is classified as a "diversified" investment company under the Investment Company Act of 1940 (the "1940 Act").
As its principal investment strategy, each Fund invests primarily in equity securities as described in the Prospectuses. Consistent with Rule 35d-1 of the 1940 Act regarding the use of certain mutual fund names, each of the Value Equity, Conservative Core Equity and Conservative Value Equity Funds has adopted a "non-fundamental" policy to invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities and the Small Cap Value Fund has adopted a "non-fundamental" policy to invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small-capitalization companies. These non-fundamental policies may be changed by the Trust's Board of Trustees (the "Board") upon at least 60 days' written notice to Fund shareholders. The Adviser manages each of the LSV Conservative Value Equity Fund and the LSV Conservative Core Equity Fund conservatively relative to its respective benchmark, the Russell 1000 Value Index and the S&P 500 Index, respectively.
Although each Fund will normally be as fully invested as practicable in equity securities, as secondary investment strategies and consistent with its investment objective, a Fund may to a lesser extent invest in warrants, rights to purchase common stocks, debt securities convertible into common stocks and preferred stocks. A portion of a Fund's assets may also be invested in investment grade fixed income securities, cash and money market securities. Investment grade fixed income securities either are
debt securities rated in one of the four highest rating categories ("investment grade") by a nationally recognized statistical rating organization (an "NRSRO") or that the Funds' investment adviser, LSV Asset Management ("LSV" or the "Adviser"), determines are of comparable quality. Each Fund may also make limited use of equity index futures contracts for liquidity purposes. In order to generate additional income, each Fund may lend securities that it owns as well as invest in repurchase agreements.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments and the associated risk factors. Each Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by its stated investment policies, including those stated below.
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Funds invest will cause the net asset value of the Funds to fluctuate. The Funds purchase equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by a Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common
stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
o SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of smaller companies are often traded in the over- the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a NRSRO, such as Standard & Poor's Ratings Service ("S&P") or Moody's Investor Service ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Association ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of
receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their non-matured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Funds' shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Funds may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Funds. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
financial institutions in order to increase their income. A repurchase
agreement is an agreement under which a fund acquires a fixed income security
(generally a security issued by the U.S. government or an agency thereof, a
banker's acceptance, or a certificate of deposit) from a commercial bank,
broker, or dealer, and simultaneously agrees to resell such security to the
seller at an agreed upon price and date (normally, the next business day).
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement may be considered a loan that is
collateralized by the security purchased. The acquisition of a repurchase
agreement may be deemed to be an acquisition of the underlying securities as
long as the obligation of the seller to repurchase the securities is
collateralized fully. The Funds follow certain procedures designed to minimize
the risks inherent in such agreements. These procedures include effecting
repurchase transactions only with creditworthy financial institutions whose
condition will be continually monitored by the Adviser. The repurchase
agreements entered into by the Funds will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Funds, the custodian or their agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Funds will seek to liquidate such collateral. However, the
exercising of the Funds' right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Funds could suffer a loss. It is the current policy of the Funds, not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by each Fund,
amounts to more than 15% of the Fund's total assets. The investments of the
Funds in repurchase agreements, at times, may be substantial when, in the view
of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions in which a Fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a Fund. At the time a Fund enters into a reverse repurchase agreement, it will earmark on the books of the Fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse
repurchase agreements by a Fund may increase the Fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to a Fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a Fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the Fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
EXCHANGE-TRADED FUNDS ("ETFS")
Each Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their operation, such as advisory and custody fees. When a Fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, the Fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by a Fund. A Fund's
purchase of such investment company securities results in the layering of
expenses, such that shareholders would indirectly bear a proportionate share of
the operating expenses of such investment companies, including advisory fees,
in addition to paying a Fund's expenses. Unless an exception is available,
Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more
than 3% of the voting shares of any one investment company, (ii) investing more
than 5% of its total assets in any one investment company, and (iii) investing
more than 10% of its total assets in all investment companies combined,
including its ETF investments.
For hedging or other purposes, a Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Funds may invest in the ETFs in excess of the 3% limit described above, provided that the Funds otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
SECURITIES LENDING. The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of each Fund (including the loan collateral). The Funds will not lend portfolio securities to their Adviser or their affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained
in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Funds.
The Funds may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Funds' securities lending agent, but will bear all of any losses from the investment of collateral.
By lending their securities, the Funds may increase their income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Funds to market
risk. The Funds remain obligated to return all collateral to the borrower under
the terms of their securities lending arrangements, even if the value of
investments made with the collateral decline. Accordingly, if the value of a
security in which the cash collateral has been invested declines, the loss
would be borne by the Fund, and the Fund may be required to liquidate other
investments in order to return collateral to the borrower at the end of the
loan. Each Fund will adhere to the following conditions whenever its portfolio
securities are loaned: (i) the Fund must receive at least 100% cash collateral
or equivalent securities of the type discussed in the preceding paragraph from
the borrower; (ii) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral; (iii)
the Fund must be able to terminate the loan on demand; (iv) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities and any increase in market value;
(v) the Fund may pay only reasonable fees in connection with the loan (which
fees may include fees payable to the lending agent, the borrower, the Fund's
administrator and the custodian); and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material
event adversely affecting the investment occurs, the Fund must terminate the
loan and regain the right to vote the securities. The Board has adopted
procedures reasonably designed to ensure that the foregoing criteria will be
met. Loan agreements involve certain risks in the event of default or
insolvency of the borrower, including possible delays or restrictions upon the
Funds' ability to recover the loaned securities or dispose of the collateral
for the loan, which could give rise to loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Funds will reduce the risk that it will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission. The Funds may use futures contracts and related options for: bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. To the extent futures and/or options on futures are employed by the Funds, such use will be in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Funds, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Funds are not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When the Funds purchase or sell a futures contract, or sell an option thereon, the Funds are required to "cover" their position in order to limit leveraging and related risks. To cover their positions, the Funds may segregate (and marked-to-market on a daily basis) cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which each Fund may undertake and on the potential increase in the speculative character of the Funds' outstanding portfolio
securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the funds arising from such investment activities.
The Funds may also cover their long position in a futures contract by purchasing a put option on the same futures contract with a strike price (I.E., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Funds will segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Funds may also cover their long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. The Funds may cover their short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
The Funds may cover their sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Funds will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. The Funds may also cover their sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. The Funds may cover their sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Funds will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Funds may also cover their sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with the Funds' use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by each Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and options on futures. In addition, some strategies reduce the Funds' exposure to price fluctuations, while others tend to increase their market exposure.
OPTIONS. The Funds may purchase and write put and call options on indices and enter into related closing transactions. A put option on a security gives the purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time during the option period. A call option on a security gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is the consideration for undertaking the obligations under the option contract.
The Funds may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage its exposure to exchange rates. Call options on foreign currency written by a Fund will be "covered," which means that the Fund will own an equal amount of the underlying foreign currency.
Put and call options on indices are similar to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than the price movements in individual securities.
All options written on indices or securities must be covered. When a Fund writes an option on a security, an index or a foreign currency, it will establish a segregated account containing cash or liquid securities in an amount at least equal to the market value of the option and will maintain the account while the option is open or will otherwise cover the transaction.
The Funds may trade put and call options on securities, securities indices and currencies, as the Adviser determines is appropriate in seeking a Fund's investment objective, and except as restricted by the Fund's investment limitations. See "Investment Limitations" in the SAI.
The initial purchase (sale) of an option contract is an "opening transaction." In order to close out an option position, the Funds may enter into a "closing transaction," which is simply the sale (purchase) of an option contract on the same security with the same exercise price and expiration date as the option contract originally opened. If a Fund is unable to effect a closing purchase transaction with respect to an option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security upon exercise.
The Funds may purchase put and call options on securities to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that a Fund may seek to purchase in the future. The Fund purchasing put and call options pays a premium therefore. If price movements in the underlying securities are such that exercise of the options would not be profitable for the Fund, loss of the premium paid may be offset by an increase in the value of the Fund's securities or by a decrease in the cost of acquisition of securities by the Fund.
The Funds may write covered call options on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases in its market value. When a Fund writes an option, if the underlying securities do not increase or decrease to a price level that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised and the Fund will realize as profit the premium received for such option. When a call option of which the Fund is the writer is exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate in any increase in the price of such securities above the strike price. When a put option of which the Fund is the writer is exercised, the Fund will be required to purchase the underlying securities at a price in excess of the market value of such securities.
The Funds may purchase and write options on an exchange or over-the-counter. Over-the-counter options ("OTC options") differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available for exchange-traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information from a market maker. It is the SEC's position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand, interest rates, the pricing volatility of the underlying security and the time remaining until the expiration date.
Risks associated with options transactions include: (1) the success of a
hedging strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while the Fund will receive a premium
when it writes covered call options, it may not participate fully in a rise in
the market value of the underlying security.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board of Trustees. Despite such good faith efforts to determine fair value prices, a Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon its sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Trust's Board of Trustees, the Adviser determines the liquidity of the Fund's investments. In determining the liquidity of the Fund's investments, the Adviser may consider various factors, including: (1) the frequency and volume of trades and quotations; (2) the number of dealers and prospective purchasers in the marketplace; (3) dealer undertakings to make a market; and (4) the nature of the security and the
market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not hold more than 15% of its net assets in illiquid securities.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be sold freely to the public absent registration under the U.S. Securities Act of 1933, as amended (the "1933 Act") or an exemption from registration. As consistent with a Fund's investment objectives, the Fund may invest in Section 4(2) commercial paper. Section 4(2) commercial paper is issued in reliance on an exemption from registration under Section 4(2) of the Act and is generally sold to institutional investors who purchase for investment. Any resale of such commercial paper must be in an exempt transaction, usually to an institutional investor through the issuer or investment dealers who make a market in such commercial paper. The Trust believes that Section 4(2) commercial paper is liquid to the extent it meets the criteria established by the Board of Trustees of the Trust. The Trust intends to treat such commercial paper as liquid and not subject to the investment limitations applicable to illiquid securities or restricted securities.
SHORT SALES -- As is consistent with a Fund's investment objectives, the Fund may engage in short sales that are either "uncovered" or "against the box." A short sale is "against the box" if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
In addition to the investment objective of each Fund, the following are fundamental policies of each Fund. Fundamental policies cannot be changed without the consent of the holders of a majority of a Fund's outstanding shares. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less.
The LSV Value Equity Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of the Fund would be invested in the securities of such issuer. This restriction applies to 75% of the Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities. For purposes of this limitation, (i) utility companies will be classified according to their services, for example, gas distribution, gas transmission, electric and telephone will each be considered a separate industry; and (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry.
3. Acquire more than 10% of the voting securities of any one issuer.
4. Invest in companies for the purpose of exercising control.
5. Issue any class of senior security or sell any senior security of which it is the issuer, except that the Fund may borrow from any bank, provided that immediately after any such borrowing there is asset coverage of at least 300% for all
borrowings of the Fund, and further provided that, to the extent that such borrowings exceed 5% of the Fund's total assets, all borrowings shall be repaid before the Fund makes additional investments. The term "senior security" shall not include any temporary borrowings that do not exceed 5% of the value of the Fund's total assets at the time the Fund makes such temporary borrowing. In addition, investment strategies that either obligate the Fund to purchase securities or require the Fund to segregate assets will not be considered borrowings or senior securities. This investment limitation shall not preclude the Fund from issuing multiple classes of shares in reliance on SEC rules or orders.
6. Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) lend its securities.
7. Purchase or sell real estate, real estate limited partnership interests, physical commodities or commodities contracts except that the Fund may purchase commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
8. Make short sales of securities, maintain a short position or purchase securities on margin, except that the Fund may obtain short-term credits as necessary for the clearance of security transactions and sell securities short "against the box. "
9. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling the Fund security.
10. Purchase securities of other investment companies except as permitted by the 1940 Act and the rules and regulations thereunder.
The foregoing percentages apply at the time of the purchase of a security.
The LSV Conservative Value Equity Fund, LSV Conservative Core Equity Fund and LSV Small Cap Value Fund may not:
1. Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
6. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
The following investment limitations of the Funds are non-fundamental and may be changed by the Board without shareholder approval:
1. Each Fund may not hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
2. Under normal circumstances, each of the Value Equity, Conservative Core Equity and Conservative Value Equity Funds shall invest at least 80% of its net assets, plus the amount of any borrowing for investment purposes, in equity securities. This non-fundamental policy may be changed by the Board upon at least 60 days' written notice to Fund shareholders.
3. Under normal circumstances, the Small Cap Value Fund shall invest at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small-capitalization companies. This non-fundamental policy may be changed by the Board upon at least 60 days' written notice to Fund shareholders.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's outstanding voting securities would be held by the fund.
CONCENTRATION. The SEC staff has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries, with certain exceptions.
BORROWING. The 1940 Act allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Fund's current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its Statement of Additional Information.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
COMMODITIES AND REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in commodities or real estate, but does require that every investment company have a fundamental investment policy governing such investments. The Funds have adopted a fundamental policy that would permit direct investment in commodities or real estate. The Funds' current investment policy is as follows: the Funds will not purchase or sell real estate, physical commodities, or commodities contracts, except that the Funds may purchase: (i) marketable securities issued by companies which own or invest in real estate (including REITs), commodities, or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
THE ADVISER
GENERAL. LSV Asset Management is a professional investment management firm registered with the SEC under the Investment Advisers Act of 1940. The Adviser was established in 1994 as a Delaware general partnership to provide active, quantitative value equity management through the application of proprietary models. LSV's general partners include officers and employees of LSV who collectively own a majority of LSV, and SEI Funds, Inc. SEI Investments Company is the parent of SEI Funds, Inc. As of December 31, 2012, LSV had approximately $65 billion in assets under management. LSV's principal business address is 155 North Wacker Drive, Suite 4600, Chicago, IL 60606.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated May 15, 1999 (the "Advisory Agreement") with respect to the Funds. Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Funds and continuously reviews, supervises and administers the investment program of the Funds, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder or its reckless disregard of its obligation and duties under the Advisory Agreement.
After the initial two year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to any Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.55% of the average daily net assets of the LSV Value Equity Fund, at an annual rate of 0.38% of the average daily net assets of the LSV Conservative Value Equity Fund and the LSV Conservative Core Equity Fund and at an annual rate of 0.70% of the average daily net assets of the LSV Small Cap Value Fund. The Adviser may, from its own resources, compensate broker-dealers whose clients purchase shares of the Funds. The Adviser has contractually agreed to waive fees and certain expenses of the LSV Conservative Value Equity Fund, the LSV Conservative Core Equity Fund and the LSV Small Cap Value Fund in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 0.35% of the average daily net assets of the LSV Conservative Value Equity Fund and the LSV Conservative Core Equity Fund and 0.85% of the LSV Small Cap Value Fund. The contractual fee waivers will be honored by the Adviser through February 28, 2014. The fee waivers may be renewed by the Adviser for subsequent periods thereafter.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the Adviser the following advisory fees:
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CONTRACTUAL FEES PAID FEES WAIVED BY ADVISER TOTAL FEES PAID (AFTER WAIVERS)
FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
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Value Equity
Fund $9,599,078 $10,080,955 $6,481,705 $0 $0 $0 $9,599,078 $10,080,955 $6,481,705
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Conservative
Value Equity
Fund $738,813 $715,801 $558,834 $276,767 $282,136 $257,622 $462,046 $433,665 $301,212
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Conservative
Core Equity
Fund $112,085 $205,641 $156,952 $96,242 $125,328 $114,094 $15,843 $80,313 $42,858
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Small Cap
Value Fund(1) N/A N/A N/A N/A N/A N/A N/A N/A N/A
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(1) Not in operation during the period.
INVESTMENT MANAGEMENT PERSONNEL OF THE ADVISER. Messrs. Lakonishok, Vermeulen
and Mansharamani have developed proprietary computer models based on their
research of investor behavior and the performance of contrarian investment
strategies. The portfolio decision making process is quantitative and driven by
(i) a proprietary computer model which ranks securities based on fundamental
measures of value and indicators of recent improved performance and, (ii) a
risk control process that controls for residual benchmark risk. Refinements to
the model are made as suggested by advances in the Adviser's research and these
refinements are generally incremental in nature. The Adviser may modify the
investment model used to manage the Funds at any time without notice.
PORTFOLIO MANAGERS
This section includes information about the Funds' portfolio managers, including information about other accounts they manage, the dollar range of each Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates the portfolio managers for their management of the Funds. The portfolio managers' compensation consists of a salary and discretionary bonus. Each of the portfolio managers is a partner of the Adviser and thereby receives a portion of the overall profit of the firm as part of his ownership interests. The bonus is based upon the profitability of the firm and individual performance. Individual performance is subjective and may be based on a number of factors, such as the individual's leadership and contribution to the strategic planning and development of the investment group.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Funds are required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Funds as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act").
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DOLLAR RANGE OF FUND SHARES AGGREGATE DOLLAR RANGE OF
NAME (FUND) (1) FUND SHARES (ALL FUNDS) (1)
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Over $1 million (Value Equity Fund)
None (Conservative Value Equity Fund)
Josef Lakonishok Over $1 million
None (Conservative Core Equity Fund)
None (Small Cap Value Fund)
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None (Value Equity Fund)
None (Conservative Value Equity Fund)
Menno Vermeulen None
None (Conservative Core Equity Fund)
None (Small Cap Value Fund)
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None (Value Equity Fund)
None (Conservative Value Equity Fund)
Puneet Mansharamani None
None (Conservative Core Equity Fund)
None (Small Cap Value Fund)
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(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
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NUMBER NUMBER NUMBER
OF TOTAL ASSETS OF TOTAL ASSETS OF TOTAL ASSETS
NAME ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
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Josef Lakonishok 29 $7,165 44(1) $10,459 410(2) $43,965
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Menno Vermeulen 29 $7,165 44(1) $10,459 410(2) $43,965
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Puneet Mansharamani 29 $7,165 44(1) $10,459 410(2) $43,965
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(1) Includes 6 accounts with aggregated assets under management of $568 million that are subject to performance-based advisory fees.
(2) Includes 29 accounts with aggregated assets under management of $6,498 million that are subject to performance-based advisory fees.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Funds' investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Funds. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby a portfolio manager could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of each Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Funds. In addition, it is also possible that a potential conflict of interest may arise because a portfolio manager manages an account with a performance-based management fee in addition to the Funds and other accounts without a performance-based fee, and accounts in which employees may be invested. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Funds whereby the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement for the Funds, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed below in the following schedule:
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FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
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0.07% First $1 billion
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0.06% $1 billion - $1.5 billion
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0.04% $1.5 billion - $3 billion
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0.035% Over $3 billion
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There is a minimum annual fee of $550,000 for the Funds (the "Annual Minimum Fee"). The Annual Minimum Fee shall be increased by $100,000 for each additional domestic equity fund and by $25,000 for each additional class of a fund. Due to these minimums, the annual administration fee the Funds pay will exceed the above percentages at low asset levels.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the Administrator the following fees:
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ADMINISTRATION FEES PAID
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FUND 2010 2011 2012
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Value Equity Fund $1,053,260 $1,086,449 $790,326
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Conservative Value Equity Fund $117,567 $111,590 $98,593
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Conservative Core Equity Fund $17,838 $32,126 $27,618
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Small Cap Value Fund(1) N/A N/A N/A
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(1) Not in operation during the period.
THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 (the "Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Funds and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or, with respect to any Fund, by a majority of the outstanding shares of that Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser makes payments from its own resources and not from Fund assets to unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates, as incentives to help market and promote the Funds and/or in recognition of their
distribution, marketing, administrative services, and/or processing support.
These additional payments are made to financial intermediaries that sell Fund shares or provide services to the Funds, the Distributor or shareholders of the Funds through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Funds in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Funds; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
Revenue sharing payments are based on the number of the intermediary's accounts holding shares of the Fund. A significant purpose of these payments is to increase the sales of Funds shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Funds' transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
U.S. Bank National Association, 800 Nicollett Mall, Minneapolis, Minnesota 55402-4302 (the "Custodian"), acts as custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Funds. The financial statements and notes thereto incorporated by reference have been audited by Ernst & Young LLP, as indicated in their reports with respect thereto, and are incorporated by reference in reliance on the authority of their reports as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service
provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-today management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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INTERESTED TRUSTEES
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Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Chief Trust and New Covenant Funds,
Executive Officer of SEI Global Assets Fund plc, SEI Global
SEI Alpha Strategy Investments Fund plc, SEI
Portfolios, LP, June Investments--Global Funds Services,
2007 to present. Limited, SEI Investments Global,
President and Director Limited, SEI Investments (Europe)
of SEI Opportunity Ltd., SEI Investments--Unit Trust
Fund, L.P. to 2010. Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd. and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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S-19
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
Consultant since 2003. Advisors' Inner Circle Fund II,
(05/26/40) (since 1991) Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust, SEI
Administrator and the Tax Exempt Trust, Adviser Managed
Distributor. Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
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INDEPENDENT TRUSTEES
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Charles E. Trustee Self-Employed Current Directorships: Trustee of The
Carlbom Business Consultant, Advisors' Inner Circle Fund II and
(since 2005) Business Projects Inc., Bishop Street Funds. Director of
(08/20/34) since 1997. Oregon Transfer Co.
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John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
Executive Officer, Advisors' Inner Circle Fund II and
(08/17/44) (since 2008) Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
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Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since January Advisors' Inner Circle Fund II and
2012; Director of Bishop Street Funds. Director of The
Endowments and Korea Fund, Inc.
Foundations, Morningstar
Investment Management,
Morningstar, Inc.,
February 2010 to May
2011; Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010; Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
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S-20
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson since 1994. Advisors' Inner Circle Fund II,
(since 2005) Bishop Street Funds, SEI Asset
(03/01/42) Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
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Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
Compliance, AARP Advisors' Inner Circle Fund II and
(01/23/43) (since 2005) Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
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Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
Allocation, Manulife Advisors' Inner Circle Fund II and
(02/12/56) (since 2011) Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
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S-21
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
June 2003 to June
2010.
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James M. Storey Trustee Attorney, Solo Current Directorships:
Practitioner since 1994. Trustee/Director of The Advisors'
(04/12/31) (since 1994) Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
-------------------------------------------------------------------------------------------------------------
George J. Trustee Retired since January Current Directorships: Trustee/
Sullivan, Jr. 2012. Self-employed Director of State Street Navigator
(since 1999) Consultant, Newfound Securities Lending Trust, The
(11/13/42) Consultants Inc., April Advisors' Inner Circle Fund II,
Lead Independent 1997 to December Bishop Street Funds, SEI Structured
Trustee 2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Funds as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Funds provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Funds, and to exercise their business judgment in a manner that serves the
best interests of the Funds' shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's independent registered public accounting firm and whether to terminate this relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence; (iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities; (iv) serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly
the Nominating Committee) that is composed of each of the independent Trustees
of the Trust. The Governance Committee operates under a written charter approved
by the Board. The principal responsibilities of the Governance Committee
include: (i) considering and reviewing Board governance and compensation issues;
(ii) conducting a self-assessment of the Board's operations; (iii) selecting and
nominating all persons to serve as independent Trustees and evaluating the
qualifications of "interested" Trustee candidates; and (iv) reviewing
shareholder recommendations for nominations to fill vacancies on the Board if
such recommendations are submitted in writing and addressed to the Committee at
the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson,
Speca, Storey and Sullivan currently serve as members of the Governance
Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The
Governance Committee meets periodically, as necessary, and met twice during the
most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one(1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
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NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
---------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
---------------------------------------------------------------------------------------------------------
Michael Lawson Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) Fund Accounting at SEI Investments AVP from
(since 2005) April 1995 to February 1998 and November
1998 to July 2005.
---------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(since 2006) Credit Fund, LP and SEI Alpha Strategy
(12/18/62) Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed Trust and
New Covenant Funds. Chief Compliance Officer
of SEI Opportunity Fund, L.P. until 2010.
Director of Investment Product Management and
Development, SEI Investments, since February
2003; Senior Investment Analyst -- Equity Team,
SEI Investments, from March 2000 to February
2003.
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Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(since 1999) SIMC and the Administrator since 1999. Vice
(03/28/68) President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
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Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
from 2006 to 2010. Associate at Morrison &
(07/18/77) Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
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John Munch Vice President and Assistant Attorney, SEI Investments Company, since
Secretary 2001. General Counsel, SEI Investments
(05/07/71) (since 2012) Distribution Co., since 2004.
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Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(since 2009) 2003.
(8/24/80)
AML Officer
(since 2011)
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PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Funds are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Funds in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Funds' securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of any Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Funds adhere to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Funds' pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the
last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Funds' pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Funds and their shareholders that is intended to supplement the discussion contained in the Funds' prospectuses. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussion here and in each Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A RIC
The Funds intend to qualify and elect to be treated as a Regulated Investment Company ("RIC"). By following such a policy, the Funds expect to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Funds as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the Code, each Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of each Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership; (ii) at the end of each fiscal quarter of each Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of each Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership; and (iii) at the end of each fiscal quarter of each Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that each Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If a Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to
each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If a Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, that Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, their shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
Each Fund is treated as a separate corporation for federal income tax purposes. A Fund therefore is considered to be a separate entity in determining its treatment under the rules for RICs described herein. Losses in one Fund do not offset gains in another and the requirements (other than certain organizational requirements) for qualifying RIC status are determined at the Fund level rather than at the Trust level.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses. In addition, the carryover of capital losses may be limited under the general loss limitation rules if a Fund experiences an ownership change as defined in the Code.
FEDERAL EXCISE TAX
Notwithstanding the Distribution Requirement described above, which only requires the Funds to distribute at least 90% of their annual investment company income and does not require any minimum distribution of net capital gain, the Funds will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of each Fund's ordinary income for that year and 98.2% of each Fund's capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of such year, plus certain other amounts. Each Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Funds may in certain circumstances be required to liquidate each Funds investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Funds to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT
Each Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Funds, constitutes the Funds' net investment income from which dividends may be paid to you. Any distributions by the Funds from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Funds will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Funds receive qualified dividend income on the securities
it holds and the Funds designate the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from each Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) each Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder), (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions by the Funds of their net short-term
capital gains will be taxable as ordinary income. Capital gain distributions
consisting of the Funds' net capital gains will be taxable as long-term capital
gains at a maximum rate of 20%.
Each Fund's dividends that are paid to their corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Funds' distributions exceed their taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Funds and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
The Funds will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, the Funds may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Funds.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of the Funds by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a
shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Funds are also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Funds will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Funds will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
FOREIGN TAXES. If more than 50% of the value of the Funds' total assets at the close of their taxable year consists of stocks or securities of foreign corporations, the Funds will be eligible to, and will, file an election with the IRS that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Funds, subject to certain limitations. Pursuant to the election, the Funds will treat those taxes as dividends paid to their shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders' federal income tax. If the Funds make the election, the Funds will report annually to their shareholders the respective amounts per share of the Funds' income from sources within, and taxes paid to, foreign countries and U.S. possessions.
TAX TREATMENT OF COMPLEX SECURITIES. The Funds may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Funds are treated as ordinary income or capital gain, accelerate the recognition of income to the Funds and/or defer the Funds' ability to recognize losses, and, in limited cases, subject the Funds to U.S. federal income tax on income from certain of their foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Funds.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Funds. Similarly, foreign exchange losses realized by the Funds on the sale of debt securities are generally treated as ordinary losses by the Funds. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce the Funds' ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Funds' ordinary income distributions to you, and may cause some or all of the Funds' previously distributed income to be classified as a return of capital.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold at a rate of 28% and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Funds generally serve
to block UBTI from being realized by their tax-exempt shareholders. However,
notwithstanding the foregoing, the tax-exempt shareholder could realize UBTI by
virtue of an investment in the Fund where, for example: (i) the Fund invests in
residual interests of Real Estate Mortgage Investment Conduits (REMICs); (ii)
the Fund invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
NON-U.S. INVESTORS. Any non-U.S. investors in the Funds may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Funds.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. A Fund will not pay any additional amounts in respect to any amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by a Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. It is expected that a Fund will not be liable for any corporate excise, income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Funds, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result
in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Funds may obtain, it is the opinion of the Adviser and the Trust's Board of Trustees that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Funds to participate in higher volume transactions will generally be beneficial to the Funds.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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Value Equity Fund $273,629 $297,749 $213,528
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Conservative Value Equity Fund $37,218 $25,546 $21,998
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Conservative Core Equity Fund $4,937 $10,752 $5,585
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Small Cap Value Fund(1) N/A N/A N/A
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(1) Not in operation during the period.
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Funds' Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Funds to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Funds.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Funds' Adviser will be in addition to and not in lieu of the services required to be performed by the Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are
reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Funds may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Funds did not pay commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Funds, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act, affiliated broker-dealers are permitted to receive and retain compensation for effecting portfolio transactions for the Funds on an exchange if a written contract is in effect between the affiliate and the Funds expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid to the affiliate by the Funds for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Funds, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds did not pay brokerage commissions to affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of their "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Funds held during their most recent fiscal year. During the fiscal year ended October 31, 2012, the Funds held the following securities of "regular brokers and dealers:"
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FUND NAME OF ISSUER TYPE OF SECURITY DOLLAR AMOUNT
AT FISCAL
YEAR END
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Citigroup, Inc. Equity $16,590,000
Morgan Stanley Equity $3,481,000
LSV Value Equity Fund Morgan Stanley Debt $2,887,000
JP Morgan Chase Equity $27,501,000
Goldman Sachs Equity $10,550,000
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Citigroup, Inc. Equity $2,322,000
Morgan Stanley Equity $321,000
LSV Conservative Value Equity Fund Morgan Stanley Debt $418,000
JP Morgan Chase Equity $3,372,000
Goldman Sachs Equity $1,261,000
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Citigroup, Inc. Equity $157,000
Morgan Stanley Equity $37,000
LSV Conservative Core Equity Fund Morgan Stanley Debt $165,000
JP Morgan Chase Equity $98,000
Goldman Sachs Equity $238,000
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As of October 31, 2012, the LSV Small Cap Value Fund had not commenced operations.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under U.S. Securities and Exchange Commission (the "SEC")
rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Funds may invest since such contracts generally have remaining maturities of less than one-year. The Funds may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover.
For the fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for each Fund were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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Value Equity Fund 19% 10%
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Conservative Value Equity Fund 16% 12%
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Conservative Core Equity Fund 23% 18%
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Small Cap Value Fund(1) N/A N/A
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(1) Not in operation during the period.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Funds portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of each of the Fund's shareholders, and include procedures to address conflicts between the interests of each Fund's shareholders and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds, the Adviser, or the principal underwriter. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Funds' Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Funds are required to disclose their complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Funds will disclose a complete or summary schedule of investments (which includes the Funds' 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Funds' net asset value ("Summary Schedule")) in their Semi-Annual and Annual Reports which are distributed to each Fund's shareholders. The Funds' complete schedule of investments following the first and third fiscal quarters will be available in quarterly holdings reports filed with the SEC on Form N-Q, and each Fund's complete schedule of investments following the second and fourth fiscal quarters, will be available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to each Fund's shareholders but will be available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. Should the Funds include only a Summary Schedule rather than a complete schedule of investments in their Semi-Annual and Annual Reports, their Form N-CSR will be available without charge, upon request, by calling 1-888-FUND-LSV.
The Adviser's website, at www.lsvasset.com, also provides information about the
Funds' complete portfolio holdings, including some or all of the following:
security description, ticker, security identification number, price per share,
par value, and interest rate updated as of the end of the most recent calendar
quarter (I.E., each March 31, June 30, September 30, and December 31). This
information on the website is provided within 15 business days at the end of
each calendar quarter. The information on the Adviser's website is publicly
available to all categories of persons.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as
frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in connection with their services to the Funds. From time to time rating and ranking organizations, such as Standard and Poor's, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Funds. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of a Fund's portfolio along with related performance attribution statistics. The Adviser currently has arrangements to provide non-public portfolio holdings information to Marco Consulting Group. The Adviser reports the complete portfolio (including security name, ticker, cusip, number of shares, current market value and percentage of portfolio), as well as percentage weightings for the top ten holdings, on a monthly basis, with a three-day lag. The portfolio holdings are used to create 1) a quarterly profile to educate clients and 2) to conduct quarterly due diligence on the Fund. This information is considered confidential and will not be distributed to the public. The Funds believe these disclosures serve a legitimate business purpose. The Funds' Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
The Funds' policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Funds' shareholders and that conflicts between the interests of the Funds' shareholders and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals.
With the exception of disclosures to rating and ranking organizations as described above, the Funds require any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Funds, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Funds' policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipient of the Funds' portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Funds for shares of any additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Funds' shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care
has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Funds to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Funds' proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-888-FUND-LSV and (ii) on the SEC's website at http://www.sec.gov.
CODES OF ETHICS
The Board of Trustees, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1 (each a "Code of Ethics" and together the "Codes of Ethics"). These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, including securities that may be purchased or held by the fund, but are required to report their personal securities transactions for monitoring purposes. In addition, certain access persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Funds. Persons who owned of record or beneficially more than 25% of a Fund's outstanding shares may be deemed to control the Fund within the meaning of the 1940 Act. The Trust believes that most of the shares referred to below were held by the persons below in accounts for their fiduciary, agency or custodial customers.
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LSV VALUE EQUITY FUND
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NAME AND ADDRESS NUMBER OF SHARES % OF FUND
------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co Inc. Reinvest Account 18,789,799.8000 28.25 %
101 Montgomery St
San Francisco, CA 94104-4151
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National Financial Services LLC 7,337,719.0580 11.03 %
For the Exclusive Benefit of Our Customers
Attn Mutual Funds 5th Floor
200 Liberty St
One World Financial Center
New York, NY 10281-1003
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Fidelity Investments Institutional Operations Co Inc (FLLOC) 5,975,378.2470 8.98 %
100 Magellan Way KW1C
Covington, KY 41015-1999
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S-37
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------------------------------------------------------------------------------------------------------------------ LSV CONSERVATIVE CORE EQUITY FUND ------------------------------------------------------------------------------------------------------------------ NAME AND ADDRESS NUMBER OF SHARES % OF FUND ------------------------------------------------------------------------------------------------------------------ Wells Fargo Bank NA FBO 1,022,066.1080 69.59 % APTAR Group Inc PO Box 1533 Minneapolis, MN 55480-1533 ------------------------------------------------------------------------------------------------------------------ A Keith Wagner TR 434,815.8680 29.60 % U/A 10/14/2004 Asbestos Workers Local 24 Medical Trust 7130 Columbia Gateway Dr Suite A Columbia, MD 21046-2966 ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ LSV CONSERVATIVE VALUE EQUITY FUND ------------------------------------------------------------------------------------------------------------------ NAME AND ADDRESS NUMBER OF SHARES % OF FUND ------------------------------------------------------------------------------------------------------------------ Pentegra Trust Company 4,560,657.3990 29.70 % c/o Pentegra Services, Inc. 3 Enterprise Drive Suite 105 Shelton, CT 06484-4694 ------------------------------------------------------------------------------------------------------------------ Provena Health Employees 4,021,650.2440 26.19 % Pension Plan Trust 9223 W Saint Francis Rd Frankfort, IL 60423-8334 ------------------------------------------------------------------------------------------------------------------ Wells Fargo Bank, NA Custodian 3,584,621.5780 23.35 % FBO: City & County of San Fran DCP c/o Fascore LLC 8515 E Orchard Rd 2T2 Greenwood VLG, CO 80111-5002 ------------------------------------------------------------------------------------------------------------------ Provena Health Operating Pool 1,655,440.3760 10.78 % 9223 W Saint Francis Rd Frankfort, IL 60423-8334 ------------------------------------------------------------------------------------------------------------------ |
APPENDIX A -- DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative.
The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
LSV ASSET MANAGEMENT
PROXY VOTING PROCEDURES
LSV's standard investment management agreement expressly authorizes LSV to vote proxies on behalf of the client's account. Therefore, unless the client expressly reserves proxy voting responsibility, it is LSV's responsibility to vote proxies relating to securities held for the client's account.
ERISA ACCOUNTS. Unless proxy voting responsibility has been expressly reserved and is being exercised by another fiduciary for an ERISA plan client, LSV, as the investment adviser for the account, must vote all proxies relating to securities held for the plan's account. If LSV is responsible for voting, LSV shall make appropriate arrangements with each account custodian to have proxies forwarded, on a timely basis to the appropriate person, and shall endeavor to correct delays or other problems relating to timely delivery of proxies and proxy materials.
Fiduciary obligations of prudence and loyalty require an investment adviser with proxy voting responsibility to vote proxies on issues that affect the value of the client's investment. Proxy voting decisions must be made solely in the best interests of the client's account. In voting proxies, LSV is required to consider those factors that may affect the value of the client's investment and may not subordinate the interests of the client to unrelated objectives.
LSV has adopted proxy voting guidelines that provide direction in determining how various types of proxy issues are to be voted. LSV will engage an expert independent third party to design guidelines for client accounts that are updated for current corporate governance issues, helping to ensure that clients' best interests are served by voting decisions. Clients are sent a copy of their respective guidelines on an annual basis.
LSV's purely quantitative investment process does not provide output or analysis that would be functional in analyzing proxy issues. LSV therefore will retain an independent, expert third party, currently Glass Lewis & Co. ("GLC"). GLC will implement LSV's proxy voting process, cast all votes on LSV's behalf in accordance with LSV's proxy voting guidelines (unless otherwise instructed by LSV), provide assistance in developing guidelines and provide analysis of proxy issues on a case-by-case basis. LSV is responsible for monitoring GLC to ensure that proxies are appropriately voted. LSV will vote issues contrary to, or issues not covered by, the guidelines only when LSV believes it is in the best interest of the client. Where the client has provided proxy voting guidelines to LSV, those guidelines will be followed, unless it is determined that a different vote would add more value to the client's holding of the security in question. Direction from a client on a particular proxy vote will take precedence over the guidelines. LSV's use of GLC is not a delegation of LSV's fiduciary obligation to vote proxies for clients.
Should a material conflict arise between LSV's interest and that of its clients (e.g., a client bringing a shareholder action has solicited LSV's support; LSV manages a pension plan for a company whose management is soliciting proxies; or an LSV employee has a relative involved in management at an investee company), LSV will vote the proxies in accordance with the recommendation of the independent third party proxy voting service. A written record will be maintained describing the conflict of interest, and an explanation of how the vote taken was in the client's best interest.
LSV may refrain from voting a proxy if the cost of voting the proxy exceeds the expected benefit to the client, for example in the case of voting a foreign security when the proxy must be translated into English or the vote must be cast in person.
Clients may receive a copy of LSV's voting record for their account by request. LSV will additionally provide any mutual fund for which LSV acts as adviser or sub-adviser, a copy of LSV's voting record for the fund so that the fund may fulfill its obligation to report proxy votes to fund shareholders.
RECORDKEEPING. In accordance with the recordkeeping rules, LSV will retain:
(i) Copies of its proxy voting policies and procedures.
(ii) A copy of each proxy statement received regarding client securities (maintained by the proxy voting service and/or available on EDGAR).
(iii) A record of each vote cast on behalf of a client (maintained by the proxy voting service).
(iv) A copy of any document created that was material to the voting decision or that memorializes the basis for that decision (maintained by the proxy voting service).
(v) A copy of clients' written requests for proxy voting information and a copy of LSV's written response to a client's request for proxy voting information for the client's account.
(vi) LSV will ensure that it may obtain access to the proxy voting service's records promptly upon LSV's request.
LSV will maintain required materials in an easily accessible place for not less than five years from the end of the fiscal year during which the last entry took place, the first two years in LSV's principal office.
STATEMENT OF ADDITIONAL INFORMATION
MCKEE INTERNATIONAL EQUITY PORTFOLIO
(TICKER SYMBOL: MKIEX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
C.S. MCKEE L.P.
This Statement of Additional Information ("SAI") is not a prospectus. It is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the McKee International Equity Portfolio (the "Fund"). This SAI is incorporated by reference into and should be read in conjunction with the Fund's prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund for the fiscal year ended October 31, 2012, including notes thereto and the report of PricewaterhouseCoopers LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Fund's 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9009 or by calling the Fund at 1-866-625-3346.
TABLE OF CONTENTS
THE TRUST ........................................................ S-1 DESCRIPTION OF PERMITTED INVESTMENTS ............................. S-1 INVESTMENT POLICIES OF THE FUND .................................. S-29 INVESTMENT ADVISORY AND OTHER SERVICES ........................... S-31 PORTFOLIO MANAGERS ............................................... S-32 THE ADMINISTRATOR ................................................ S-33 THE DISTRIBUTOR .................................................. S-34 PAYMENTS TO FINANCIAL INTERMEDIARIES ............................. S-35 TRANSFER AGENT ................................................... S-35 CUSTODIAN ........................................................ S-35 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .................... S-35 LEGAL COUNSEL .................................................... S-36 TRUSTEES AND OFFICERS OF THE TRUST ............................... S-36 PURCHASING AND REDEEMING SHARES .................................. S-46 DETERMINATION OF NET ASSET VALUE ................................. S-47 TAXES ............................................................ S-47 BROKERAGE ALLOCATION AND OTHER PRACTICES ......................... S-52 PORTFOLIO HOLDINGS ............................................... S-55 DESCRIPTION OF SHARES ............................................ S-56 SHAREHOLDER LIABILITY ............................................ S-57 LIMITATION OF TRUSTEES' LIABILITY ................................ S-57 PROXY VOTING ..................................................... S-57 CODES OF ETHICS .................................................. S-57 5% AND 25% SHAREHOLDERS .......................................... S-58 APPENDIX A -- DESCRIPTON OF RATINGS .............................. A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ............... B-1 |
March 1, 2013 CSM-SX-001-1200
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. The Fund pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information. The Trust is authorized to offer shares of the Fund in Institutional Class Shares. The Trust reserves the right to create and issue additional classes of shares.
HISTORY OF THE FUND. The McKee International Equity Portfolio is the successor to the UAM Funds, Inc. McKee International Equity Portfolio (the "Predecessor Fund"). The Predecessor Fund was managed by C.S. McKee L.P. ("McKee" or the "Adviser") using the same investment objective, strategies, policies and restrictions as those of the Fund. The Predecessor Fund's date of inception was May 26, 1994. The Predecessor Fund dissolved and reorganized into the McKee International Equity Portfolio on June 24, 2002. All of the assets and liabilities of the Predecessor Fund were transferred to its successor in connection with the Fund's commencement of operations on June 24, 2002.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
WHAT INVESTMENT STRATEGIES MAY THE FUND USE?
The Fund's investment objectives and principal investment strategies are described in the prospectus. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below. The following information supplements, and should be read in conjunction with, the prospectus.
DEBT SECURITIES
Corporations and governments use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
U.S. GOVERNMENT SECURITIES -- The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $ 250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
CORPORATE BONDS - Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Adviser will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
GINNIE MAE -- Ginnie Mae is the principal governmental guarantor of mortgage-related securities. Ginnie Mae is a wholly owned corporation of the U.S. government within the Department of Housing and Urban Development. Securities issued by Ginnie Mae are treasury securities, which means the full faith and credit of the U.S. government backs them. Ginnie Mae guarantees the timely payment of principal and interest on securities issued by institutions approved by Ginnie Mae and backed by pools of FHA-insured or VA-guaranteed mortgages. Ginnie Mae does not guarantee the market value or yield of mortgage-backed securities or the value of the Fund's shares. To buy Ginnie Mae securities, the Fund may have to pay a premium over the maturity value of the underlying mortgages, which the Fund may lose if prepayment occurs.
FANNIE MAE -- Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. Fannie Mae is regulated by the Secretary of Housing and Urban Development. Fannie Mae purchases conventional mortgages from a list of approved sellers and service providers, including state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Securities issued by Fannie Mae are agency securities, which means Fannie Mae, but not the U.S. government, guarantees their timely payment of principal and interest.
FREDDIE MAC -- Freddie Mac is stockholder-owned corporation established by the U.S. Congress to create a continuous flow of funds to mortgage lenders. Freddie Mac supplies lenders with the money to make mortgages and packages the mortgages into marketable securities. The system is designed to create a stable mortgage credit system and reduce the rates paid by homebuyers. Freddie Mac, not the U.S. government, guarantees timely payment of principal and interest.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by Ginnie Mae, Fannie Mae and Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES -- Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. The most significant differences of mortgage-backed securities are:
o payments of interest and principal are more frequent (usually
monthly); and
o falling interest rates generally cause individual borrowers to pay
off their mortgage earlier than expected, which results in prepayments
of principal on the securities, thus forcing the Fund to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. If the prepayment rates increase, the Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Fund may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
SHORT-TERM INVESTMENTS - To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, the Fund may invest a portion of its assets in the short-term securities listed below, U.S. government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS - The Fund will only invest in a security issued by a commercial bank if the bank:
o has total assets of at least $1 billion, or the equivalent in other currencies (based on the most recent publicly available information about the bank); and
o is a U.S. bank and a member of the Federal Deposit Insurance Corporation; or
o is a foreign branch of a U.S. bank and the Adviser believes the security is of an investment quality comparable with other debt securities that the Fund may purchase.
TIME DEPOSITS - Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation. The Fund may only purchase time deposits maturing from two business days through seven calendar days.
CERTIFICATES OF DEPOSIT - Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or savings and loan association for a definite period of time and earning a specified return.
BANKERS' ACCEPTANCE - A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods).
COMMERCIAL PAPER - Commercial paper is a short-term obligation with a maturity ranging from one to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. The Fund may invest in commercial paper rated A-1 or A-2 by Standard and Poor's Ratings Services ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service ("Moody's"), or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A - Ratings" for a description of commercial paper ratings.
YANKEE BONDS - Yankee bonds are dollar-denominated bonds issued inside the United States by foreign entities. Investments in these securities involve certain risks that are not typically associated with investing in domestic securities. See "Foreign Securities."
ZERO COUPON BONDS - These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with the same maturity. The Fund's investments in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its Fund securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest payments ("coupons") separated from the underlying principal ("corpus") by their holder, typically a custodian bank or investment brokerage firm. Once the holder of the security has stripped or separated corpus and coupons, it may sell each component separately. The principal or corpus is then sold at a deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic interest (cash) payments. Typically, the coupons are sold separately or grouped with other coupons with like maturity dates and sold bundled in such form. The underlying treasury security is held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (I.E., unregistered securities which are owned ostensibly by the bearer or holder thereof), in trust on behalf of the owners thereof. Purchasers of stripped obligations acquire, in effect, discount obligations that are economically identical to the zero coupon securities that the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," the Fund may record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
TERMS TO UNDERSTAND:
MATURITY - Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security held by the mutual fund, with the maturity of each security weighted by the percentage of the assets of the mutual fund it represents.
DURATION - Duration is a calculation that seeks to measure the price sensitivity of a debt security, or of a mutual fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration. Effective duration takes into account call features and sinking fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES - The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding period and coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument, therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
o INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (I.E., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected, resulting in prepayments on the securities. The Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of the Fund. If left unattended, drifts in the average maturity of the Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of the Fund.
o EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause the Fund's average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of the Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term treasury securities, such as three-month treasury bills, are considered "risk free." Corporate securities offer higher yields than treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." Since an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which affects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called investment-grade because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, the Adviser may determine that it is of investment-grade. The Adviser may retain securities that are downgraded, if it believes that keeping those securities is warranted.
Debt securities rated below investment-grade ("junk bonds") are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influences their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause
the Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's assessment of the issuer's financial strength. The Fund currently uses ratings compiled by Moody's, S&P and Fitch Inc. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk.
The section "Appendix A - Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
The Adviser may use ratings produced by ratings agencies as guidelines to determine the rating of a security at the time the Fund buys it. A rating agency may change its credit ratings at any time. The Adviser monitors the rating of the security and will take such action, if any, it believes appropriate when it learns that a rating agency has reduced the security's rating. The Fund is not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded below the above-stated ratings.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, or an underlying economic factor, such as an interest rate or a market benchmark, such as an index. Investors can use derivatives to gain exposure to various markets in a cost efficient manner, to reduce transaction costs, alter duration or to remain fully invested. They may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates. Investing in derivatives for these purposes is known as "hedging." When hedging is successful, the Fund will have offset any depreciation in the value of its Fund securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of the Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure. To the extent that the Fund engages in hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), the Fund must either operate within certain guidelines and restrictions with respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Fund, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Fund is not subject to registration or regulation as a CPO under the CEA. As a result, the Fund will operate within certain guidelines and restrictions with respect to its use of futures, options on such futures, commodity options and certain swaps.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading and regulated by the
CFTC. These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC options"). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counterparty will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When the Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). The Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. The Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium
paid and related transaction costs. Otherwise, the Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When the Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when the Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. The Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an over-the-counter option by entering into an offsetting transaction with the counterparty to the option.
The Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, the Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, the Fund would hope to profit by closing out the put option at a lower price. If security prices fall, the Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive the Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. The Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, the Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Fund is permitted only to write covered options. At the time of selling the call option, the Fund may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, the Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (I.E., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
The Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. The Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. The Fund may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to the Fund.
o COMBINED POSITIONS
The Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, the Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, the Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written
call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (I.E., the parties to the contract may fix the maturity date and the amount).
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC.
o Do not require an initial margin deposit.
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect the Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which the Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause the Fund to assume the risk of fluctuations in the value of the currency it
purchases. Cross-hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, the Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, the Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
To the extent that the Fund engages in foreign currency hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of the Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, if the counterparty's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. The Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counterparty is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Fund's gains or losses. In order to reduce the risk associated with leveraging, the Fund may cover its current obligations under swap agreements according to guidelines established by the U.S. Securities and Exchange Commission ("SEC"). If the Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If the Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can
gain exposure to stocks making up the index of securities without actually
purchasing those stocks. Equity index swaps involve not only the risk
associated with investment in the securities represented in the index, but also
the risk that the performance of such securities, including dividends, will not
exceed the return on the interest rate that the Fund will be committed to pay.
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, the Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if the Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, the Fund may have to pay more money than it receives. Similarly, if the Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, the Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. The Fund may enter into a currency swap when it has one currency and desires a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance of the Fund than if it had not entered into any derivatives transactions. Derivatives may magnify the Fund's gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose the Fund to greater risks.
CORRELATION OF PRICES - The Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities the Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if the Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, the Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of the Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect the Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of the Fund's foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of the Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, the Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, the Fund may close out a futures contract only on the exchange the contract was initially traded. Although the Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, the Fund may not be able to close out its position. In an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (I.E., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, the Fund may lose money by investing in derivatives. For example, if the Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if the Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into the Fund. If the Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to the Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. The Fund may lose its margin deposits if a broker with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (I.E., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Fund may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
EQUITY SECURITIES
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the U.S. on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
COMMON STOCKS - Common stocks represent units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are described below, dividends on common stocks are not fixed but are declared at the discretion of the company's board of directors.
PREFERRED STOCKS - Preferred stocks are also units of ownership in a company. Preferred stocks normally have preference over common stock in the payment of dividends and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market values of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk.
CONVERTIBLE SECURITIES - Convertible securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of the issuer's common stock at the Fund's option during a specified time period (such as convertible preferred stocks, convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same corporation. In general, the market value of a convertible security is at least the higher of its "investment value" (I.E., its value as a fixed income security) or its "conversion value" (I.E., its value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times of steady interest rates than other types of debt securities. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics, and other factors. Because the Fund will create synthetic convertible positions only out of high grade fixed income securities, the credit rating associated with the Fund's synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one-month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing "time value" as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss, the market price of the option component generally reflects these differences in maturities, and the Adviser takes such differences into account when evaluating such positions. When a synthetic convertible position "matures" because of the expiration of the associated option, the Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If the Fund does not so extend the maturity of a position, it may continue to hold the associated fixed income security.
RIGHTS AND WARRANTS - A right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life, usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
RISKS OF INVESTING IN EQUITY SECURITIES:
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
SMALL AND MEDIUM-SIZED COMPANIES - Investors in small and medium-sized companies typically take on greater risk and price volatility than they would by investing in larger, more established companies. This increased risk may be due to the greater business risks of their small or medium size, limited markets and financial resources, narrow product lines and frequent lack of management depth. The securities of small and medium-sized companies are often traded in the over-the-counter market and might not be traded in volumes typical of securities traded on a national securities exchange. Thus, the securities of small and medium capitalization companies are likely to be less liquid, and subject to more abrupt or erratic market movements, than securities of larger, more established companies.
TECHNOLOGY COMPANIES - Stocks of technology companies have tended to be subject to greater volatility than securities of companies that are not dependent upon or associated with technological issues. Technology companies operate in various industries. Since these industries frequently share common characteristics, an event or issue affecting one industry may significantly influence other, related industries. For example, technology companies may be strongly affected by worldwide scientific or technological developments and their products and services may be subject to governmental regulation or adversely affected by governmental policies.
INITIAL PUBLIC OFFERINGS ("IPOS") - The Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on the Fund with a small asset base. The impact of IPOs on the Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to the Fund for investing, particularly as the Fund's asset base grows. Because IPO shares frequently are volatile in price, the Fund may hold IPO shares for a very short period of time. This may increase the turnover of the Fund's portfolio and may lead to increased expenses for the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO
shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The Fund's investment in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which presents risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product lines.
FOREIGN SECURITIES
TYPES OF FOREIGN SECURITIES:
Foreign securities are debt and equity securities that are traded in markets outside of the U.S. The markets in which these securities are located can be developed or emerging. The Fund can invest in foreign securities in a number of ways:
o The Fund can invest directly in foreign securities denominated in a foreign currency;
o The Fund can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o The Fund can invest in investment funds.
AMERICAN DEPOSITARY RECEIPTS ("ADRS") -- ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and
information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS - An "emerging country" is generally a country that the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS - Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If the Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS - Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict control foreign investments in its securities markets. These restrictions could limit the Fund's ability
to invest in a particular country or make it very expensive for the Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION - There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign companies more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Adviser anticipates that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards.
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis.
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States.
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated.
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights.
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK - While the Fund denominates its net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES - Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for the Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Fund receives from its investments. The Fund does not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS - Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
EXCHANGE-TRADED FUNDS ("ETFS")
The Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their operation, such as advisory and custody fees. When a Fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, the Fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the
underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
INVESTMENT COMPANY SHARES
The Fund may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Fund. The Fund's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying the Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
NON-DIVERSIFICATION
The Fund is non-diversified, as that term is defined in the 1940 Act, which means that a relatively high percentage of assets of the Fund may be invested in the securities of a limited number of issuers. Although the Adviser does not intend to invest more than 5% of the Fund's assets in any single issuer (with the exception of securities which are issued or guaranteed by a national government), the value of the shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence than the shares of a diversified investment company would be. The Fund intends to satisfy the diversification requirements necessary to qualify as a regulated investment company under the Internal Revenue Code, which requires that the Fund be diversified (I.E., will not invest more than 5% of its assets in the securities in any one issuer) with respect to 50% of its assets.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with financial institutions. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The acquisition of a repurchase agreement may be deemed to be an acquisition of the underlying securities as long as the obligation of the seller to repurchase the securities is collateralized fully. The Fund follows certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase
transactions only with creditworthy financial institutions whose condition will be continually monitored by the Adviser. The repurchase agreements entered into by the Fund will provide that the underlying collateral at all times shall have a value at least equal to 102% of the resale price stated in the agreement and consist only of securities permissible under Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance with this requirement). Under all repurchase agreements entered into by the Fund, the custodian or its agent must take possession of the underlying collateral. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to liquidate such collateral. However, the exercising of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. It is the current policy of the Fund, not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by that Fund, amounts to more than 15% of the Fund's total assets. The investments of the Fund in repurchase agreements, at times, may be substantial when, in the view of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. Reverse repurchase agreements are transactions in which the Fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by the Fund. At the time the Fund enters into a reverse repurchase agreement, it will earmark on the books of the Fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by the Fund may increase the Fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the Fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by the Fund may decline below the price at which it is obligated to repurchase the securities. In addition, when the Fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the Fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
RESTRICTED AND ILLIQUID SECURITIES
While the Fund does not anticipate doing so, it may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of the Fund's net assets invested in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board of Trustees (the "Board"). This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
SECURITIES LENDING
The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund's Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or
U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. The Board has adopted procedures reasonably designed to
ensure that the foregoing criteria will be met. Loan agreements involve certain
risks in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
SHORT SALES
DESCRIPTION OF SHORT SALES:
Selling a security short is when an investor sells a security it does not own. To sell a security short an investor must borrow the security from someone else to deliver to the buyer. The investor then replaces the security it borrowed by purchasing it at the market price at or before the time of replacement. Until it replaces the security, the investor repays the person that lent it the security for any interest or dividends that may have accrued during the period of the loan.
Investors typically sell securities short to:
o Take advantage of an anticipated decline in prices.
o Protect a profit in a security it already owns.
The Fund can lose money if the price of the security it sold short increases between the date of the short sale and the date on which the Fund replaces the borrowed security. Likewise, the Fund can profit if the price of the security declines between those dates. Because the market price of the security sold short could increase without limit, the Fund could also be subject to a theoretically unlimited loss.
To borrow the security, the Fund may be required to pay a premium, which would increase the cost of the security sold. The Fund will also incur transaction costs in effecting short sales. The Fund's gains and losses will be
decreased or increased, as the case may be, by the amount of the premium, dividends, interest, or expenses the Fund may be required to pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent necessary to meet margin requirements, until the short position is closed out.
SHORT SALES AGAINST THE BOX - In addition, the Fund may engage in short sales "against the box." In a short sale against the box, the Fund agrees to sell at a future date a security that it either currently owns or has the right to acquire at no extra cost. The Fund will incur transaction costs to open, maintain and close short sales against the box. For tax purposes, a short sale against the box may be a taxable event to the Fund.
RESTRICTIONS ON SHORT SALES:
The Fund will not short sell a security if:
o After giving effect to such short sale, the total market value of all securities sold short would exceed 25% of the value of the Fund's net assets.
o The market value of the securities of any single issuer that have been sold short by the Fund would exceed two percent (2%) of the value of the Fund's net assets.
o Any security sold short would constitute more than two percent (2%) of any class of the issuer's securities.
Whenever the Fund sells a security short, the Fund segregates an amount of cash or liquid securities equal to the difference between (a) the current market value of the securities sold short and (b) any cash or U.S. government securities the Fund is required to deposit with the broker in connection with the short sale (not including the proceeds from the short sale). The segregated assets are marked to market daily in an attempt to ensure that the amount deposited in the segregated account plus the amount deposited with the broker is at least equal to the current market value of the securities.
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed-delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities the Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. The Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
The Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When the Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, the Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed-delivery, or forward delivery basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because the Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. The Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments.
INVESTMENT POLICIES OF THE FUND
FUNDAMENTAL POLICIES
The following investment policies are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less. Unless otherwise noted, the Fund will determine compliance with the investment limitation percentages below (with the exception of a limitation relating to borrowing and illiquid securities) and other applicable investment requirements immediately after and as a result of its acquisition of such security or other asset. Accordingly, the Fund generally will not consider changes in values, net assets or other circumstances when determining whether the investment complies with its investment limitations. The Fund will not:
o Make any investment inconsistent with its classification as a diversified series of an open-end investment company under the 1940 Act. This restriction does not, however, apply when the Fund is classified as a non-diversified series of an open-end investment company under the 1940 Act.
o Borrow money, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in the Fund's prospectus and SAI as they may be amended from time to time.
o Issue senior securities, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction.
o Underwrite securities of other issuers, except insofar as the Fund may technically be deemed to be an underwriter under the 1933 Act in connection with the purchase or sale of its portfolio securities.
o Concentrate its investments in the securities of one or more issuers conducting their principal business activities in the same industry (other than securities issued or guaranteed by the U. S. government or its agencies or instrumentalities).
o Purchase or sell real estate, except (1) to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction, (2) that the Fund may invest in securities of issuers that deal or invest in real estate and (3) that the Fund may purchase securities secured by real estate or interests therein.
o Purchase or sell commodities or contracts on commodities except that the Fund may engage in financial futures contracts and related options and currency contracts and related options and may otherwise do so in accordance with applicable law and without registering as a commodity pool operator under the Commodity Exchange Act.
o Make loans to other persons, except that the Fund may lend its portfolio securities in accordance with applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in the Fund's prospectus and SAI as they may be amended from time to time. The acquisition of investment securities or other investment instruments shall not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
In addition to the investment objective of the Fund, the following investment limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval.
The Fund may:
o not borrow money, except that (1) the Fund may borrow from banks (as defined in the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33 1/3% of its total assets (including the amount borrowed), (2) the Fund may borrow up to an additional 5% of its total assets for temporary purposes, (3) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, and (4) the Fund may purchase securities on margin and engage in short sales to the extent permitted by applicable law.
Notwithstanding the investment restrictions above, the Fund may not borrow amounts in excess of 33 1 / 3% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. The Fund will not purchase securities while borrowings are outstanding except to exercise prior commitments and to exercise subscription rights.
o purchase and sell currencies or securities on a when-issued, delayed delivery or forward-commitment basis.
o purchase and sell foreign currency, purchase options on foreign currency and foreign currency exchange contracts.
o invest in the securities of foreign issuers.
o purchase shares of other investment companies to the extent permitted by applicable law. The Fund may, notwithstanding any fundamental policy or other limitation, invest all of its investable assets in securities of a single open-end management investment company with substantially the same investment objectives, policies and limitations.
The 1940 Act currently permits the Fund to invest up to 10% of its total assets in the securities of other investment companies. However, the Fund may not invest more than 5% of its total assets in the securities of any one investment company or acquire more than 3% of the outstanding securities of any one investment company, unless permissible under the 1940 Act and the rules and promulgations thereunder.
o hold illiquid and restricted securities to the extent permitted by applicable law.
The Fund intends to follow the policies of the SEC as they are adopted
from time to time with respect to illiquid securities, including (1)
treating as illiquid securities that may not be disposed of in the
ordinary course of business within seven days at approximately the
value at which the Fund has valued the investment on its books; and
(2) limiting its holdings of such securities to 15% of net assets.
o write covered call options and may buy and sell put and call options.
o enter into repurchase agreements.
o lend portfolio securities to registered broker-dealers or other institutional shareholders. These loans may not exceed 33 1/3% of the Fund's total assets taken at market value. In addition, the Fund must receive at least 100% collateral.
o sell securities short and engage in short sales "against the box."
o enter into swap transactions.
Further, the Fund may not change its investment strategy to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of companies located in at least three countries other than the U.S. without 60 days' prior written notice to shareholders.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. C.S. McKee L.P., a Pennsylvania limited partnership located at One Gateway Center, Pittsburgh, Pennsylvania 15222, serves as the Fund's investment adviser. The Adviser manages and supervises the investment of the Fund's assets on a discretionary basis. As of December 31, 2012, the Adviser had approximately $13.5 billion in assets under management. The Adviser was formed by certain officers of the Fund's former adviser, C.S. McKee & Co., Inc. (the "Former Adviser") who purchased the Former Adviser's investment advisory business on January 10, 2002. The Former Adviser was an affiliate of Old Mutual (US) Holdings Inc. (formerly named United Asset Management Corporation). The Adviser is not affiliated with Old Mutual (US) Holdings Inc.
Despite this transaction, there were no changes in the actual investment management services, administrative functions, supervisory responsibilities or fee arrangements for the Fund. In addition, the persons responsible for the day to day management of the Fund did not change and the Adviser continues the business of the Former Adviser. The Adviser and the Former Adviser have provided investment management services to pension and profit sharing plans, trusts and endowments, 401(k) and thrift plans, corporations and other institutions and individuals since 1972.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated June 24, 2002, as amended (the "Advisory Agreement") with respect to the Fund. Under the Advisory Agreement, the Adviser serves as investment adviser and makes the investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder or its reckless disregard of its obligation and duties thereunder. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.70% of the average daily net assets of the Fund. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Adviser the following advisory fees:
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CONTRACTUAL FEES PAID FEES WAIVED BY THE ADVISER TOTAL FEES PAID TO THE ADVISER
(AFTER WAIVERS)
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FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
----------------------------------------------------------------------------------------------------------------------
McKee
International
Equity Portfolio $1,497,434 $1,723,239 $1,425,953 $0 $0 $0 $1,497,434 $1,723,239 $1,425,953
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PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates the Fund's portfolio managers, Gregory M. Melvin and William J. Andrews, for their management of the Fund. The portfolio managers' overall compensation is designed to be competitive with similar investment advisers and to compensate the portfolio managers for their contributions to the Adviser and its investment products. The portfolio managers' compensation consists of a salary, retirement plan, equity ownership in the Adviser, profit participation and a discretionary bonus. The discretionary bonus is based in part on the Fund's one- and three-year pre-tax performance measured against the MSCI EAFE Index and the Adviser's assets under management, as well as other factors, including the portfolio managers' investment ideas, leadership, and overall contributions to the investment team.
Mr. Melvin also receives compensation in his role as owner and President of Dartmouth Capital Advisors, Inc. For his services in the investment management of approximately 45 accounts, Mr. Melvin receives a management fee that is based upon a percentage of assets under management. Dartmouth Capital Advisors, Inc. is not affiliated with the Fund or the Adviser, and the compensation Mr. Melvin receives from Dartmouth Capital Advisors, Inc. does not affect the Fund or the Adviser in any way. There is no overlap between the accounts at Dartmouth Capital Advisors, Inc. and the Fund, and Mr. Melvin's management of Dartmouth Capital Advisors, Inc. accounts does not present a conflict with his management of the Fund.
FUND SHARES OWNED BY THE PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
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DOLLAR RANGE OF
NAME FUND SHARES (FUND) (1)
--------------------------------------------------------------------------------
Gregory M. Melvin $100,001 - $500,000
--------------------------------------------------------------------------------
William J. Andrews $100,001 - $500,000
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(1) Valuation date is October 31, 2012.
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OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
-----------------------------------------------------------------------------
NUMBER NUMBER NUMBER
OF OF OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
(MILLIONS) (MILLIONS) (1) (MILLIONS)
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Gregory M.
Melvin 3 $305.98 12 $763.37 604 $12,077.57
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William J.
Andrews 3 $305.98 12 $763.37 559 $11,926.44
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(1) Two accounts are subject to a performance-based advisory fee with aggregated assets under management of $311 million as of October 31, 2012.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby a portfolio manager could favor one account over another. Another potential conflict could include a portfolio manager's knowledge about the size, timing and possible market impact of Fund trades, whereby the portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Fund. In addition, it is also possible that a potential conflict of interest may arise because the portfolio managers manage an account with a performance-based management fee in addition to the Fund and other accounts without a performance-based fee. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $250 million
--------------------------------------------------------------------------------
0.10% $250 million - $500 million
--------------------------------------------------------------------------------
0.08% $500 million - $1 billion
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0.06% Over $1 billion
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The minimum fee is $125,000 for one portfolio, $250,000 for two portfolios, $350,000 for three portfolios, an additional $75,000 for each additional portfolio over three and an additional $20,000 for each additional class per portfolio after the first class, apportioned to the Fund as a percentage of average daily net assets. Due to these minimums, the annual administration fee the Fund pays will exceed the above percentages at low asset levels. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following administration fees:
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ADMINISTRATION FEES PAID
---------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
McKee International Equity
Portfolio $256,705 $294,364 $244,450
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THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments, and an affiliate of the Administrator are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's Shares. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
CUSTODIAN
Union Bank, N.A., 350 California Street, 6th Floor, San Francisco, CA 94104 (the "Custodian"), serves as the custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700 Philadelphia, PA 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP, as indicated in their report with respect thereto, and are incorporated by reference hereto in reliance upon the authority of said firm as experts in giving said reports.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the
Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of
the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. President Managed Trust, SEI Liquid Asset
and Director of SEI Trust, SEI Asset Allocation Trust, SEI
Structured Credit Fund, Tax Exempt Trust, Adviser Managed
LP. President and Chief Trust and New Covenant Funds.
Executive Officer of Director of SEI Global Master Fund plc, SEI
SEI Alpha Strategy Global Assets Fund plc, SEI Global
Portfolios, LP, June Investments Fund plc, SEI
2007 to present. Investments--Global Funds Services,
President and Director Limited, SEI Investments Global,
of SEI Opportunity Limited, SEI Investments (Europe)
Fund, L.P. to 2010. Ltd., SEI Investments--Unit Trust
Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
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POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Administrator Trust, SEI Asset Allocation Trust, SEI
and the Distributor. Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of SEI
Investments (Europe), Limited, SEI
Investments--Global Funds Services,
Limited, SEI Investments Global,
Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd.,
SEI Global Nominee Ltd. and SEI
Investments -- Unit Trust Management
(UK) Limited. Director of the
Distributor since 2003.
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INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Business Current Directorships: Trustee of The
(08/20/34) (since 2005) Consultant, Business Advisors' Inner Circle Fund II and
Projects Inc., since Bishop Street Funds. Director of
1997. Oregon Transfer Co.
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John K. Darr Trustee Retired. Chief Executive Current Directorships: Trustee of The
(08/17/44) (since 2008) Officer, Office of Advisors' Inner Circle Fund II and
Finance, Federal Home Bishop Street Funds. Director of
Loan Banks, from 1992 Federal Home Loan Bank of
to 2007. Pittsburgh, Manna, Inc. (non-
profit developer of affordable housing
for ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
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Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since January Advisors' Inner Circle Fund II and
2012. Director of Bishop Street Funds. Director of The
Endowments and Korea Fund, Inc.
Foundations, Morningstar
Investment Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International Consulting
and Chief Executive
Officer of Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010. Country
Manager -- Morningstar
UK Limited,
Morningstar, Inc., June
2005 to May 2007.
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POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Investor Current Directorships: Trustee of The
Johnson (since 2005) since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
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Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from 2008 Bishop Street Funds.
to 2010. Self-Employed
Legal and Financial
Services Consultant since
2003. Counsel (in-house)
for State Street Bank
from 1995 to 2003.
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Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment Management
Services, John Hancock
Financial Services
(subsidiary of Manulife
Financial), June 2003 to
June 2010.
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James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and US Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
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POSITION
WITH TRUST AND
NAME AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
-------------------------------------------------------------------------------------------------------------
George J. Sullivan, Jr. Trustee Retired since January Current Directorships:
(11/13/42) (since 1999) 2012. Self-employed Trustee/Director of State Street
Lead Independent Consultant, Newfound Navigator Securities Lending Trust,
Trustee Consultants Inc., April The Advisors' Inner Circle Fund II,
1997 to December 2011. Bishop Street Funds, SEI Structured
Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board
because of their ability to review and understand information about the Fund
provided to them by management, to identify and request other information they
may deem relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on the
management and administration of the Fund, and to exercise their business
judgment in a manner that serves the best interests of the Fund's shareholders.
The Trust has
concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's independent registered public accounting firm and whether to terminate this relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence; (iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities; (iv) serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently
serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
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DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
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Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
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Krikorian None None
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Speca None None
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Storey None None
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Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the "Fund Complex."
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
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AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on (1) board
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Nesher $0 N/A N/A $0 for service on (1) board
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INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
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Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Johnson $52,654 N/A N/A $52,654 for service on one (1) board
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Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
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Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Storey $52,654 N/A N/A $52,654 for service on one (1) board
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Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers
of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
--------------------------------------------------------------------------------
NAME AND POSITION WITH PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
DATE OF BIRTH TRUST AND LENGTH
OF TERM
--------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
--------------------------------------------------------------------------------
Michael Lawson Treasurer, Director, SEI Investments, Fund
(10/08/60) Controller and Accounting since July 2005. Manager,
Chief Financial SEI Investments, Fund Accounting at
Officer SEI Investments AVP from April 1995
(since 2005) to February 1998 and November 1998
to July 2005.
--------------------------------------------------------------------------------
Russell Emery Chief Compliance Chief Compliance Officer of SEI Structured
(12/18/62) Officer (since Credit Fund, LP and SEI Alpha Strategy
2006) Portfolios, LP since June 2007. Chief Compliance
Officer of The Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Institutional Managed
Trust, SEI Asset Allocation Trust, SEI
Institutional International Trust, SEI Institutional
Investments Trust, SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust,
Adviser Managed Trust and New Covenant Funds.
Chief Compliance Officer of SEI Opportunity
Fund, L.P. until 2010. Director of Investment
Product Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February 2003.
--------------------------------------------------------------------------------
Timothy D. Vice President and General Counsel and Secretary of SIMC
Barto Assistant Secretary and the Administrator since 2004. Vice
(03/28/68) (since 1999) President of SIMC and the
Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant
Secretary of SIMC, the Administrator
and the Distributor, and Vice President
of the Distributor, from 1999 to 2003.
--------------------------------------------------------------------------------
Dianne M. Vice President Counsel at SEI Investments since 2010.
Sulzbach and Secretary Associate at Morgan, Lewis & Bockius
(07/18/77) (since 2011) LLP from 2006 to 2010. Associate at
Morrison & Foerster LLP from 2003 to
2006. Associate at Stradley Ronon
Stevens & Young LLP from 2002 to
2003.
--------------------------------------------------------------------------------
John Munch Vice President and Attorney, SEI Investments Company,
(05/07/71) Assistant Secretary since 2001. General Counsel SEI Investments
(since 2012) Distribution Co., since 2004.
--------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments
(8/24/80) (since 2009) since 2003.
AML Officer
(since 2011)
--------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing
agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elects to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. If the Fund qualifies as a RIC it will not be subject to federal income taxes on the net investment income and net realized capital gains that it distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, the Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in qualified publicly traded partnerships ("Qualifying Income Test"); (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers that the Fund controls and which are
engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships ("Asset Test").
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
The Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar year. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
The treatment of capital loss carryovers for RICs is similar to the rules that apply to capital loss carryovers of individuals which provide that such losses are carried over by the Fund indefinitely. If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires the Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, the Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of that year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Fund may, in certain circumstances, be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. The Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Fund receives qualified dividend income on the securities
it holds and the Fund designates the distribution as qualified dividend income.
Qualified dividend income is, in general, dividend income from taxable domestic
corporations and certain foreign corporations (e.g., foreign corporations
incorporated in a possession of the United States or in certain countries with
a comprehensive tax treaty with the United States, or the stock of which is
readily tradable on an established securities market in the United States). A
dividend will not be treated as qualified dividend income to the extent that
(i) the shareholder has not held the shares on which the dividend was paid for
more than 60 days during the 121-day period that begins on the date that is 60
days before the date on which the shares become "ex-dividend" (which is the day
on which declared distributions (dividends or capital gains) are deducted from
the Fund's assets before it calculates the net asset value) with respect to
such dividend (and the Fund also satisfies those holding period requirements
with respect to the securities it holds that paid the dividends distributed to
the shareholder), (ii) the shareholder is under an obligation (whether pursuant
to a short sale or otherwise) to make related payments with respect to
substantially similar or related property, or (iii) the shareholder elects to
treat such dividend as investment income under section 163(d)(4)(B) of the
Code. Distributions by the Fund of its net short-term capital gains will be
taxable as ordinary income. Capital gain distributions consisting of the Fund's
net capital gains will be taxable as long-term capital gains at a maximum rate
of 20%, regardless of how long the Fund's shares have been held by the
shareholder. Shareholders will be notified annually by the Fund as to the
federal tax status of all distributions made by the Fund.
The Fund's dividends that are paid to its corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be re-characterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in
which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
FOREIGN TAXES. If more than 50% of the value of the Fund's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to the election, the Fund will treat those taxes as dividends paid to its shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders' federal income tax. If the Fund makes the election, it will report annually to its shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and U.S. possessions.
TAX TREATMENT OF COMPLEX SECURITIES. The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold, at applicable withholding rates, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
Non-U.S. Investors. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of the Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by its tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT
OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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McKee International Equity Portfolio $103,222 $89,879 $98,870
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.
To the extent that research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual
companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Fund paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR AMOUNT OF
TOTAL DOLLAR AMOUNT OF BROKERAGE TRANSACTIONS INVOLVING BROKERAGE
FUND COMMISSIONS FOR RESEARCH SERVICES COMMISSIONS FOR RESEARCH SERVICES
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McKee International Equity $32,482 $18,695,474
Portfolio
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BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. The Fund did not hold any securities of regular brokers and dealers during the fiscal year ended October 31, 2012.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the value of the securities
purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. The Fund may at times hold investments in short-term instruments, which are excluded for purposes of computing portfolio turnover. For the fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for the Fund were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
--------------------------------------------------------------------------------
McKee International Equity Portfolio 10% 11%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund, its Adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Fund's Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Fund discloses a complete or summary schedule of investments (which includes the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. The Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q, and the Fund's complete schedule of investments following the 2nd and 4th fiscal quarters, is available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV. Should the Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-866-625-3346. In addition, the Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://aicfundholdings.com/mckee. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in connection with their services to the Fund. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of the Fund's portfolio along
with related performance attribution statistics. The lag time for such disclosures will vary. The Fund believes that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Fund's policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Fund's shareholders and that to the extent conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than three days after the date of the information. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Fund requires any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Fund, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Fund's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipients of the Fund's portfolio holdings information.
The Adviser currently has an arrangement to provide Fund portfolio holdings information to a third party prior to the date on which portfolio holdings information is posted on the Internet. Under this arrangement, the Adviser provides portfolio holdings information with respect to the Fund as of the end of each month, no sooner than three days after the end of the month, to Pierce Park Group. The information provided to this third party, until made publicly available, is considered confidential and will not be distributed to the public nor traded upon. The Fund believes these disclosures serve a legitimate business purpose. No compensation is received by the Fund or the Adviser in connection with the disclosure of portfolio holdings information. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-866-625-3346; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, including securities that may be purchased or held by the Fund, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Fund. The Fund believes that most of the shares referred to below were held by the persons listed below in accounts for their fiduciary, agency or custodial customers. Any shareholder listed below as owning of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to "control" the Fund within the meaning of the 1940 Act. Shareholders controlling the Fund may have a significiant impact on any shareholder vote of the Fund.
-------------------------------------------------------------------------------- MCKEE INTERNATIONAL EQUITY PORTFOLIO -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- SAXON & CO 4,065,751.1610 21.23% FBO WESTMORELAND COUNTY EMPLOYEES RETIREMENT FUND PO BOX 7780 PHILADELPHIA, PA 19182-0001 -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 3,873,193.7450 20.22% REINVEST ACCOUNT ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- PARBANC CO 1,540,399.7290 8.04% 514 MARKET ST PARKERSBURG, WV 26101-5144 -------------------------------------------------------------------------------- NFS LLC FEBO 1,053,551.0450 5.50% PATTON & CO AS NOMINEE AGENT FOR COMMUNITY BANK NA PO BOX 690 ATTN TRUST DEPT OLEAN, NY 14760-0690 -------------------------------------------------------------------------------- SAXON & CO 985,140.5830 5.14% PO BOX 7780-1888 PHILADELPHIA, PA 19182-0001 -------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater then in the "aaa" and "aa" classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each rating classification: the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DEBT RATINGS - TAXABLE DEBT & DEPOSITS GLOBALLY
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year.
Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
SHORT-TERM RATINGS
SHORT-TERM PRIME RATING SYSTEM - TAXABLE DEBT & DEPOSITS GLOBALLY
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
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following characteristics:
o Leading market positions in well-established industries.
o Conservative capitalization structure with moderate reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
A-3
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Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
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Not Prime Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S RATING SERVICES
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. Accordingly, in the case of junior debt, the rating may not conform exactly to the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, CCC, CC and C
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial , or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to non-payment.
C A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preffered stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking or a similar action if payments on an obligation are jeopardised.
N.R. This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant speculative characteristics. Ratings of 'B-1', 'B-2', and 'B-3' may be assigned to indicate finer distinctions within the 'B' category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term obligation rated 'B-1' is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation rated 'B-2' is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated 'B-3' is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C A short-term obligation rated 'C' is currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardised.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor's capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government's own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.
FITCH INC. RATINGS
INTERNATIONAL LONG-TERM CREDIT RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and
does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings:
INVESTMENT GRADE
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. 'A' ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category
SPECULATIVE GRADE
BB: Speculative.
'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative.
o For issuers and performing obligations, 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
o For individual obligations, may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of 'R1' (outstanding).
CCC: For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. o For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions.
Such obligations typically would possess a Recovery Rating of 'R2' (superior), or 'R3' (good) or 'R4' (average).
CC: For issuers and performing obligations, default of some kind appears probable.
o For individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of 'R4' (average) or 'R5' (below average).
Grade C: For issuers and performing obligations, default is imminent.
o For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor recoveries. Such obligations would possess a Recovery Rating of 'R6' (poor).
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated 'D' upon a default. Defaulted and distressed obligations typically are rated along the continuum of 'C' to 'B' ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation's documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the 'B' or 'CCC-C' categories.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for US public finance, in line with industry standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
RD Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
Notes to Long-term and Short-term ratings: The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' Long-term rating category, to categories below 'CCC', or to Short-term ratings other than 'F1'. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are 'stable' could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
Program ratings (such as those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, i.e. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.
Variable rate demand obligations and other securities which contain a short-term 'put' or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.
Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.
Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.
Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.
'PIF': Paid-in --Full; denotes a security that is paid-in-full, matured, called, or refinanced.
'NR' indicates that Fitch Ratings does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
OBJECTIVE
The objective of our proxy voting process is to maximize the long-term
investment performance of our clients.
POLICY
It is our policy to vote all proxy proposals in accordance with management
recommend-ations except in instances where the effect of particular resolutions
could adversely affect shareholder value. In such cases, it is our policy to
vote against these proposals. Examples of proposals which could negatively
impact shareholder interests include, but are not limited to the following:
1. Anti-takeover amendments such as fair price provisions and staggered board provisions.
2. Poison pill provisions designed to discourage another entity from seeking control.
3. Greenmail attempts.
4. Golden parachutes and related management entrenchment measures.
5. Oversized stock option grants, strike price revisions.
PROCEDURE:
Our procedure for processing proxy statements is as follows:
1. Upon receipt, all proxy material will be forwarded to the Investment Administrative Assistant for his/her review. Specifically, proxies will be reviewed for material conflict of interest and in such cases will be addressed by the Compliance Department to ensure that resolutions are voted in the best interest of shareholders.
2. If the proxy proposals are routine and contain no proposals adverse to the investment interests of our clients, the Investment Administrative Assistant will vote the resolutions in favor of management. The vote will be reviewed and signed by the Chief Investment Officer, or in his/her absence, by the senior equity portfolio manager.
3. If non-routine proposals or proposals considered to have a potentially negative investment performance impact are discovered, the Chief Investment Officer will review the particular resolutions thoroughly with the equity manager responsible for the investment.
4. After this review, if the Chief Investment Officer determines that specific proposals could have a negative investment performance effect, he will vote against those proposals.
5. The Chief Investment Officer will review any exceptional provisions which are of significant investment interest with the Chief Executive Officer before voting on those issues.
6. Copies of all proxy material, along with our voting record, will be maintained by the Investment Administrative Assistant.
7. The Chief Investment Officer will review our proxy voting record with the Chief Executive Officer annually, or more often if necessary.
STATEMENT OF ADDITIONAL INFORMATION
RICE HALL JAMES SMALL CAP PORTFOLIO
(TICKER SYMBOL: RHJMX)
RICE HALL JAMES MICRO CAP PORTFOLIO
(TICKER SYMBOL: RHJSX)
RICE HALL JAMES MID CAP PORTFOLIO
(TICKER SYMBOL: RHJVX)
EACH, A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
RICE HALL JAMES & ASSOCIATES, LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Rice Hall James Small Cap Portfolio (Small Cap Portfolio), the Rice Hall James Micro Cap Portfolio (Micro Cap Portfolio), and the Rice Hall James Mid Cap Portfolio (Mid Cap Portfolio) (each a "Fund" and collectively, the "Funds"). This SAI is incorporated by reference and should be read in conjunction with the Funds' prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus.
The financial statements including the notes thereto and the report of PricewaterhouseCoopers LLP thereon, as contained in the 2012 Annual Report to Shareholders are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Funds' 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Funds' prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121 or calling the Funds at 1-866-474-5669.
TABLE OF CONTENTS
THE TRUST .................................................................. S-1 DESCRIPTION OF PERMITTED INVESTMENTS ....................................... S-2 INVESTMENT POLICIES OF THE FUNDS ...........................................S-27 INVESTMENT ADVISORY AND OTHER SERVICES .....................................S-30 PORTFOLIO MANAGERS .........................................................S-32 THE ADMINISTRATOR ..........................................................S-33 THE DISTRIBUTOR ............................................................S-34 PAYMENTS TO FINANCIAL INTERMEDIARIES .......................................S-35 TRANSFER AGENT .............................................................S-36 CUSTODIAN ..................................................................S-36 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ..............................S-36 LEGAL COUNSEL ..............................................................S-36 TRUSTEES AND OFFICERS OF THE TRUST .........................................S-36 PURCHASING AND REDEEMING SHARES ............................................S-45 DETERMINATION OF NET ASSET VALUE ...........................................S-46 TAXES ......................................................................S-46 BROKERAGE ALLOCATION AND OTHER PRACTICES ...................................S-51 PORTFOLIO HOLDINGS .........................................................S-53 DESCRIPTION OF SHARES ......................................................S-54 SHAREHOLDER LIABILITY ......................................................S-55 |
LIMITATION OF TRUSTEES' LIABILITY ..........................................S-55 PROXY VOTING ...............................................................S-55 CODES OF ETHICS ............................................................S-55 5% AND 25% SHAREHOLDERS ....................................................S-55 APPENDIX A -- RATINGS ...................................................... A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ......................... B-1 |
March 1, 2013 RHJ-SX-001-1200
THE TRUST
GENERAL. Each Fund is a separate series of the Trust. The Trust is an open-end
investment management company established under Massachusetts law as a
Massachusetts voluntary association (commonly known as a business trust) under
a Declaration of Trust dated July 18, 1991, as amended and restated February
18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust
to offer separate series ("funds") of shares of beneficial interest ("shares").
The Trust reserves the right to create and issue shares of additional funds.
Each fund is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong solely to that
fund and would be subject to liabilities related thereto. Each Fund pays its
(i) operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses, and (ii) pro rata
share of the Fund's other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the
assets of that fund. Expenses not attributable to a specific fund are allocated
across all of the funds on the basis of relative net assets. The other funds of
the Trust are described in one or more separate Statements of Additional
Information.
HISTORY OF THE RICE HALL JAMES SMALL CAP PORTFOLIO AND THE RICE HALL JAMES MICRO CAP PORTFOLIO. The Rice Hall James Small Cap Portfolio is a successor to the UAM Funds, Inc. Rice Hall James Small/Mid Cap Portfolio ("Predecessor Small/Mid Cap Fund"). The Rice Hall James Micro Cap Portfolio is a successor to the UAM Funds, Inc. Rice Hall James Micro Cap Portfolio ("Predecessor Micro Cap Fund" and together with the "Predecessor Small/Mid Cap Fund," the "Predecessor Funds"). The Predecessor Funds were managed by Rice Hall James & Associates (the "Predecessor Adviser") using similar or, in the case of the Rice Hall James Micro Cap Portfolio, the same investment objective, strategies, policies and restrictions as those used by the Funds. The Predecessor Small/Mid Cap Fund and the Predecessor Micro Cap Fund's dates of inception were November 1, 1996 and July 1, 1994, respectively. Each of the Predecessor Funds dissolved and reorganized into the current Rice Hall James Small Cap Portfolio and the Rice Hall James Micro Cap Portfolio, respectively, on June 24, 2002. Substantially all of the assets of each Predecessor Fund were transferred to its successor in connection with each Fund's commencement of operations on June 24, 2002. Prior to January 20, 2008, the Rice Hall James Small Cap Portfolio's investment strategy also included equity securities of mid cap companies in addition to investments in equity securities of small cap companies.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer multiple classes of shares of its funds. The Funds currently offers Institutional Class shares or Investor Class shares, as specified in the chart below. The Trust reserves the right to create and issue additional classes of shares. The different classes provide for variations in certain distribution and shareholder servicing expenses. For more information on shareholder servicing and distribution expenses, see the "Distributor."
-------------------------------------------------------------------------------- FUND INSTITUTIONAL CLASS INVESTOR CLASS -------------------------------------------------------------------------------- Rice Hall James Small Cap Portfolio X -------------------------------------------------------------------------------- Rice Hall James Micro Cap Portfolio X -------------------------------------------------------------------------------- Rice Hall James Mid Cap Portfolio X -------------------------------------------------------------------------------- |
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. Each Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate each Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
WHAT INVESTMENT STRATEGIES MAY THE FUNDS USE?
The Funds' investment objectives and principal investment strategies are described in the prospectus. Each Fund is classified as a "diversified" investment company under the Investment Company Act of 1940 as amended (the "1940 Act"). The following information supplements, and should be read in conjunction with, the prospectus. Each Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
DEBT SECURITIES
Corporations and governments use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
U.S. GOVERNMENT SECURITIES - Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200
billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $ 250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
CORPORATE BONDS - Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. Rice Hall James & Associates, LLC (the "Adviser") will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
GINNIE MAE -- Ginnie Mae is the principal governmental guarantor of mortgage-related securities. Ginnie Mae is a wholly owned corporation of the U.S. government within the Department of Housing and Urban Development. Securities issued by Ginnie Mae are treasury securities, which means the full faith and credit of the U.S. government backs them. Ginnie Mae guarantees the timely payment of principal and interest on securities issued by institutions approved by Ginnie Mae and backed by pools of FHA-insured or VA-guaranteed mortgages. Ginnie Mae does not guarantee the market value or yield of mortgage-backed securities or the value of a Fund's
shares. To buy Ginnie Mae securities, the Funds may have to pay a premium over the maturity value of the underlying mortgages, which the Fund may lose if prepayment occurs.
FANNIE MAE -- Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. Fannie Mae is regulated by the Secretary of Housing and Urban Development. Fannie Mae purchases conventional mortgages from a list of approved sellers and service providers, including state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Securities issued by Fannie Mae are agency securities, which means Fannie Mae, but not the U.S. government, guarantees their timely payment of principal and interest.
FREDDIE MAC- Freddie Mac is stockholder-owned corporation established by the U.S. Congress to create a continuous flow of funds to mortgage lenders. Freddie Mac supplies lenders with the money to make mortgages and packages the mortgages into marketable securities. The system is designed to create a stable mortgage credit system and reduce the rates paid by homebuyers. Freddie Mac, not the U.S. government, guarantees timely payment of principal and interest.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by Ginnie Mae, Fannie Mae & Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES - Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. For example,
o payments of interest and principal are more frequent (usually
monthly); and
o falling interest rates generally cause individual borrowers to pay
off their mortgage earlier than expected, which results in prepayments
of principal on the securities, thus forcing the Fund to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. If the prepayment rates increase, the Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to pre-payment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements
under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Funds may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
SHORT-TERM INVESTMENTS - To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, a Fund may invest a portion of its assets in the short-term securities listed below, U.S. government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS - The Funds will only invest in a security issued by a commercial bank if the bank:
o Has total assets of at least $1 billion, or the equivalent in other
currencies (based on the most recent publicly available information
about the bank); and
o Is a U.S. bank and a member of the Federal Deposit Insurance
Corporation; or
o Is a foreign branch of a U.S. bank and the Adviser believes the
security is of an investment quality comparable with other debt
securities that the Funds may purchase.
TIME DEPOSITS - Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation. The Funds may only purchase time deposits maturing from two business days through seven calendar days.
CERTIFICATES OF DEPOSIT - Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or savings and loan association for a definite period of time and earning a specified return.
BANKERS' ACCEPTANCE - A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods).
COMMERCIAL PAPER - Commercial paper is a short-term obligation with a maturity ranging from one to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. The Funds may invest in commercial paper rated A-1 or A-2 by Standard and Poor's Ratings Services ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service, Inc. ("Moody's"), or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A - Ratings" for a description of commercial paper ratings.
YANKEE BONDS - Yankee bonds are dollar-denominated bonds issued inside the United States by foreign entities. Investments in these securities involve certain risks that are not typically associated with investing in domestic securities. See "Foreign Securities."
ZERO COUPON BONDS - These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with the same maturity. A Fund's investments in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its portfolio securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once the
holder of the security has stripped or separated corpus and coupons, it may
sell each component separately. The principal or corpus is then sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (I.E., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of
the owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," a Fund may record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
TERMS TO UNDERSTAND:
MATURITY - Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security held by the mutual fund, with the maturity of each security weighted by the percentage of the assets of the mutual fund it represents.
DURATION - Duration is a calculation that seeks to measure the price sensitivity of a debt security, or of a mutual fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration. Effective duration takes into account call features and sinking fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES - The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding
period and coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument, therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
o INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (I.E., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected, resulting in prepayments on the securities. A Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of a Fund. If left unattended, drifts in the average maturity of a Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of the Fund.
o EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause the Funds' average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of a Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term Treasury securities, such as three-month treasury bills, are considered "risk free." Corporate securities offer higher yields than Treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." If an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which affects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called investment-grade because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, the Adviser may determine that it is of investment-grade. The Adviser may retain securities that are downgraded, if it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influences their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause the Funds to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's assessment of the issuer's financial strength. The Funds currently use ratings compiled by Moody's, S&P, and Fitch. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk.
The section "Appendix A - Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
The Adviser may use ratings produced by ratings agencies as guidelines to determine the rating of a security at the time the Fund buys it. A rating agency may change its credit ratings at any time. The Adviser monitors the rating of the security and will take such action, if any, it believes appropriate when it learns that a rating agency has reduced the security's rating. The Funds are not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded below the above-stated ratings.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, or an underlying economic factor, such as an interest rate or a market benchmark. Unless otherwise stated in the Funds' prospectus, the Funds may use derivatives for risk management purposes, including to gain exposure to various markets in a cost efficient manner, to reduce transaction costs or to remain fully invested. A Fund may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates (a practice known as "hedging"). When hedging is successful, a Fund will have offset any depreciation in the value of its portfolio securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of a Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), a Fund must either operate within certain guidelines and restrictions with respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Funds, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Funds are not subject to registration or regulation as a CPO under the CEA. As a result, the Funds will operate within certain guidelines and restrictions with respect to its use of futures, options on such futures, commodity options and certain swaps.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading and regulated by the CFTC. These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
A Fund may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC options"). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counter-party will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When a Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). A Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that a Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. A Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium
paid and related transaction costs. Otherwise, a Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put
option) or buying (in the case of a call option) the underlying
instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When a Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when a Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. A Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an over-the-counter option by entering into an offsetting transaction with the counter-party to the option.
A Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, a Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, the Funds would hope to profit by closing out the put option at a lower price. If security prices fall, a Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. A Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, a Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Funds are permitted only to write covered options. At the time of selling the call option, the Funds may cover the option by owning, among other things:
o The underlying security (or securities convertible into the
underlying security without additional consideration), index, interest
rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser
exercise price;
o A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract; or
o In the case of an index, the portfolio of securities that corresponds
to the index.
At the time of selling a put option, a Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (I.E., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
A Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. A Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. A Fund may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
A Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to the Funds.
o COMBINED POSITIONS
A Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, a Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, a Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange
contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (I.E., the parties to
the contract may fix the maturity date and the amount).
o Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their customers,
as opposed to futures contracts which are traded only on exchanges
regulated by the CFTC.
o Do not require an initial margin deposit.
o May be closed by entering into a closing transaction with the
currency trader who is a party to the original forward contract, as
opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect a Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. A Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
A Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. A Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which a Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that a Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
A Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross-hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, a Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, a Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of a Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from a Fund. If a swap agreement calls for payments by a Fund, the Fund must be prepared to make such payments when due. In addition, if the counter-party's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. A Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counter-party is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, the Funds may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a Fund's gains or losses. In order to reduce the risk associated with leveraging, a Fund may cover its current obligations under swap agreements according to guidelines established by the U.S. Securities and Exchange Commission ("SEC"). If a Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can
gain exposure to stocks making up the index of securities without actually
purchasing those stocks. Equity index swaps involve not only the risk
associated with investment in the securities represented in the index, but also
the risk that the performance of such securities, including dividends, will not
exceed the return on the interest rate that the Funds will be committed to pay.
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if a Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, a Fund may have to pay more money than it receives. Similarly, if a
Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, a Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. A Fund may enter into a currency swap when it has one currency and desires a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance of a Fund than if it had not entered into any derivatives transactions. Derivatives may magnify a Fund's gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities a Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose a Fund to greater risks.
CORRELATION OF PRICES - A Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities a Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if a Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, a Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller
number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of a Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect a Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of a Fund's foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of a Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, a Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, a Fund may close out a futures contract only on the exchange the contract was initially traded. Although a Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, a Fund may not be able to close out its position. In an illiquid market, a Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (I.E., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, a Fund may lose money by investing in derivatives. For example, if a Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, a Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if a Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, a Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if a Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into a Fund. If a Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to a Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, a Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. A Fund may lose its margin deposits if a broker with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (I.E., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Funds may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
EQUITY SECURITIES
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Funds invest will cause the net asset value of the Funds to fluctuate. The Funds purchase equity securities traded in the U.S. on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
TYPES OF EQUITY SECURITIES:
COMMON STOCKS - Common stocks represent units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are described below, dividends on common stocks are not fixed but are declared at the discretion of the Board of Trustees (the "Board").
PREFERRED STOCKS - Preferred stocks are also units of ownership in a company. Preferred stocks normally have preference over common stock in the payment of dividends and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market values of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk.
CONVERTIBLE SECURITIES - Convertible securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of the issuer's common stock at a Fund's option during a specified time period (such as convertible preferred stocks, convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same corporation. In general, the market value of a convertible security is at least the higher of its "investment value" (I.E., its value as a fixed income security) or its "conversion value" (I.E., its value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times of steady interest rates than other types of debt securities.
The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which a Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics, and other factors. Because a Fund will create synthetic convertible positions only out of high grade fixed income securities, the credit rating associated with a Fund's synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one-month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing "time value" as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss, the market price of the option component generally reflects these differences in maturities, and the Adviser takes such differences into account when evaluating such positions. When a synthetic convertible position "matures" because of the expiration of the associated option, a Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If a Fund does not so extend the maturity of a position, it may continue to hold the associated fixed income security.
REAL ESTATE INVESTMENT TRUSTS ("REITS"). A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Code. The Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which the Funds invest may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Portfolio invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills,
have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through a Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
REAL ESTATE COMPANIES' SECURITIES. The Funds may be subject to the risks associated with the direct ownership of real estate because of its policy of concentration in the securities of companies principally engaged in the real estate industry. For example, real estate values may fluctuate as a result of general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, demographic trends and variations in rental income, changes in zoning laws, casualty or condemnation losses, regulatory limitations on rents, changes in neighborhood values, related party risks, changes in how appealing properties are to tenants, changes in interest rates and other real estate capital market influences. The value of securities of companies which service the real estate business sector may also be affected by such risks.
RIGHTS AND WARRANTS - A right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life, usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
RISKS OF INVESTING IN EQUITY SECURITIES:
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
SMALL AND MEDIUM-SIZED COMPANIES - Investors in small and medium-sized companies typically take on greater risk and price volatility than they would by investing in larger, more established companies. This increased risk may be due to the greater business risks of their small or medium size, limited markets and financial resources, narrow product lines and frequent lack of management depth. The securities of small and medium-sized companies are often traded in the over-the-counter market and might not be traded in volumes typical of securities traded on a national securities exchange. Thus, the securities of small and medium capitalization companies are likely to be less liquid, and subject to more abrupt or erratic market movements, than securities of larger, more established companies.
TECHNOLOGY COMPANIES - Stocks of technology companies have tended to be subject to greater volatility than securities of companies that are not dependent upon or associated with technological issues. Technology companies operate in various industries. Since these industries frequently share common characteristics, an event or issue affecting one industry may significantly influence other, related industries. For example, technology companies may be strongly affected by worldwide scientific or technological developments and their products and services may be subject to governmental regulation or adversely affected by governmental policies.
INITIAL PUBLIC OFFERINGS ("IPOS") - A Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on a Fund with a small asset base. The impact of IPOs on a Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to a Fund for investing, particularly as the Fund's asset base grows. Because IPO shares frequently are volatile in price, a Fund may hold IPO shares for a very short period of time. This may increase the turnover of a Fund's portfolio and may lead to increased expenses for a Fund, such as commissions and transaction costs. By selling IPO shares, a Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The policy of the Adviser is to purchase only IPOs that are appropriate for funds managed according to the Adviser's Micro-Cap Equity strategy. The allocation of these IPO shares will be made pro rata to the Adviser's micro cap equity funds, including the Micro Cap Portfolio and separately managed accounts, in accordance with minimum allocation guidelines in place at the time. Thus, the Small Cap Portfolio and Mid Cap Portfolio may purchase shares of a recent IPO in the secondary market.
If the Adviser is allocated insufficient shares of an IPO to allocate to all of its micro-cap funds, these micro-cap funds, including the Micro Cap Portfolio, will generally receive IPO allocations on a rotating basis. The Micro Cap Portfolio may not, however, receive IPO allocations if it has insufficient cash reserves to pay for shares that would otherwise be allocated to it.
A Fund's investment in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which presents risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability
may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product lines.
FOREIGN SECURITIES
TYPES OF FOREIGN SECURITIES:
Foreign securities are debt and equity securities that are traded in markets outside of the U.S. The markets in which these securities are located can be developed or emerging. A Fund can invest in foreign securities in a number of ways:
o A Fund can invest directly in foreign securities denominated in a foreign currency;
o A Fund can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o A Fund can invest in investment funds.
AMERICAN DEPOSITARY RECEIPTS ("ADRS") - ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS - An "emerging country" is generally a country that the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS - Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. Shareholders of a Fund that invests in such investment funds will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS - Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the U.S. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict or control foreign investments in its securities markets. These restrictions could limit a fund's ability to invest in a particular country or make it very expensive for a Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other companies may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION - There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign companies more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Adviser anticipates that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities.
Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the U.S.;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards.
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis.
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States.
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated.
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights.
o restrictions on transferring securities within the U.S. or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK - While the Funds denominate their net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES - Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for a Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income a Fund receives from its investments. The Funds do not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS - Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
EXCHANGE-TRADED FUNDS ("ETFS")
Each Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their operation, such as advisory and custody fees. When a Fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, the Fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
INVESTMENT COMPANIES
The Funds may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Funds. The Funds' purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying a Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, the Funds may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies,
known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Funds may invest in the ETFs in excess of the 3% limit described above, provided that the Funds otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with financial institutions. A
repurchase agreement is an agreement under which a fund acquires a fixed income
security (generally a security issued by the U.S. government or an agency
thereof, a banker's acceptance, or a certificate of deposit) from a commercial
bank, broker, or dealer, and simultaneously agrees to resell such security to
the seller at an agreed upon price and date (normally, the next business day).
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement may be considered a loan that is
collateralized by the security purchased. The acquisition of a repurchase
agreement may be deemed to be an acquisition of the underlying securities as
long as the obligation of the seller to repurchase the securities is
collateralized fully. The Funds follow certain procedures designed to minimize
the risks inherent in such agreements. These procedures include effecting
repurchase transactions only with creditworthy financial institutions whose
condition will be continually monitored by the Adviser. The repurchase
agreements entered into by the Funds will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Funds, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, a Fund will seek to liquidate such collateral. However, the
exercising of a Fund's right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sale upon a default
of the obligation to repurchase were less than the repurchase price, the Fund
could suffer a loss. It is the current policy of the Funds not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by a Fund, amounts to
more than 15% of the Fund's total assets. The investments of the Funds in
repurchase agreements, at times, may be substantial when, in the view of the
Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
A Fund may enter into reverse repurchase agreements. Reverse repurchase agreements are transactions in which a Fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a Fund. At the time a Fund enters into a reverse repurchase agreement, it will earmark on the books of the Fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by a Fund may increase the Fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to a Fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a Fund invests the proceeds it receives in a reverse
repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the Fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
RESTRICTED AND ILLIQUID SECURITIES
While the Funds do not anticipate doing so, each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. A Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of a Fund's net assets held in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that can not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
SECURITIES LENDING
The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Funds (including the loan collateral). The Funds will not lend portfolio securities to their Adviser or their affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Funds.
The Funds may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Funds' securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, a Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. Investing cash collateral subjects the Fund to market risk. The Fund remains obligated to return all collateral to the borrower under the terms of its securities lending arrangements, even if the value of investments made with the collateral decline. Accordingly, if the value of a security in which the cash collateral has been invested declines, the loss would be borne by the Fund, and the Fund may be required to liquidate other investments in order to return collateral to the borrower at the end of the loan. Each Fund will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities
rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon a Fund's ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
SHORT SALES
DESCRIPTION OF SHORT SALES:
Selling a security short is when an investor sells a security it does not own. To sell a security short an investor must borrow the security from someone else to deliver to the buyer. The investor then replaces the security it borrowed by purchasing it at the market price at or before the time of replacement. Until it replaces the security, the investor repays the person that lent it the security for any interest or dividends that may have accrued during the period of the loan.
Investors typically sell securities short to:
o Take advantage of an anticipated decline in prices.
o Protect a profit in a security it already owns.
A Fund can lose money if the price of the security it sold short increases between the date of the short sale and the date on which the Fund replaces the borrowed security. Likewise, a Fund can profit if the price of the security declines between those dates. Because the market price of the security sold short could increase without limit, the Fund could also be subject to a theoretically unlimited loss.
To borrow the security, a Fund may be required to pay a premium, which would increase the cost of the security sold. The Fund will also incur transaction costs in effecting short sales. A Fund's gains and losses will be decreased or increased, as the case may be, by the amount of the premium, dividends, interest, or expenses the Fund may be required to pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent necessary to meet margin requirements, until the short position is closed out.
SHORT SALES AGAINST THE BOX - In addition, a Fund may engage in short sales "against the box." In a short sale against the box, a Fund agrees to sell at a future date a security that it either currently owns or has the right to acquire at no extra cost. A Fund will incur transaction costs to open, maintain and close short sales against the box. For tax purposes, a short sale against the box may be a taxable event to the Fund.
RESTRICTIONS ON SHORT SALES:
A Fund will not short sell a security if:
o After giving effect to such short sale, the total market value of all securities sold short would exceed 25% of the value of a Fund's net assets.
o The market value of the securities of any single issuer that have been sold short by a Fund would exceed two percent (2%) of the value of a Fund's net assets.
o Any security sold short would constitute more than two percent (2%) of any class of the issuer's securities.
Whenever a Fund sells a security short, the Fund segregates an amount of cash or liquid securities equal to the difference between (a) the current market value of the securities sold short and (b) any cash or U.S. government securities the Fund is required to deposit with the broker in connection with the short sale (not including the proceeds from the short sale). The segregated assets are marked to market daily in an attempt to ensure that the amount deposited in the segregated account plus the amount deposited with the broker is at least equal to the current market value of the securities.
WHEN ISSUED, DELAYED -- DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, a Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities a Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. A Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
A Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When a Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, a Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, a Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because a Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
A Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. A Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments.
INVESTMENT POLICIES OF THE FUNDS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental, which means that a Fund cannot change them without approval by the vote of a majority of a fund's outstanding shares. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Unless otherwise noted, the Funds will determine compliance with the investment limitation percentages below (with the exception of a limitation relating to borrowing and illiquid securities) and other applicable investment requirements immediately after, and as a result of, a Fund's acquisition of such security or other asset. Accordingly, a Fund generally will not consider changes in values, net assets or other circumstances when determining whether the investment complies with its investment limitations. Each of the Funds will not:
o Make any investment inconsistent with its classification as a diversified series of an open-end investment company under the 1940 Act. This restriction does not, however, apply to any Fund classified as a non- diversified series of an open-end investment company under the 1940 Act.
o Borrow money, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in a Fund's prospectus and SAI as they may be amended from time to time.
o Issue senior securities, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction.
o Underwrite securities of other issuers, except insofar as a Fund may technically be deemed to be an underwriter under the Securities Act of 1933 in connection with the purchase or sale of its portfolio securities.
o Concentrate its investments in the securities of one or more issuers conducting their principal business activities in the same industry (other than securities issued or guaranteed by the U. S. government or its agencies or instrumentalities).
o Purchase or sell real estate, except (1) to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction, (2) that a Fund may invest in securities of issuers that deal or invest in real estate and (3) that a Fund may purchase securities secured by real estate or interests therein.
o Purchase or sell commodities or contracts on commodities except that a Fund may engage in financial futures contracts and related options and currency contracts and related options and may otherwise do so in accordance with applicable law and without registering as a commodity pool operator under the Commodity Exchange Act.
o Make loans to other persons, except that a Fund may lend its portfolio securities in accordance with applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in a Fund's prospectus and SAI as they may be amended from time to time. The acquisition of investment securities or other investment instruments shall not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
In addition to each Fund's investment objective, the following limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval. Each of the Funds may:
o Not purchase securities of any issuer (except securities of other investment companies, securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of a Fund would be invested in the securities of such issuer; or acquire more than 10% of the outstanding voting securities of any one issuer. This restriction applies to 75% of a Fund's total assets.
o Not borrow money, except that (1) a Fund may borrow from banks (as defined in the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33(1)/3 % of its total assets (including the amount borrowed), (2) a Fund may borrow up to an additional 5% of its total assets for temporary purposes, (3) a Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, and (4) a Fund may purchase securities on margin and engage in short sales to the extent permitted by applicable law.
o Notwithstanding the investment restriction above, a Fund may not borrow amounts in excess of 33(1)/3 % of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of portfolio shares. A Fund will not purchase securities while borrowings are outstanding except to exercise prior commitments and to exercise subscription rights.
o Purchase and sell currencies or securities on a when-issued, delayed delivery or forward-commitment basis.
o Purchase and sell foreign currency, purchase options on foreign currency and foreign currency exchange contracts.
o Invest in the securities of foreign issuers.
o Purchase shares of other investment companies to the extent permitted by applicable law. A Fund may, notwithstanding any fundamental policy or other limitation, invest all of its investable assets in securities of a single open-end management investment company with substantially the same investment objectives, policies and limitations.
The 1940 Act currently permits each Fund to invest up to 10% of its total assets in the securities of other investment companies. However, a Fund may not invest more than 5% of its total assets in the securities of any one investment company or acquire more than 3% of the outstanding securities of any one investment company, unless permissible under the 1940 Act and the rules and promulgations thereunder.
o Hold illiquid and restricted securities to the extent permitted by applicable law.
o Each Fund intends to follow the policies of the SEC as they are adopted from time to time with respect to illiquid securities, including (1) treating as illiquid securities that may not be disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued the investment on its books; and (2) limiting its holdings of such securities to 15% of net assets.
o Write covered call options and may buy and sell put and call options.
o Enter into repurchase agreements.
o Lend portfolio securities to registered broker-dealers or other institutional shareholders. These loans may not exceed 33 1/3% of the Fund's total assets taken at market value. In addition, a Fund must receive at least 100% collateral.
o Sell securities short and engage in short sales "against the box. "
o Enter into swap transactions.
Further,
1. The Small Cap Portfolio may not change its investment strategy to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of small capitalization companies at the time of initial purchase without 60 days' prior written notice to shareholders.
2. The Micro Cap Portfolio may not change its investment strategy to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of small capitalization companies at the time of initial purchase without 60 days' prior written notice to shareholders.
3. The Mid Cap Portfolio may not change its investment strategy to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of mid capitalization companies at the time of initial purchase without 60 days' prior written notice to shareholders.
The following descriptions of the 1940 Act may assist investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than securities of other investment companies, securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's outstanding voting securities would be held by the fund.
CONCENTRATION. The SEC staff has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total.
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Funds' current investment policy on lending is as follows: a Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its Statement of Additional Information.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in real estate, but does require that every investment company have a fundamental investment policy governing such investments. The Funds will not purchase or sell real estate, except that the Funds may purchase: (i) marketable securities issued by companies which own or invest in real estate (including REITs).
COMMODITIES. The 1940 Act does not directly restrict an investment company's ability to invest in commodities, but does require that every investment company have a fundamental investment policy governing such investments. The Funds will not purchase or sell physical commodities or commodities contracts, except that the Funds may purchase: (i) marketable securities issued by companies which own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. Rice Hall James & Associates, LLC, a 100% employee owned Delaware limited liability company located at 600 West Broadway, Suite 1000, San Diego, California 92101, serves as the investment adviser to each Fund. The Adviser manages and supervises the investment of each Fund's assets on a discretionary basis. As of December 31, 2012, the Adviser held $1.1 billion in assets under management. On February 13, 2003, the Adviser completed the purchase of Rice Hall James & Associates, the former adviser to the Funds (the "Predecessor Adviser"). In conjunction with this transaction, there were no changes in the actual investment management services, administrative functions or supervisory responsibilities for the Funds. The Adviser and the Predecessor Adviser have provided investment management services to individual and institutional shareholders since 1970.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated August 8, 2008 (the "Advisory Agreement") with respect to the Funds. Under the Advisory Agreement, the Adviser serves as investment adviser and makes the investment decisions for the Funds and continuously reviews, supervises and administers the investment program of the Funds, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of misfeasance or negligence generally in the performance of its duties hereunder or its negligent disregard of its obligation and duties under the Advisory Agreement.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of each Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of a Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services, the Small Cap Portfolio and the Micro Cap Portfolio pay the Adviser a fee calculated at an annual rate of 0.80% and 0.75% of their average daily net assets, respectively.
The Mid Cap Portfolio pays the Adviser an annual fee that is detailed below in the following schedule:
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FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
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0.90% First $250 million
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0.80% $250 million - $500 million
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0.70% Over $500 million
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Due to the effect of fee waivers by the Adviser, the actual percentage of average daily net assets that a Fund pays in any given year may be different from the rate set forth in its contract with the Adviser. The Adviser has voluntarily agreed to reduce fees and reimburse expenses of the Small Cap Portfolio and Micro Cap Portfolio in order to keep their net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees
and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.50% and 1.60% respectively, of the Funds' average daily net assets. The Adviser may change or cancel these expense limitations of the Funds at any time. With respect to the Mid Cap Portfolio, the Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep total annual Fund operating expenses (not including excluded expenses) from exceeding 1.40% of the Fund's average daily net assets until February 28, 2014. If at any point during the Mid Cap Portfolio's operations total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the total annual fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following in management fees to the Adviser:
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CONTRACTUAL FEES PAID FEES WAIVED BY ADVISER TOTAL FEES PAID (AFTER WAIVERS)
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FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
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Small Cap
Portfolio $291,090 $546,129 $959,863 $0 $0 $0 $291,090 $546,129 $959,863
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Micro Cap
Portfolio $645,509 $443,058 $286,864 $46,208 $0 $0 $599,301 $433,058 $286,864
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Mid Cap
Portfolio $131,535 $76,946 $82,198 $83,997 $71,991 $68,707 $47,538 $4,955 $13,491
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PORTFOLIO MANAGERS
This section includes information about the Funds' portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates the Funds' portfolio managers for their management of the Funds. The portfolio manager's compensation consists of salary and a discretionary bonus. The discretionary bonus ranges from 100% to 200% of the portfolio manager's salary. Approximately 50% of the bonus is based upon the portfolio manager's contributions to the investment team and to the Adviser as a whole. The remaining 50% of the bonus is based upon investment productivity, with a small emphasis on Fund or account performance.
FUND SHARES OWNED BY THE PORTFOLIO MANAGERS. The following table shows the dollar amount range of the portfolio managers' "beneficial ownership" of shares of the Funds as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
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NAME DOLLAR RANGE OF FUND SHARES(1)
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$100,001 - $500,000 (Small Cap Portfolio)
Timothy A. Todaro, CFA $100,001 - $500,000 (Micro Cap Portfolio)
$100,001 - $500,000 (Mid Cap Portfolio)
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$100,001 - $500,000 (Small Cap Portfolio)
Thomas W. McDowell $100,001 - $500,000 (Micro Cap Portfolio)
$100,001 - $500,000 (Mid Cap Portfolio)
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$100,001 - $500,000 (Small Cap Portfolio)
James D. Dickinson, CFA $50,001 - $100,000 (Micro Cap Portfolio)
$50,001 - $100,000 (Mid Cap Portfolio)
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$50,001 - $100,000 (Small Cap Portfolio)
Cara M. Thome $50,001 - $100,000 (Micro Cap Portfolio)
None (Mid Cap Portfolio)
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(1) Valuation date is October 31, 2012.
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OTHER ACCOUNTS. In addition to the Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. Note that none of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
------------------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER
OF TOTAL OF OF TOTAL ASSETS
NAME ACCOUNTS ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS (IN MILLIONS)
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Timothy A. Todaro, CFA 0 $0 0 $0 30 $65
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Thomas W. McDowell 0 $0 0 $0 69 $531
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James D. Dickinson,
CFA 0 $0 0 $0 0 $0
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Cara M. Thome 0 $0 0 $0 10 $28
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CONFLICTS OF INTERESTS. The portfolio managers' management of the investments of "other accounts" may give rise to potential conflicts of interest in connection with their management of a Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby a portfolio manager could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of a Fund. In addition, it is also possible that a potential conflict of interest may arise because a portfolio manager manages an account with a performance-based management fee in addition to the Funds and other accounts without a performance-based fee. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for each Fund whereby the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $250 million
--------------------------------------------------------------------------------
0.10% $250 million - $500 million
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0.08% $500 million - $750 million
--------------------------------------------------------------------------------
0.04% Over $750 million
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The minimum fee is $125,000 for one portfolio, $250,000 for two portfolios, $350,000 for three portfolios, $425,000 for four portfolios, $500,000 for five portfolios, each additional portfolio over five to be agreed upon in writing by the parties, and $20,000 for each additional class per portfolio after the first class, apportioned to the Funds as a percentage of average daily net assets. Due to these minimums, the annual administration fee each Fund pays will exceed the above percentages at low asset levels. For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following administration fees:
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ADMINISTRATION FEES PAID
---------------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
Small Cap Portfolio $94,674 $170,506 $249,599
--------------------------------------------------------------------------------
Micro Cap Portfolio $218,838 $157,295 $80,987
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Mid Cap Portfolio $36,528 $22,200 $19,414
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The Funds direct certain portfolio trades to the Distributor, via a network of executing brokers, who pay a portion of the Funds' expenses. Under this arrangement the Funds had expenses reduced by the amounts listed below, which were used to pay administration fees, for the following fiscal years ending October 31:
--------------------------------------------------------------------------------
2010 2011 2012
--------------------------------------------------------------------------------
Small Cap Portfolio $6,556 $63,266 $150,370
--------------------------------------------------------------------------------
Micro Cap Portfolio $5,136 $70,080 $29,354
--------------------------------------------------------------------------------
Mid Cap Portfolio $3,439 $1,832 $3,191
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THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 (the "Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, PA 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Funds and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such
term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to any Fund, by a majority of the outstanding shares of that Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
DISTRIBUTION PLAN. The Trust has adopted a Distribution Plan with respect to the Investor Class Shares (the "Distribution Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Distribution Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Distribution Plan or in any agreements related to the Distribution Plan ("Qualified Trustees"). The Distribution Plan requires that quarterly written reports of amounts spent under the Distribution Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Distribution Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the affected Fund(s). All material amendments of the Distribution Plan will require approval by a majority of the Board and of the Qualified Trustees.
The Distribution Plan provides that Investor Class Shares of the Mid Cap Portfolio will pay the Distributor a fee of 0.25% of the Fund's average daily net assets attributable to Investor Class Shares. Under the Distribution Plan, the Distributor may make payments pursuant with written agreements to financial institutions and intermediaries such as banks, savings and loan associations, insurance companies including, without limit, investment counselors, broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for services, reimbursement of expenses incurred in connection with distribution assistance or provision of shareholder services. The Distribution Plan is characterized as a reimbursement plan since the distribution fee will be paid to the Distributor as reimbursement for, or in anticipation of, expenses incurred for distribution related activity. Investors should understand that some Agents may charge their clients fees in connection with purchases of shares or the provision of shareholder services with respect to shares. The Trust intends to operate the Distribution Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
PAYMENTS UNDER THE DISTRIBUTION PLAN. For the fiscal years ended October 31, 2010, 2011 and 2012, the Mid Cap Portfolio paid the Distributor the following fees:
--------------------------------------------------------------------------------
FEES PAID
-----------------------------------
FUND SHARE CLASS 2010 2011 2012
--------------------------------------------------------------------------------
Mid Cap Portfolio Investor Class Shares $36,538 $21,374 $22,833
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PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates, as incentives to help market and promote the Funds and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Funds, the Distributor or shareholders of the Funds through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Funds in a financial intermediary's
retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Funds; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Funds by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Funds shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the transfer agent and dividend disbursing agent for the Funds under a transfer agency agreement with the Trust.
CUSTODIAN
Union Bank, National Association, 475 Sansome Street, 15th Floor, San Francisco, California 94111 (the "Custodian"), serves as the custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700 Philadelphia, PA 19103, serves as independent registered public accounting firm for the Funds. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP, as indicated in their report with respect thereto, and are incorporated by reference hereto in reliance upon the authority of said firm as experts in giving said reports.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, Jr., an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under
management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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INTERESTED TRUSTEES
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Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd. and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
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William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
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S-39
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust,
Administrator and the SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
Management (UK) Limited. Director
of the Distributor since 2003.
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INDEPENDENT TRUSTEES
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Charles E. Trustee Self-Employed Current Directorships: Trustee of The
Carlbom (since 2005) Business Consultant, Advisors' Inner Circle Fund II and
(08/20/34) Business Projects Inc., Bishop Street Funds. Director of
since 1997. Oregon Transfer Co.
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John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and
Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
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Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of The
Jr. (since 2011) Consultant since Advisors' Inner Circle Fund II and
(05/28/52) January 2012. Director Bishop Street Funds. Director of The
of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
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S-40
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NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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Inc., June 2005 to May
2007.
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Mitchell A. Trustee Retired. Private Current Directorships: Trustee of The
Johnson (since 2005) Investor since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
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Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
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Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
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James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
--------------------------------------------------------------------------------------------------------------------
S-41
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
--------------------------------------------------------------------------------------------------------------------
George J. Trustee Retired since January Current Directorships: Trustee/
Sullivan, Jr. (since 1999) 2012. Self-employed Director of State Street Navigator
(11/13/42) Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II,
1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Funds as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board
because of their ability to review and understand information about the Funds
provided to them by management, to identify and request other information they
may deem relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on the
management and administration of the Funds, and to exercise their business
judgment in a manner that serves the best interests of the Funds' shareholders.
The Trust has concluded that each of the Trustees should serve as a Trustee
based on their own experience, qualifications, attributes and skills as
described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a
founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal
auditing department of the Trust's Administrator that are material to the
Trust as a whole, if any, and management's responses to any such reports;
(vi) reviewing each fund's audited financial statements and considering any
significant disputes between the Trust's management and the independent
registered public accounting firm that arose in connection with the
preparation of those financial statements; (vii) considering, in
consultation with the independent registered public accounting firm and the
Trust's senior internal accounting executive, if any, the independent
registered public accounting firms' reports on the adequacy of the Trust's
internal financial controls; (viii) reviewing, in consultation with each
fund's independent registered public accounting firm, major changes
regarding auditing and accounting principles and practices to be followed
when preparing each fund's financial statements; and (ix) other audit
related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and
Sullivan and Ms. Krikorian currently serve as members of the Audit
Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The
Audit Committee meets periodically, as necessary, and met four (4) times
during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
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INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
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Krikorian None None
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Speca None None
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Storey None None
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Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
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PENSION OR RETIREMENT ESTIMATED ANNUAL
AGGREGATE BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME COMPENSATION OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
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INTERESTED TRUSTEES
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Doran $0 N/A N/A $0 for service on (1) board
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Nesher $0 N/A N/A $0 for service on (1) board
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INDEPENDENT TRUSTEES
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Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
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Darr $52,654 N/A N/A $52,654 for service on one (1) board
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Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Johnson $52,654 N/A N/A $52,654 for service on one (1) board
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Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
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Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
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Storey $52,654 N/A N/A $52,654 for service on one (1) board
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Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
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NAME AND POSITION WITH PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
DATE OF BIRTH TRUST AND LENGTH
OF TERM
--------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
--------------------------------------------------------------------------------
Michael Lawson Treasurer, Director, SEI Investments, Fund
(10/08/60) Controller and Accounting since July 2005. Manager,
Chief Financial SEI Investments, Fund Accounting at
Officer SEI Investments AVP from April 1995
(since 2005) to February 1998 and November 1998
to July 2005.
--------------------------------------------------------------------------------
Russell Emery Chief Compliance Chief Compliance Officer of SEI Structured
(12/18/62) Officer (since Credit Fund, LP and SEI Alpha Strategy
2006) Portfolios, LP since June 2007. Chief Compliance
Officer of The Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Institutional Managed
Trust, SEI Asset Allocation Trust, SEI
Institutional International Trust, SEI Institutional
Investments Trust, SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust,
Adviser Managed Trust and New Covenant Funds.
Chief Compliance Officer of SEI Opportunity
Fund, L.P. until 2010. Director of Investment
Product Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February 2003.
--------------------------------------------------------------------------------
Timothy D. Vice President and General Counsel and Secretary of SIMC
Barto Assistant Secretary and the Administrator since 2004. Vice
(03/28/68) (since 1999) President of SIMC and the
Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant
Secretary of SIMC, the Administrator
and the Distributor, and Vice President
of the Distributor, from 1999 to 2003.
--------------------------------------------------------------------------------
Dianne M. Vice President Counsel at SEI Investments since 2010.
Sulzbach and Secretary Associate at Morgan, Lewis & Bockius
(07/18/77) (since 2011) LLP from 2006 to 2010. Associate at
Morrison & Foerster LLP from 2003 to
2006. Associate at Stradley Ronon
Stevens & Young LLP from 2002 to
2003.
--------------------------------------------------------------------------------
John Munch Vice President and Attorney, SEI Investments Company,
(05/07/71) Assistant Secretary since 2001. General Counsel SEI Investments
(since 2012) Distribution Co., since 2004.
--------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments
(8/24/80) (since 2009) since 2003.
AML Officer
(since 2011)
--------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange (the "NYSE") is open for business. Shares of each Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by a Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the
Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of a Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of any Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. Each of the Funds adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available, or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting each Fund and its shareholders that is intended to supplement the discussion contained in the Funds' prospectus. No attempt is made to present a detailed explanation of the tax treatment of each Fund or its shareholders, and the discussion here and in the Funds' prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). Each Fund intends to qualify and elects to be treated as a RIC. By following such a policy, each Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of a Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the Code, each Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of each Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership; (ii) at the end of each fiscal quarter of each Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership; and (iii) at the end of each fiscal quarter of each Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If a Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If a Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, that Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
The treatment of capital loss carryovers for RICs is similar to the rules that apply to capital loss carryovers of individuals which provide that such losses are carried over by a Fund indefinitely. If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any)
of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires a Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, a Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of such year, plus certain other amounts. Each Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. A Fund may, in certain circumstances, be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of a Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. Each Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by a Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by each Fund will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Fund receives qualified dividend income on the securities
it holds and the Fund designates the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from the Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) the Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder), (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions by the Fund of its net short-term
capital gains will be taxable as ordinary income. Capital gain distributions
consisting of the Fund's net capital gains will be taxable as long-term capital
gains. Distributions reported to Fund shareholders as capital gain dividends
shall be taxable as long-term capital gains at a maximum rate of 20%,
regardless of how long the shareholder has owned the shares. Each Fund's
shareholders will be notified annually by the Fund as to the federal tax status
of all distributions made by the Fund.
Each Fund's dividends that are paid to their corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If a Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the
shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in a Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of a Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, a Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, a Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, a Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
FOREIGN TAXES. Dividends and interests received by a Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors.
TAX TREATMENT OF COMPLEX SECURITIES. Each Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by a Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by each Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by each Fund. Similarly, foreign exchange losses realized by a Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce a Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce a Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold, at applicable withholding rates, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Funds may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Funds.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. A Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Funds generally serve to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by a Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. A Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in a Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, a Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When a Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including a Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of a Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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Small Cap Portfolio $132,015 $329,775 $460,619
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Micro Cap Portfolio $994,266 $578,799 $238,821
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Mid Cap Portfolio $50,809 $12,635 $14,934
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause each Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research
services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to each Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser in connection with the Funds or any other specific client account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to, and not in lieu of, the services required to be performed by the Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Funds may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. The FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Funds paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR AMOUNT OF TRANSACTIONS
TOTAL DOLLAR AMOUNT OF BROKERAGE INVOLVING BROKERAGE COMMISSIONS FOR
FUND COMMISSIONS FOR RESEARCH SERVICES RESEARCH SERVICES
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Small Cap Portfolio $174,155 $96,718,176
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Micro Cap Portfolio $41,943 $17,281,828
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Mid Cap Portfolio $4,849 $3,713,567
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BROKERAGE WITH FUND AFFILIATES. A Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act, affiliated broker-dealers are permitted to receive and retain compensation for effecting portfolio transactions for the Fund
on an exchange if a written contract is in effect between the affiliate and the Fund expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of their "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Funds held during their most recent fiscal year. The Funds did not hold any securities of regular brokers or dealers during the fiscal year ended October 31, 2012.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. The Funds may at times hold investments in short-term instruments, which are excluded for purposes of computing portfolio turnover. For the Funds' two most recently completed fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for the Funds were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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Small Cap Portfolio 79% 89%
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Micro Cap Portfolio 147% 101%
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Mid Cap Portfolio 57% 60%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Funds' shareholders, on the one hand, and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds, their Adviser, or their principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Funds' Chief Compliance Officer reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Funds are required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). Each Fund will disclose a complete or summary schedule of investments (which includes each Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its semi-annual and annual reports which are distributed to Fund shareholders. Each Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q, and each Fund's complete schedule of investments following
the second and fourth fiscal quarters is available in semi-annual and annual reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV. Should a Fund include only a Summary Schedule rather than a complete schedule of investments in its semi-annual and annual reports, its Form N-CSR will be available without charge, upon request, by calling 1-866-474-5669. In addition, each Fund generally publishes a complete list of its portfolio holdings and a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://www.rhjfunds.com. The information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of any Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in connection with their services to the Funds. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of a Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Funds believe that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Funds' policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Funds' shareholders and that to the extent conflicts between the interests of the Funds' shareholders and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than three days after the date of the information. The Funds' Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Funds require any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Funds, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Funds' policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipient of the Funds' portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing
shares will not be issued. The Trust has received a legal opinion to the effect that each Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by each Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review each Fund's proxy voting record.
The Trust is required to disclose annually the Funds' complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling (866) 474-5669; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
CODES OF ETHICS
The Board of Trustees, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, including securities that may be purchased or held by the Funds, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of any class of shares of the Funds. The Funds
believe that most of the shares referred to below were held by the persons indicated in accounts for their fiduciary, agency or custodial customers. Any shareholder listed below as owning 25% or more of the outstanding shares of a Fund may be presumed to "control" (as that term is defined in the 1940 Act) the Fund. Shareholders controlling a Fund could have the ability to vote a majority of the shares of the Fund on any matter requiring the approval of Fund shareholders.
-------------------------------------------------------------------------------- RICE HALL JAMES MICRO CAP PORTFOLIO -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 578,903.3240 35.19% REINVEST ACCOUNT ATTN MUTUAL FUND 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- NFS LLC FEBO 171,028.6750 10.40% FIIOC AS AGENT FOR QUALIFIED EMPLOYEE BENEFIT PLANS (401K) FINOPS-IC FUNDS 100 MAGELLAN WAY KW1C COVINGTON, KY 41015-1987 -------------------------------------------------------------------------------- WELLS FARGO BANK NA CUST 150,027.9030 9.12% FBO OLMSTED KAEHR NANCY PO BOX 1533 MINNEAPOLIS, MN 55480-1533 -------------------------------------------------------------------------------- WACHOVIA BANK FBO 86,334.1740 5.25% VARIOUS RETIREMENT PLANS 1525 WEST WT HARRIS BLVD CHARLOTTE, NC 28262-8522 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- RICE HALL JAMES SMALL CAP PORTFOLIO -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 1,981,907.7310 33.66% FBO REINVEST ACCOUNT ATTN MUTUAL FUND 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- BRICS & CO 580,495.7750 9.86% FBO FMOL-EQUITY MUTUAL FDS-CAP RES 340 S CLEVELAND AVE OH1-0481 WESTERVILLE, OH 43081-8917 -------------------------------------------------------------------------------- CURRIE & CO. 574,729.9770 9.76% C/O FIDUCIARY TRUST CO INTL PO BOX 3199 CHURCH STREET STATION NEW YORK, NY 10008-3199 -------------------------------------------------------------------------------- BRICS & CO 335,982.3430 5.71% FBO FMOL-EQUITY MUTUAL FDS-PENSION 340 S CLEVELAND AVE OH1-0481 WESTERVILLE, OH 43081-8917 -------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------- RICE HALL JAMES MID CAP PORTFOLIO -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- CHARLES SCHWAB & CO 157,865.9000 24.93% 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- WELLS FARGO FBO 61,747.9410 9.75% VARIOUS RETIREMENT PLANS 1525 WEST WT HARRIS BLVD CHARLOTTE, NC 28262-8522 -------------------------------------------------------------------------------- |
APPENDIX A -- RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater then in the "aaa" and "aa" classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each rating classification: the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DEBT RATINGS - TAXABLE DEBT & DEPOSITS GLOBALLY
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the
country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
SHORT-TERM RATINGS
SHORT-TERM PRIME RATING SYSTEM - TAXABLE DEBT & DEPOSITS GLOBALLY
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institution) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
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characteristics:
o Leading market positions in well-established industries.
o Conservative capitalization structure with moderate reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
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NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S RATING SERVICES
A Standard & Poor's issuer credit rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The issuer credit rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor.
Counterparty credit ratings, ratings assigned under the Corporate Credit Rating Service (formerly called the Credit Assessment Service) and sovereign credit ratings are all forms of issuer credit ratings.
Issuer credit ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any issuer credit rating and may, on occasion, rely on unaudited financial information. Issuer credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances. Issuer credit ratings can be either long term or short term. Short-term issuer credit ratings reflect the obligor's creditworthiness over a short-term time horizon.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. Accordingly, in the case of junior debt, the rating may not conform exactly to the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, CCC, CC AND C
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial , or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to non-payment.
C A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking or a similar action if payments on an obligation are jeopardized.
N.R. This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant speculative characteristics. Ratings of 'B-1', 'B-2', and 'B-3' may be assigned to indicate finer distinctions within the 'B' category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term obligation rated 'B-1' is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation rated 'B-2' is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated 'B-3' is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C A short-term obligation rated 'C' is currently vulnerable to non-payment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
FITCH INC. RATINGS
INTERNATIONAL LONG-TERM CREDIT RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer
Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings:
INVESTMENT GRADE
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. 'A' ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category
SPECULATIVE GRADE
BB: Speculative.
'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative.
o For issuers and performing obligations, 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
o For individual obligations, may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of 'R1' (outstanding).
CCC: For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. o For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of 'R2' (superior), or 'R3' (good) or 'R4' (average).
CC: For issuers and performing obligations, default of some kind appears probable.
o For individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of 'R4' (average) or 'R5' (below average).
Grade C: For issuers and performing obligations, default is imminent.
o For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor recoveries. Such obligations would possess a Recovery Rating of 'R6' (poor).
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated 'D' upon a default. Defaulted and distressed obligations typically are rated along the continuum of 'C' to 'B' ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation's documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the 'B' or 'CCC-C' categories.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for US public finance, in line with industry standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
RD Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
Notes to Long-term and Short-term ratings: The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' Long-term rating category, to categories below 'CCC', or to Short-term ratings other than 'F1'. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are 'stable' could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
Program ratings (such as those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, I.E. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.
Variable rate demand obligations and other securities which contain a short-term 'put' or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.
Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.
Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.
Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.
'PIF': Paid-in -Full; denotes a security that is paid-in-full, matured, called, or refinanced.
'NR' indicates that Fitch Ratings does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
PROXY VOTING
INTRODUCTION
Rule 206(4)-6 under the Advisers Act requires every investment adviser to adopt and implement written policies and procedures, reasonably designed to ensure that advisers that votes proxies on behalf of their clients do so in the best interest of its clients. The Rule further requires the adviser to disclose in Part 2 of Form ADV, a concise summary of the adviser's proxy voting process, an offer to provide a copy of the adviser's complete proxy voting policy and procedures to clients upon request, and disclosure on how clients may obtain information on how the adviser voted their proxies.
RHJ has adopted Proxy Voting Policies and Procedures and utilizes a third party proxy voting service to vote client proxies. Under RHJ's standard investment advisory contract, RHJ will vote all shares held on behalf of clients unless the client has specifically maintained the responsibility itself or allocated that responsibility to someone else.
POLICY
RHJ will vote proxies on behalf of a client's account if: 1) the underlying advisory agreement between the client and RHJ expressly provides that RHJ shall be responsible for voting proxies on behalf of the client's account unless the client requests otherwise in writing, 2) the proxy is associated with a security that was transferred to RHJ that RHJ sold after the record date for sending the proxy, or 3) RHJ makes a determination that the costs of voting the proxy outweigh the benefits to the client.
A. PROXY VOTING POLICIES
RHJ utilizes Glass, Lewis & Co. (GL) Proxy Voting Services for proxy voting administration and proxy research. RHJ has adopted the Glass Lewis proxy voting guidelines with the ability to override GL recommendations when to do so is in the best interest of the client.
B. MATERIAL CONFLICTS OF INTEREST
RHJ and/or GL may occasionally be subject to conflicts of interest in voting RHJ client proxies due to business or personal relationships either may have with persons having an interest in the outcome of certain votes. For example, RHJ, GL or one or more of their affiliates may provide services to or be involved in a company whose management is soliciting proxies.
If at any time, either RHJ, GL or their employees become aware of any type of potential or actual conflict of interest relating to a proposed proxy vote, they must promptly report such conflict to the RHJ Chief Compliance Officer. Conflicts of interest will be handled in a couple of different ways, depending on the type and materiality. This includes:
1. In cases where the written voting guidelines state the voting position as either "for" or "against" such proposal, then voting will be in accordance with the pre- determined guidelines.
2. In cases where the written voting guidelines state the voting
position will be determined on a "case by case" basis for such
proposal, or such proposal is not listed in the proxy voting
guidelines, then one of the two following methods will be selected by
the CCO depending upon the facts and circumstances of each situation
and the requirements of applicable law:
a. The proxy vote will be determined in accordance with the party
that is not involved in the conflict. In other words, if GL has a
conflict then RHJ will make the voting determination and vice
versa.
b. The proxy vote will be pursuant to client direction.
C. OVERVIEW OF PROXY VOTING PROCEDURES
When a client elects to have RHJ vote proxies for the account managed by RHJ, the client's custodian is notified to forward proxy materials to Glass Lewis. RHJ provides GL with account and custodian information for reconciliation purposes.
As voting agent, Glass Lewis will:
o Receive all materials directly from Broadridge or the custodian
o Open proxy mail and log in proxies
o Reconcile ballots and contact custodians for missing ballots
o Distribute research with suggested vote recommendations
o Mark, copy and mail proxy cards
o Keep records of all votes cast
o Provide customized written reports and voting records upon request
o Notify RHJ CCO immediately if any conflict of interest arises due to a pending vote.
o Handle conflicts of interest on RHJ clients' proxies in accordance with RHJ procedures listed above.
The RHJ analytical team monitors the proxy voting issues of companies and notifies the RHJ proxy voting coordinator of any votes to be made that are not in accordance with the Glass Lewis guidelines. In addition, the RHJ proxy voting coordinator will notify the RHJ analyst of any contested meeting or high profile proposal.
D. OBTAINING PROXY VOTING RECORDS
A client may request proxy-voting records or a copy of the GL Proxy Voting Guidelines by emailing RHJ at INFO@RICEHALL.COM or by submitting a written request to:
RHJ Proxy Voting Info
600 West Broadway, Suite 1000
San Diego, CA 92101
E. DUE DILIGENCE
The CCO or designee will perform periodic, but no less than annual, due diligence reviews of GL to help ensure that GL is receiving and voting required RHJ's clients' proxies, is voting all RHJ's clients' proxies
in accordance with written guidelines and disclosures and maintaining all required proxy voting records on behalf of RHJ.
STATEMENT OF ADDITIONAL INFORMATION
SANDS CAPITAL GLOBAL GROWTH FUND
(INSTITUTIONAL CLASS SHARES TICKER SYMBOL: SCMGX)
(INVESTOR CLASS SHARES TICKER SYMBOL: SCGVX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
SANDS CAPITAL MANAGEMENT, LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Sands Capital Global Growth Fund (the "Fund"). This SAI is incorporated by reference and should be read in conjunction with the Fund's prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund, including the notes thereto and the report of Ernst & Young LLP thereon, are contained in the 2012 Annual Report to Shareholders and are herein incorporated by reference into and deemed to be part of this SAI. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121 or by calling 1-888-826-5646.
TABLE OF CONTENTS
THE TRUST .............................................................. S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES ........ S-1 DESCRIPTION OF PERMITTED INVESTMENTS ................................... S-2 INVESTMENT LIMITATIONS ................................................. S-17 THE ADVISER ............................................................ S-18 PORTFOLIO MANAGERS ..................................................... S-19 THE ADMINISTRATOR ...................................................... S-20 THE DISTRIBUTOR ........................................................ S-21 SHAREHOLDER SERVICES ................................................... S-21 PAYMENTS TO FINANCIAL INTERMEDIARIES ................................... S-22 THE TRANSFER AGENT ..................................................... S-22 THE CUSTODIAN .......................................................... S-22 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .......................... S-23 LEGAL COUNSEL .......................................................... S-23 TRUSTEES AND OFFICERS OF THE TRUST ..................................... S-23 PURCHASING AND REDEEMING SHARES ........................................ S-32 DETERMINATION OF NET ASSET VALUE ....................................... S-33 TAXES .................................................................. S-33 FUND TRANSACTIONS ...................................................... S-39 PORTFOLIO HOLDINGS ..................................................... S-41 DESCRIPTION OF SHARES .................................................. S-42 SHAREHOLDER LIABILITY .................................................. S-42 LIMITATION OF TRUSTEES' LIABILITY ...................................... S-43 PROXY VOTING ........................................................... S-43 CODE OF ETHICS ......................................................... S-43 5% AND 25% SHAREHOLDERS ................................................ S-43 APPENDIX A -- RATINGS .................................................. A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ..................... B-1 |
March 1, 2013 SAN-SX-001-0400
THE TRUST
GENERAL. The Fund is a series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. Each fund pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer shares of the Fund in Institutional and Investor Class Shares. The different classes provide for variations in certain shareholder servicing expenses and in the minimum initial investment requirements. Minimum investment requirements and investor eligibility are described in the prospectuses. The Trust reserves the right to create and issue additional classes of shares. For more information on shareholder servicing expenses, see the "Shareholder Services" section in the SAI.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. Under the Declaration of Trust, the Trustees have the power to liquidate the Fund without shareholder approval. While the Trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective and principal investment strategy are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
SANDS CAPITAL GLOBAL GROWTH FUND. The Fund seeks long-term capital appreciation. This investment objective is non-fundamental, and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940 (the "1940 Act").
DESCRIPTION OF PERMITTED INVESTMENTS
The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, or an underlying economic factor, such as an interest rate or a market benchmark. Unless otherwise stated in the Fund's prospectus, the Fund may use derivatives for risk management purposes, including to gain exposure to various markets in a cost efficient manner, to reduce transaction costs or to remain fully invested. The Fund may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates (a practice known as "hedging"). When hedging is successful, the Fund will have offset any depreciation in the value of its portfolio securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of the Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the Investment Company Act of 1940, as amended ("1940 Act"). Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), the Fund must either operate within certain guidelines and restrictions with respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Fund, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Fund is not subject to registration or regulation as a CPO under the CEA. As a result, the Fund will operate within certain guidelines and restrictions with respect to its use of futures, options on such futures, commodity options and certain swaps.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade - known as "contract markets" - approved for such trading and regulated by the CFTC. These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit
"initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures position.
MARKET ACCESS PRODUCT -- A market access product is a derivative security with synthetic exposure to an underlying foreign security and may include low exercise price options ("LEPOs"), participatory notes ("P-Notes"), warrants, zero strike options and total return swaps. Market access products are subject to the same risks as direct investments in securities of foreign issuers. If the underlying security decreases in value, the value of the market access product will decrease in correlation. Market access products are also subject to counterparty risk, which is the risk that the issuer of the market access product may be unwilling or unable to fulfill its obligations and the market access product may lose value, despite the performance of its underlying security.
LEPOs and P-Notes allow holders to gain indirect exposure to issuers in certain countries. A LEPO is an option to purchase a security with an exercise price significantly below the market price of the underlying security. Because of its low exercise price, a LEPO is virtually certain to be exercised and the value and performance of its intrinsic value is effectively identical to that of the underlying equity. These features are designed to allow participation in the performance of an equity security where there are legal or financial obstacles to purchasing the underlying security directly. If the LEPO is cash-settled, the buyer profits to the same extent as with a direct holding in the underlying, but without having to transact in it. P-Notes are derivatives that are generally traded over-the-counter and constitute general unsecured contractual obligations of the banks and broker-dealers that issue them. Generally, these banks and broker-dealers buy securities listed on certain foreign exchanges and then issue P-Notes which are designed to replicate the performance of certain issuers and markets. The performance results of P-Notes will not correlate exactly to the performance of the issuers or markets that they seek to replicate due to transaction costs and other expenses. The holder of a P-Note typically does not receive voting or other rights as it would if it directly owned the underlying security, but is subject to the same risks of investing directly in the underlying security.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (I.E., the parties to the contract may fix the maturity date and the amount);
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC;
o Do not require an initial margin deposit; and
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect the Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which the Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause the Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross-hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, the Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, the Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance of the Fund than if it had not entered into any derivatives transactions. Derivatives may magnify the Fund's gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose the Fund to greater risks.
CORRELATION OF PRICES - The Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities the Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if the Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, the Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of the Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect the Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of the Fund's foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of the Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, the Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, the Fund may close out a futures contract only on the exchange the contract was initially traded. Although the Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, the Fund may not be able to close out its position. In an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and/or
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (I.E., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, the Fund may lose money by investing in derivatives. For example, if the Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if the Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into the Fund. If the Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to the Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. The Fund may lose its margin deposits if a broker-dealer with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (I.E., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Fund may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such a transaction will not be subject to the 300% asset coverage requirement otherwise applicable to
borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with these requirements, and subject to certain risks.
EQUITY SECURITIES (U.S. AND FOREIGN)
Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non- convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
o LARGE AND MEDIUM CAPITALIZATION ISSUERS. Large capitalization companies may lag the performance of smaller capitalization companies because large capitalization companies may experience slower rates of growth than smaller capitalization companies and may not respond as quickly to market changes and opportunities. Investing in equity securities of medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of smaller companies are often traded in the over-the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
o INITIAL PUBLIC OFFERINGS ("IPOS") - The Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on a fund with a small asset base. The impact of IPOs on the Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to the Fund for investing, particularly as the Fund's asset base grows. Because IPO shares frequently are volatile in price, the Fund may hold IPO shares for a very short period of time. This may increase the turnover of the Fund's portfolio and may lead to increased expenses for the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The Fund's investment in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which presents risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product lines.
FOREIGN SECURITIES
Foreign securities are debt and equity securities that are traded in markets outside of the United States. The markets in which these securities are located can be developed or emerging. Consistent with its investment strategies, the Fund can invest in foreign securities in a number of ways:
o It can invest directly in foreign securities denominated in a foreign currency;
o It can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o It can invest in investment funds.
TYPES OF FOREIGN SECURITIES:
AMERICAN DEPOSITARY RECEIPTS (ADRS) - ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are
alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS - An "emerging country" is generally a country that the MSCI Barra would consider to be an emerging or developing country. The MSCI Barra classifies countries as being located in emerging markets based on three criteria: economic development, size and liquidity, and market accessibility. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, Hong Kong, Singapore, New Zealand and most nations located in Western Europe.
Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
INVESTMENT FUNDS -- Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If the Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses (including operating expenses and the fees of the Adviser), but also will bear indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS -- Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict or control foreign investments in its securities markets. These restrictions could limit the Fund's ability to invest in a particular country or make it very expensive for the Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION -- There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign countries more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Fund's investment managers anticipate that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards;
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis;
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States;
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated;
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights; and
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK -- While the Fund denominates its net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES -- Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for the Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Fund receives from its investments. The Fund does not expect such foreign withholding taxes to have a significant impact on performance.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organizations ("NRSRO"), such as Standard & Poor's Ratings Service ("S&P") or Moody's Investor Service ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Ratings" to this SAI.
U. S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U. S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith
and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and
Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds.
Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with financial institutions in order to increase its income. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The acquisition of a repurchase agreement may be deemed to be an acquisition of the underlying securities as long as the obligation of the seller to repurchase the securities is collateralized fully. The Fund follows certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with creditworthy financial institutions whose condition will be continually monitored by the Adviser. The repurchase agreements entered into by the Fund will provide that the underlying collateral at all times shall have a value at least equal to 102% of the resale price stated in the agreement and consist only of securities permissible under Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance with this requirement). Under all repurchase agreements entered into by the Fund, the custodian or their agent must take possession of the underlying collateral. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to liquidate such collateral. However, the exercising of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. It is the current policy of the Fund, not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more than 15% of the Fund's total assets. The investments of the Fund in repurchase agreements, at times, may be substantial when, in the view of the Adviser, liquidity or other considerations so warrant.
EXCHANGE TRADED FUNDS ("ETFS"). ETFs are investment companies whose shares are bought and sold on a securities exchange. An ETF holds a portfolio of securities designed to track a particular market segment or index. Some examples of ETFs are SPDRs([R]), DIAMONDS(SM), NASDAQ 100 Index Tracking Stock(SM) ("QQQs(SM)"), and iShares([R]). The Fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or foreign market while awaiting an opportunity to purchase securities directly. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities and ETFs have management fees that increase their costs versus the costs of owning the underlying securities directly. See also "Securities of Other Investment Companies" below.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering
of expenses, such that shareholders would indirectly bear a proportionate share
of the operating expenses of such investment companies, including advisory
fees, in addition to paying the Fund's expenses. Unless an exception is
available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i)
acquiring more than 3% of the voting shares of any one investment company, (ii)
investing more than 5% of its total assets in any one investment company, and
(iii) investing more than 10% of its total assets in all investment companies
combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or
performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, SPDR, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex and First Trust exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise complies with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board of Trustees. Despite such good faith efforts to determine fair value prices, the Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon its sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Trust's Board of Trustees, the Adviser determines the liquidity of the Fund's investments. In determining the liquidity of the Fund's investments, the Adviser may consider various factors, including: (1) the frequency and volume of trades and quotations; (2) the number of dealers and prospective purchasers in the marketplace; (3) dealer undertakings to make a market; and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not hold more than 15% of its net assets in illiquid securities.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the U.S. Securities Act of
1933, as amended (the "1933 Act") or an exemption from registration. As
consistent with the Fund's investment objectives, the Fund may invest in
Section 4(2) commercial paper. Section 4(2) commercial paper is issued in
reliance on an exemption from registration under Section 4(2) of the Act and is
generally sold to institutional investors who purchase for investment. Any
resale of such commercial paper must be in an exempt transaction, usually to an
institutional investor through the issuer or investment dealers who make a
market in such commercial paper. The Trust believes that Section 4(2)
commercial paper is liquid to the extent it meets the criteria established by
the Board of Trustees of the Trust. The Trust intends to treat such commercial
paper as liquid and not subject to the investment limitations applicable to
illiquid securities or restricted securities.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Trust's Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to their Adviser or their affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. The Fund will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities of the type discussed
in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon the Fund's ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following are fundamental policies of the Fund. Fundamental policies cannot be changed without the consent of the holders of a majority of the Fund's outstanding shares. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
6. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
In addition to the investment objective of the Fund, the following investment limitation of the Fund is non-fundamental and may be changed by the Board without shareholder approval:
1. The Fund may not hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
The following descriptions of the 1940 Act may assist investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's outstanding voting securities would be held by the fund.
CONCENTRATION. The SEC staff has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries, with certain exceptions.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets.
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as short sales, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Fund's current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending, as described in its Statement of Additional Information.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly.
COMMODITIES AND REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in commodities or real estate, but does require that every investment company have a fundamental investment policy governing such investments. The Fund has adopted a fundamental policy that would permit direct investment in commodities or real estate. The Fund's current investment policy is as follows: the Fund will not purchase or sell real estate, physical commodities, or commodities contracts, except that the Fund may purchase: (i) marketable securities issued by companies which own or invest in real estate (including REITs), commodities, or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
THE ADVISER
GENERAL. Sands Capital Management, LLC ("Sands" or the "Adviser") is a professional independent investment management firm registered with the SEC under the Investment Advisers Act of 1940. Sands was initially formed as a Sub-Chapter S-Corporation in 1992 and converted to a Delaware limited liability company in 2005. Its principal place of business is located at 1101 Wilson Boulevard, Suite 2300, Arlington, VA 22209. As of December 31, 2012, Sands had approximately $27 billion in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement (the "Advisory Agreement") with respect to the Fund. Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of misfeasance or negligence generally in the performance of its duties hereunder or its negligent disregard of its obligation and duties under the Advisory Agreement.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. (As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act).
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.85% of the average daily net assets of the Fund. The Adviser has contractually agreed to waive fees and reimburse expenses in order to keep net operating expenses (excluding shareholder servicing fees, interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding 1.10% of the Fund's Institutional Class Shares' and Investor Class Shares' average daily net assets until February 28, 2014. In addition, if at any point total annual Fund operating expenses (not including excluded expenses) are below the expense caps, the Adviser may retain the difference between the total annual Fund operating expenses (not including excluded expenses) and the expense caps listed above to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following in advisory fees:
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CONTRACTUAL ADVISORY FEES PAID FEES WAIVED BY ADVISER(2) TOTAL FEES PAID TO THE ADVISOR
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2010(1) 2011 2012 2010(1) 2011 2012 2010(1) 2011 2012
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$18,518 $77,239 $240,134 $18,518 $77,239 $240,134 $0 $0 $0
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(1) Represents the period between March 31, 2010 (commencement of Fund operations) and October 31, 2010.
(2) For the fiscal periods ended October 31, 2010, 2011 and 2012, the Adviser additionally reimbursed the Fund for fees of $250,276, $316,198 and $113,042, respectively, to maintain the stated expense cap under its contractual expense limitation agreement with the Fund.
PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts
managed, the dollar range of the Fund shares owned and how the portfolio managers are compensated.
COMPENSATION. The Adviser compensates the portfolio managers for their management of the Fund. The portfolio managers' compensation consists of a salary, qualitative bonus and a profit sharing and 401(k) plan. Additional compensation may be in the form of an investment results bonus and equity in the Adviser. Salary is benchmarked to be competitive with the industry worldwide. The qualitative bonus is based on a target set at the beginning of the year and on each individual's responsibilities and objectives that are agreed upon at the beginning of each year. At the end of the year, this bonus is paid out after a form review of the individual's actual contribution to investment performance and client service work. The investments result bonus is calculated from the performance variance of the Adviser's composite returns and their respective benchmarks over 1, 3 and 5 year periods, weighted towards the 3 and 5 year results.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act").
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DOLLAR RANGE OF
NAME FUND SHARES (FUND) (1)
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David E. Levanson, CFA $500,001 - $1,000,000
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Sunil H. Thakor, CFA $500,001 - $1,000,000
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(1) Valuation date is October 31, 2012
OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts are subject to a performance-based fee. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
(EXCLUDING THE FUND)
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NUMBER NUMBER NUMBER
OF TOTAL ASSETS OF TOTAL ASSETS OF TOTAL ASSETS
NAME ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
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David E.
Levanson, CFA 1 $927 6 $2,314 4 $126
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Sunil H. Thakor,
CFA 1 $927 6 $2,314 4 $126
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CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio managers could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of the Fund's trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Fund. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal
business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement for the Fund, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed below in the following schedule:
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FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.15% First $250 million
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0.12% $250 million - $500 million
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0.10% Over $500 million
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There is a minimum annual fee of $150,000 for the Fund and $10,000 per additional class. Due to these minimums, the annual administration fee the Fund pays will exceed the above percentages at low asset levels.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Administrator the following fees:
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CONTRACTUAL FEES PAID FEES WAIVED BY THE ADMINISTRATOR TOTAL FEES PAID TO THE ADVISOR
(AFTER WAIVERS)
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2010(1) 2011 2012 2010(1) 2011 2012 2010(1) 2011 2012
---------------------------------------------------------------------------------------------------------------------
$93,809 $160,000 $160,000 $0 $0 $0 $93,809 $160,000 $160,000
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(1) Represents the period between March 31, 2010 (commencement of Fund operations) and October 31, 2010.
THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 (the "Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares. The principal business address of the Distribution is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not
"interested parties" of the Trust and have no direct or indirect financial interest in the operation of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Board or, with respect to any Fund, by a majority of the outstanding shares of that Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
SHAREHOLDER SERVICES
SHAREHOLDER SERVICING PLAN. The Fund has adopted a shareholder servicing plan (the "Service Plan") under which a shareholder servicing fee of up to 0.25% of average daily net assets attributable to the Investor Class Shares of the Fund will be paid to other service providers. Under the Service Plan, other service providers may perform, or may compensate other service providers for performing certain shareholder and administrative services as discussed below.
DESCRIPTION OF SHAREHOLDER SERVICES. Shareholder services may include: (i) maintaining accounts relating to clients that invest in shares; (ii) arranging for bank wires; (iii) responding to client inquiries relating to the services performed by the services provider; (iv) responding to inquiries from clients concerning their investment in shares; (v) assisting clients in changing dividend options, account designations and addresses; (vi) providing information periodically to clients showing their position in shares; (vii) forwarding shareholder communications from the Fund such as proxies, shareholder reports, annual reports, and dividend distribution and tax notices to clients; and (viii) processing dividend payments from the Fund on behalf of clients.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as
determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the transfer agent and dividend disbursing agent for the Fund under a transfer agency agreement with the Trust.
THE CUSTODIAN
Union Bank, N.A., 350 California Street, 6(th) Floor, San Francisco, CA 94104 (the "Custodian"), serves as the custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by Ernst & Young LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an
independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
--------------------------------------------------------------------------------------------------------------------------
POSITION WITH TRUST PRINCIPAL
NAME AND DATE OF AND LENGTH OF OCCUPATIONS
BIRTH TERM IN THE PAST 5 YEARS OTHER DIRECTORSHIPS HELD IN THE PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II, Bishop Street
(since 1991) performs various Funds, SEI Daily Income Trust, SEI
services on behalf of Institutional International Trust, SEI
SEI Investments for Institutional Investments Trust, SEI Institutional
which Mr. Nesher is Managed Trust, SEI Liquid Asset Trust, SEI
compensated. Asset Allocation Trust, SEI Tax Exempt Trust,
President and Director Adviser Managed Trust and New Covenant
of SEI Structured Funds. Director of SEI Global Master Fund plc,
Credit Fund, LP. SEI Global Assets Fund plc, SEI Global
President and Chief Investments Fund plc, SEI Investments--Global
Executive Officer of Funds Services, Limited, SEI Investments
SEI Alpha Strategy Global, Limited, SEI Investments (Europe) Ltd.,
Portfolios, LP, June SEI Investments--Unit Trust Management
2007 to present. (UK) Limited, SEI Multi-Strategy Funds PLC,
President and Director SEI Global Nominee Ltd and SEI Alpha
of SEI Opportunity Strategy Portfolios, LP.
Fund, L.P. to 2010.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
--------------------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II, Bishop Street
Partner at Morgan, Funds, SEI Daily Income Trust, SEI
Lewis & Bockius LLP Institutional International Trust, SEI
(law firm) from 1976 Institutional Investments Trust, SEI Institutional
to 2003. Counsel to the Managed Trust, SEI Liquid Asset Trust, SEI
Trust, SEI Asset Allocation Trust and SEI Tax Exempt
--------------------------------------------------------------------------------------------------------------------------
S-24
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POSITION WITH TRUST PRINCIPAL
NAME AND DATE OF AND LENGTH OF OCCUPATIONS
BIRTH TERM IN THE PAST 5 YEARS OTHER DIRECTORSHIPS HELD IN THE PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------------
Investments, SIMC, Trust, Adviser Managed Trust and New
the Administrator and Covenant Funds. Director of SEI Alpha Strategy
the Distributor. Portfolios, LP. Director of SEI Investments
(Europe), Limited, SEI Investments--Global
Funds Services, Limited, SEI Investments
Global, Limited, SEI Investments (Asia),
Limited, SEI Asset Korea Co., Ltd., SEI Global
Nominee Ltd. and SEI Investments -- Unit Trust
Management (UK) Limited. Director of the
Distributor since 2003.
--------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Current Directorships: Trustee of The
(08/20/34) (since 2005) Business Consultant, Advisors' Inner Circle Fund II and Bishop
Business Projects Inc., Street Funds. Director of Oregon Transfer Co.
since 1997.
--------------------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and Bishop
Office of Finance, Street Funds. Director of Federal Home Loan
Federal Home Loan Bank of Pittsburgh, Manna, Inc. (non-profit
Banks, from 1992 to developer of affordable housing for ownership)
2007. and Meals on Wheels, Lewes/Rehoboth Beach.
--------------------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since Advisors' Inner Circle Fund II and Bishop
January 2012. Director Street Funds. Director of The Korea Fund, Inc.
of Endowments and
Foundations,
Morningstar
Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar
Associates Europe
Limited, Morningstar,
Inc., May 2007 to
February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
--------------------------------------------------------------------------------------------------------------------------
Mitchell A. Johnson Trustee Retired. Private Current Directorships: Trustee of The
(03/01/42) (since 2005) Investor since 1994. Advisors' Inner Circle Fund II, Bishop Street
Funds, SEI Asset Allocation Trust, SEI Daily
--------------------------------------------------------------------------------------------------------------------------
S-25
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--------------------------------------------------------------------------------------------------------------------------
POSITION WITH TRUST PRINCIPAL
NAME AND DATE OF AND LENGTH OF OCCUPATIONS
BIRTH TERM IN THE PAST 5 YEARS OTHER DIRECTORSHIPS HELD IN THE PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------------
Income Trust, SEI Institutional International
Trust, SEI Institutional Managed Trust, SEI
Institutional Investments Trust, SEI Liquid
Asset Trust, SEI Tax Exempt Trust, Adviser
Managed Trust and New Covenant Funds.
Director of SEI Alpha Strategy Portfolios, LP.
Director of Federal Agricultural Mortgage
Corporation (Farmer Mac) since 1997.
--------------------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and Bishop
Financial Inc., from Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
--------------------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and Bishop
Asset Management Street Funds.
(subsidiary of
Manulife Financial),
June 2010 to May
2011. Executive Vice
President -- Investment
Management Services,
John Hancock
Financial Services
(subsidiary of
Manulife Financial),
June 2003 to June
2010.
--------------------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships: Trustee/Director of The
(04/12/31) (since 1994) Practitioner since Advisors' Inner Circle Fund II, Bishop Street
1994. Funds and U.S. Charitable Gift Trust. Trustee of
SEI Daily Income Trust, SEI Institutional
International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt Trust and SEI
Alpha Strategy Portfolios, L.P. until December
2010.
--------------------------------------------------------------------------------------------------------------------------
George J. Sullivan, Trustee Retired since January Current Directorships: Trustee/ Director of
Jr. (since 1999) 2012. Self-employed State Street Navigator Securities Lending Trust,
(11/13/42) Lead Independent Consultant, Newfound The Advisors' Inner Circle Fund II, Bishop
Trustee Consultants Inc., April Street Funds, SEI Structured Credit Fund, LP,
1997 to December SEI Daily Income Trust, SEI Institutional
--------------------------------------------------------------------------------------------------------------------------
S-26
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--------------------------------------------------------------------------------------------------------------------------
POSITION WITH TRUST PRINCIPAL
NAME AND DATE OF AND LENGTH OF OCCUPATIONS
BIRTH TERM IN THE PAST 5 YEARS OTHER DIRECTORSHIPS HELD IN THE PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------------
2011. International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt Trust, SEI
Alpha Strategy Portfolios, LP, Adviser
Managed Trust and New Covenant Funds.
Member of the independent review committee
for SEI's Canadian-registered mutual funds.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
--------------------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and
banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and considering any significant
disputes between the Trust's management and the independent registered
public accounting firm that arose in connection with the preparation of
those financial statements; (vii) considering, in consultation with the
independent registered public accounting firm and the Trust's senior
internal accounting executive, if any, the independent registered public
accounting firms' reports on the adequacy of the Trust's internal financial
controls; (viii) reviewing, in consultation with each fund's independent
registered public accounting firm, major changes regarding auditing and
accounting principles and practices to be followed when preparing each
fund's financial statements; and (ix) other audit related matters. Messrs.
Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms.
Krikorian currently serve as members of the Audit Committee. Mr.
Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
--------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
--------------------------------------------------------------------------------
NAME AND POSITION WITH PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
DATE OF BIRTH TRUST AND LENGTH
OF TERM
--------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
--------------------------------------------------------------------------------
Michael Lawson Treasurer, Director, SEI Investments, Fund
(10/08/60) Controller and Accounting since July 2005. Manager,
Chief Financial SEI Investments, Fund Accounting at
Officer SEI Investments AVP from April 1995
(since 2005) to February 1998 and November 1998
to July 2005.
--------------------------------------------------------------------------------
Russell Emery Chief Compliance Chief Compliance Officer of SEI Structured
(12/18/62) Officer (since Credit Fund, LP and SEI Alpha Strategy
2006) Portfolios, LP since June 2007. Chief Compliance
Officer of The Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Institutional Managed
Trust, SEI Asset Allocation Trust, SEI
Institutional International Trust, SEI Institutional
Investments Trust, SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust,
Adviser Managed Trust and New Covenant Funds.
Chief Compliance Officer of SEI Opportunity
Fund, L.P. until 2010. Director of Investment
Product Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February 2003.
--------------------------------------------------------------------------------
Timothy D. Vice President and General Counsel and Secretary of SIMC
Barto Assistant Secretary and the Administrator since 2004. Vice
(03/28/68) (since 1999) President of SIMC and the
Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant
Secretary of SIMC, the Administrator
and the Distributor, and Vice President
of the Distributor, from 1999 to 2003.
--------------------------------------------------------------------------------
Dianne M. Vice President Counsel at SEI Investments since 2010.
Sulzbach and Secretary Associate at Morgan, Lewis & Bockius
(07/18/77) (since 2011) LLP from 2006 to 2010. Associate at
Morrison & Foerster LLP from 2003 to
2006. Associate at Stradley Ronon
Stevens & Young LLP from 2002 to
2003.
--------------------------------------------------------------------------------
John Munch Vice President and Attorney, SEI Investments Company,
(05/07/71) Assistant Secretary since 2001. General Counsel SEI Investments
(since 2012) Distribution Co., since 2004.
--------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments
(8/24/80) (since 2009) since 2003.
AML Officer
(since 2011)
--------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of any Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and will elect (or has elected) to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. If the Fund qualifies as a RIC it will not be subject to federal income taxes on the net investment income and net realized capital gains that it timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, the Fund must distribute annually to its shareholders at least 90% of the Fund's net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of the Fund's net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, other income from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership (the "Qualifying Income Test"); (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership; and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, the Fund's shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income.
The Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX
Notwithstanding the Distribution Requirement described above, which only requires the Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, the Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at
least 98% of the Fund's ordinary income for that year and 98.2% of the Fund's capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of such year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Fund may in certain circumstances be required to liquidate the Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. The Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Fund receives qualified dividend income on the securities
it holds and the Fund designates the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from the Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) the Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder), (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions by the Fund of its net short-term
capital gains will be taxable as ordinary income. Distributions reported to
Fund shareholders as capital gain dividends shall be taxable as long-term
capital gains at a maximum rate of 20%, regardless of how long the shareholder
has owned the shares. The Fund's shareholders will be notified annually by the
Fund as to the federal tax status of all distributions made by the Fund.
The Fund's dividends that are paid to its corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer
in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
FOREIGN INVESTMENTS. If more than 50% of the value of the Fund's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the Internal Revenue Service that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to the election, the Fund will treat those taxes as dividends paid to its shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders' federal income tax. If the Fund makes the election, the Fund will report annually to its shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and U.S. possessions.
The Fund's transactions in foreign currencies and forward foreign currency contracts will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Fund (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund and defer losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also may require the Fund to mark-to-market certain types of positions in its portfolio (i.e., treat them as if they were closed out) which may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the RIC distribution requirements for avoiding income and excise taxes. The Fund intends to monitor its transactions, intends to make the appropriate tax elections, and intends to make the appropriate entries in their books and
records when it acquires any foreign currency or forward foreign currency contract in order to mitigate the effect of these rules so as to prevent disqualification of the Fund as a RIC and minimize the imposition of income and excise taxes.
In general, foreign currency gains or losses from forward contracts, from futures contracts that are not "regulated futures contracts," and from unlisted options will be treated as ordinary income or loss under the Code. At times, a significant portion of the Fund's returns (both positive and negative) may be attributable to investments in such currency forward contracts. Also, certain foreign exchange gains derived with respect to foreign fixed income securities are subject to special treatment. In general, any such gains or losses will increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Fund's net capital gain. Additionally, if such losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary dividend distributions.
Gains from the sale or other disposition of foreign currencies and other income
(including but not limited to gains from options, futures or forward contracts)
derived from investing in such stock, securities, or foreign currencies
generally are included as "good income" for purposes of the Qualifying Income
Test described above that must be satisfied in order for the Fund to be treated
as RIC. It should be noted, however, that for purposes of the Qualifying Income
Test, the Secretary of the Treasury is authorized to issue regulations that
would exclude from qualifying income foreign currency gains which are not
directly related to a RIC's principal business of investing in stock or
securities (or options and futures with respect to stock or securities). No
regulations have been issued pursuant to this authorization. It is possible,
however, that such regulations may be issued in the future. If such future
regulations were applied to the Fund, it is possible under certain
circumstances that its qualifying income would no longer satisfy the Qualifying
Income Test and the Fund would fail to qualify as a RIC. It is also possible
that the Fund's strategy of investing in foreign currency-related financial
instruments might cause the Fund to fail to satisfy the requirements set forth
under the RIC diversification tests, resulting in its failure to qualify as a
RIC. A failure of the diversification tests might result, for example, from a
determination by the IRS that financial instruments in which the Fund invests
are not securities. Moreover, even if the financial instruments are treated as
securities, a determination by the IRS regarding the identity of the issuers of
the securities or the fair market values of the securities that differs from
the determinations made by the Fund could result in the failure by the Fund to
diversify its investments in a manner necessary to satisfy the diversification
tests. The tax treatment of the Fund and its shareholders in the event the Fund
fails to qualify as a RIC is described above. The failure of the Fund to
maintain its status as a RIC may be avoided in some circumstances pursuant to
certain savings provisions enacted in recent legislation which are also
described above.
TAX TREATMENT OF COMPLEX SECURITIES. The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Fund.
If the Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies" or "PFIC," the Fund will be subject to one of the following special tax regimes: (i) the Fund is liable for U.S. federal income tax, and an additional interest charge, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund was able and elected to treat a PFIC as a "qualifying electing fund" or "QEF," the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the passive foreign investment company, whether or not such earnings or gains are distributed to the Fund; or (iii) the Fund may be entitled to mark-to-market annually shares of the PFIC, and in such event would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount
and thus do not make periodic cash interest payments, the Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because the Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold, at a rate of 28%, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by its tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S.
government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Trust's Board of Trustees that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
--------------------------------------------------------------------------------
AGGREGATE DOLLAR AMOUNT
OF BROKERAGE COMMISSIONS PAID
--------------------------------------------------------------------------------
FUND 2010(1) 2011 2012
--------------------------------------------------------------------------------
Sands Capital Global Growth Fund $4,441 $15,668 $45,917
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(1) Represents the period between March 31, 2010 (commencement of Fund operations) and October 31, 2010.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and
custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Fund paid no commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act, affiliated broker-dealers are permitted to receive and retain compensation for effecting portfolio transactions for the Fund on an exchange if a written contract is in effect between the affiliate and the Fund expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal period from March 31, 2010 (commencement of Fund operations) to October 31, 2010 and the fiscal years ended October 31, 2011 and 2012, the Fund did not pay any aggregate brokerage commissions on Fund transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. The Fund did not hold any securities of its regular broker dealers during the fiscal year ended October 31, 2012.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under U.S. Securities and Exchange Commission (the "SEC") rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Fund may invest since such contracts generally have remaining maturities of less than one year. The Fund may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover. For the fiscal years ended October 31, 2011 and 2012, the Fund's portfolio turnover rate was as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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Sands Capital Global Growth Fund 19% 21%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of the Fund's shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund, the Adviser, or the principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Fund's Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Fund will disclose a complete or summary schedule of investments (which includes the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to the Fund's shareholders. The Fund's complete schedule of investments following the first and third fiscal quarters will be available in quarterly holdings reports filed with the SEC on Form N-Q, and the Fund's complete schedule of investments following the second and fourth fiscal quarters will be available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q and Form N-CSR are not distributed to the Fund's shareholders but are available, free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV. Should the Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-888-826-5646. In addition, the Fund provides information about its top ten holdings, updated as of the most recent calendar quarter on the internet at http://www.sandscapital.com. This information is generally provided within 30 days after each calendar quarter and is available on the Fund's fact sheets. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the custodian, administrator or transfer agent, in
connection with their services to the Fund. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of the Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Fund believes that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Fund's policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Fund's shareholders and that to the extent conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than three days after the date of the information. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Fund requires any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Fund, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Fund's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of the fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Fund for shares of any additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any
neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-888-826-5646; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
CODE OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1 (each a "Code of Ethics" and together the "Codes of Ethics"). These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, including securities that may be purchased or held by the Fund, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Fund. The Fund believes that most of the shares referred to below were held by the persons listed below in accounts for their fiduciary, agency or custodial customers. Any shareholder listed below as owning of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to "control" the Fund within the meaning of the 1940 Act. Shareholders controlling the Fund may have a significant impact on any shareholder vote of the Fund.
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SANDS CAPITAL GLOBAL GROWTH FUND -- INVESTOR CLASS SHARES
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NAME AND ADDRESS NUMBER OF SHARES % OF CLASS
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CHARLES SCHWAB & CO INC 68,016.4690 55.24%
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL FUNDS
101 MONTGOMERY ST
SAN FRANCISCO, CA 94104-4151
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ROGER L FENNINGDORF & 12,991.8720 10.55%
MARSHA L ANASTASIA TEN COM
12 LEDGEWOOD RD
REDDING, CT 06896-2915
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S-42
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-------------------------------------------------------------------------------------------------- RICHARD W RAHN 10,478.3340 8.51% 8917 POTOMAC FOREST DR GREAT FALLS, VA 22066-4111 -------------------------------------------------------------------------------------------------- SANDS CAPITAL MANAGEMENT LLC 10,160.3650 8.25% 1101 WILSON BLVD STE 2300 ARLINGTON, VA 22209-2281 -------------------------------------------------------------------------------------------------- PERSHING LLC 7,566.2960 6.15% P O BOX 2052 JERSEY CITY, NJ 07303-2052 -------------------------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 6,910.8500 5.61% FOR EXCLUSIVE BENEFIT OF CUSTOMERS ATTN MUTUAL FUNDS DEPT 5TH FL ONE WORLD FINANCIAL CENTER 200 LIBERTY ST NEW YORK, NY 10281-1003 -------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- SANDS CAPITAL GLOBAL GROWTH FUND -- INSTITUTIONAL CLASS SHARES ---------------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS ---------------------------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 4,543,002.7460 71.62% FOR EXCLUSIVE BENEFIT OF CUSTOMERS ATTN MUTUAL FUNDS DEPT 5TH FL ONE WORLD FINANCIAL CENTER 200 LIBERTY ST NEW YORK, NY 10281-1003 ---------------------------------------------------------------------------------------------------- BENTLEY UNIVERSITY 407,844.9560 6.43% 175 FOREST ST WALTHAM, MA 02452-4713 ---------------------------------------------------------------------------------------------------- |
APPENDIX A -- RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative.
The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
SANDS CAPITAL MANAGEMENT, LLC
PROXY VOTING POLICY AND PROCEDURES
Most Recent Amendment: January 2011
ISSUE
Rule 206(4)-6 under the Advisers Act requires every registered investment adviser to adopt and implement written policies and procedures, reasonably designed to ensure that the adviser votes proxies in the best interest of its clients. The procedures must address material conflicts that may arise in connection with proxy voting. The Rule further requires the adviser to provide a concise summary of the adviser's proxy voting process and offer to provide copies of the complete proxy voting policy and procedures to clients upon request. Lastly, the Rule requires that the adviser disclose to clients how they may obtain information on how the adviser voted their proxies.
SCM votes proxies for a significant number of its clients, and therefore has adopted and implemented this Proxy Voting Policy and Procedures.
POLICY
It is the policy of SCM to vote client proxies in the best interest of our clients. Proxies are an asset of a client account, which should be treated by SCM with the same care, diligence, and loyalty as any asset belonging to a client. Consideration will be given to both the short and long term implications of each proposal to be voted on.
Any general or specific proxy voting guidelines provided by an advisory client or its designated agent in writing will supersede this policy. Clients may wish to have their proxies voted by an independent third party or other named fiduciary or agent, at the client's expense.
PROCEDURES FOR SCM'S RECEIPT OF CLASS ACTIONS
The following procedures outline SCM's receipt of "Class Action" documents from clients and custodians:
SCM will not file "Class Actions" on behalf of any client. If "Class Action" documents are received by SCM from a client's custodian, SCM will make a best effort to forward the documents to the client. Likewise if "Class Action" documents are received by SCM from a client, SCM will make a best effort to gather, at the client's request, any requisite information it has regarding the matter and forward it to the client, to enable the client to file the "Class Action".
PROXY COMMITTEE
SCM has established a Proxy Committee. The Proxy Committee consists of three permanent members (the Chief Operating Officer, Director of Client Services, Director of Compliance) and one or more rotating members (Portfolio Managers). The Proxy Committee meets at least annually and as necessary to fulfill its responsibilities. A majority of the members of the Proxy Committee constitutes a quorum for the transaction of business. The Director of Client Services acts as secretary of the Proxy Committee and maintains a record of Proxy Committee meetings and actions.
The Proxy Committee is responsible for (i) the oversight and administration of proxy voting on behalf of SCM's clients, including developing, authorizing, implementing and updating this Proxy Voting Policy and Procedures; (ii) overseeing the proxy voting process; and (iii) engaging and overseeing any third-party service provider as voting agent to receive proxy statements and/or to provide information, research or other services intended to facilitate the proxy voting decisions made by SCM. The Proxy Committee reviews reports on SCM's proxy voting activity at least annually and as necessary to fulfill its responsibilities.
The Proxy Committee has developed a set of criteria for evaluating proxy issues. These criteria and general voting guidelines are set forth in SCM's Proxy Voting Guidelines (the "Guidelines"), a copy of which is attached hereto as Attachment C. The Proxy Committee may amend or supplement the Guidelines from time to time. All Guidelines are to be applied generally and not absolutely, such that the evaluation of each proposal will be performed in the context of the Guidelines giving appropriate consideration to the circumstances of the company whose proxy is being voted.
PROCEDURES FOR IDENTIFICATION AND VOTING OF PROXIES
The following procedures are designed to enable SCM to resolve material conflicts of interest before voting client proxies.
1. SCM maintains a list of all clients for which it votes proxies. The list may be maintained either in hard copy or electronically and is updated by the Director of Client Services or a designee who obtains proxy voting information from client agreements.
As part of the account opening procedure, the Director of Client Services will note whether or not SCM is responsible for voting proxies for the new client.
2. In cases where it has been designated to vote client proxies, SCM works with the client to ensure that SCM is the designated party to receive proxy voting materials from companies or intermediaries.
3. The Director of Client Services receives all proxy voting materials and has overall responsibility for ensuring that proxies are voted and submitted in a timely manner.
4. Prior to a proxy voting deadline, the appropriate Research Analyst will make a determination as to how to vote each proxy proposal based on his or her analysis of the proposal and the Guidelines. In evaluating a proxy proposal, an analyst may consider information from a number of sources, including management of the company, shareholder groups and independent proxy research services.
5. SCM Staff Members will reasonably try to assess whether there are any material conflicts between SCM's interests and those of its clients with respect to proxy voting by considering the situations identified in the Conflicts of Interest section of this document.
6. So long as no material conflicts of interest have been identified, SCM will vote proxies according to SCM's policy. SCM may also elect not to vote if it deems doing so in its clients' best interest. (See #8 and Proxies of Certain Non-U.S. Issuers below.) The rationale for not voting a client proxy will be documented and the documentation will be maintained in SCM's permanent files.
7. Upon detection of a conflict of interest, the conflict will be brought to the attention of the Proxy Committee for resolution. See Conflicts of Interest section for additional information.
8. SCM is not required to vote every client proxy provided that electing not to vote is consistent with SCM's fiduciary obligations. SCM shall at no time ignore or neglect its proxy voting responsibilities. However, there may be times when refraining from voting is in the client's best interest, such as when an analysis of a particular client proxy reveals that the cost of voting the proxy may exceed the expected benefit to the client. See Proxies of Certain Non-U.S. Issuers below,
9. The Director of Client Services and the Research Analyst will report any attempts by SCM's personnel to influence the voting of client proxies in a manner that is inconsistent with SCM's policy, as well as any attempts by persons or entitles outside SCM seeking to influence the voting of client proxies. Such report shall be made to SCM's Chief Compliance Officer ("CCO"), or if the CCO is the person attempting to influence the voting, then to SCM's Chief Executive Officer.
10. All proxy votes will be recorded and the following information will be maintained:
o The name of the issuer of the portfolio security;
o The exchange ticker symbol of the portfolio security;
o The Council on Uniform Securities Identification Procedures ("CUSIP") number for the portfolio security;
o The shareholder meeting date;
o The number of shares SCM is voting firm-wide;
o A brief identification of the matter voted on;
o Whether the matter was proposed by the issuer or by a security holder;
o Whether or not SCM cast its vote on the matter;
o How SCM cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of directors);
o Whether SCM cast its vote with or against management; and
o Whether any client requested an alternative vote of its proxy.
In the event that SCM votes the same proxy in two directions, it shall maintain documentation to support its voting (this may occur if a client requires SCM to vote a certain way on an issue, while SCM deems it beneficial to vote in the opposite direction for its other clients) in SCM's permanent files.
LOANED SECURITIES
When an SCM client participates in a securities lending program, SCM will not be able to vote the proxy of the shares out on loan. SCM will generally not seek to recall for voting the client shares on loan. However, under rare circumstances, for voting issues that may have a particularly significant impact on the investment, SCM may request a client to recall securities that are on loan if we determine that the benefit of voting outweighs the costs and lost revenue to the client and the administrative burden of retrieving the securities The research analyst who is responsible for voting the proxy will notify the Proxy Committee in the event they believe a recall of loaned securities is necessary.
In determining whether a recall of a security is warranted ("Significant Event"), SCM will take into consideration whether the benefit of the vote would be in the client's best interest despite the costs and the lost revenue to the client and the administrative burden of retrieving the securities. SCM may utilize third-party service providers to assist it in identifying and evaluating whether an event constitutes a Significant Event. The Proxy Committee will review the proxy proposals that have been determined to be Significant Events from time to time and will adjust the foregoing standard as it deems necessary.
PROXIES OF CERTAIN NON-U.S. ISSUERS
It is SCM's policy to seek to vote all proxies for securities held in client accounts for which we have proxy voting authority where SCM can reasonably determine that voting such proxies will be in the best interest of its clients.
Voting proxies of issuers in non-US markets may give rise to a number of administrative/operational issues that may cause SCM to determine that voting such proxies are not in the best interest of its clients or that it is not reasonably possible to determine whether voting such proxies will be in the best interests of its clients. While not exhaustive, the following list of considerations highlights some potential instances in which a proxy vote might not be entered.
o SCM may receive meeting notices without enough time to fully consider the proxy or after the cut-off date for voting.
o Some markets require SCM to provide local agents with a power of attorney or consularization prior to implementing SCM's voting instructions.
o Proxy material may not be available in English.
o SCM may be unable to enter an informed vote in certain circumstances due to the lack of information provided in the proxy statement or by the issuer or other resolution sponsor, and may not vote in those instances.
o Proxy voting in certain countries requires "share blocking." Shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting with a designated depositary. During this blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to the clients' custodian banks. Absent compelling reasons to the contrary, SCM believes that the benefit to the client of exercising the vote is outweighed by the cost of voting (i.e., not being able to sell the shares during this period). Accordingly, if share blocking is required SCM generally elects not to vote those shares. The Portfolio Manager or Research Analyst in conjunction with the Proxy Committee retains the final authority to determine whether to block the shares in the client's portfolio or to pass on voting the meeting.
CONFLICTS OF INTEREST
Although SCM has not currently identified any material conflicts of interest that would affect its proxy voting decisions, it is aware of the following potential conflicts that could exist in the future:
o CONFLICT: SCM is retained by a firm, or is in the process of being retained by a firm, which is affiliated with an issuer that is held in SCM's client portfolios.
o CONFLICT: SCM is retained by an individual, or is in the process of being retained by an individual, who is an officer or director of an issuer that is held in SCM's client portfolios.
o CONFLICT: SCM's Staff Members maintain a personal and/or business relationship (not an advisory relationship) with issuers or individuals that serve as officers or directors of issuers. For example, the spouse of an SCM Staff Member may be a high-level executive of an issuer that is held in SCM's client portfolios. The spouse could attempt to influence SCM to vote in favor of management.
o CONFLICT: SCM or a Staff Member(s) personally owns a significant number of an issuer's securities that are also held in SCM's client portfolios. The Staff Member(s) may seek to vote proxies in a different direction for his/her personal holdings than would otherwise be warranted by SCM's policy. The Staff Member(s) could oppose voting the proxies according to the policy and successfully influence SCM to vote proxies in contradiction to the policy.
RESOLUTION:
SCM realizes that, due to the difficulty of predicting and identifying all material conflicts, it must rely on its Staff Members to notify the Director of Client Services and/or the CCO of any material conflict that may impair SCM's ability to vote proxies in an objective manner. Upon such notification, the Director of Client Services and/or the CCO will notify the Proxy Committee of the conflict.
In the event that the Proxy Committee determines that SCM has a conflict of interest with respect to a proxy proposal, the Proxy Committee shall also determine whether the conflict is "material" to that proposal. The Proxy Committee may determine on a case-by-case basis that a particular proposal does not involve a material conflict of interest. To make this determination, the Proxy Committee must conclude that the proposal is not directly related to SCM's conflict with the issuer. If the Proxy Committee determines that a conflict is not material, then SCM may vote the proxy in accordance with the recommendation of the Research Analyst.
In the event that the Proxy Committee determines that SCM has a material conflict of interest with respect to a proxy proposal, SCM will vote on the proposal in accordance with the determination of the Proxy Committee. Prior to voting on the proposal, SCM may (i) contact an independent third party (such as another plan fiduciary) to recommend how to vote on the proposal and vote in accordance with the recommendation of such third party (or have the third party vote such proxy); or (ii) with respect to client accounts that are not subject to ERISA, fully disclose the nature of the conflict to the client and obtain the client's consent as to how SCM will vote on the proposal (or otherwise obtain instructions from the client as to how to vote the proxy).
RECORDKEEPING
SCM must maintain the documentation described in the following section for a period of not less than five (5) years in an easily accessible place, the first two (2) years at its principal place of business. Director of Client Services will be responsible for the following procedures and for ensuring that the required documentation is retained.
CLIENT REQUEST TO REVIEW PROXY VOTES:
o Any request, whether written (including e-mail) or oral, received by any Staff Member of SCM, must be promptly reported to the Director of Client Services. All written requests must be retained in the permanent file.
o The Director of Client Services will record the identity of the client, the date of the request, and the disposition (e.g., provided a written or oral response to client's request, referred to third party, not a proxy voting client, other dispositions, etc.) in a suitable place.
o Clients are permitted to request the proxy voting record for the 5-year period prior to their request.
PROXY STATEMENTS RECEIVED REGARDING CLIENT SECURITIES:
o Upon receipt of a proxy, copy or print a sample of the proxy statement or card and maintain the copy in a central file along with a sample of the proxy solicitation instructions.
NOTE: SCM is permitted to rely on proxy statements filed on the SEC's EDGAR system instead of keeping its own copies.
PROXY VOTING RECORDS:
o Documents prepared or created by SCM that were material to making a decision on how to vote, or that memorialized the basis for the decision.
o Documentation or notes or any communications received from third parties, other industry analysts, third-party service providers, company's management discussions, etc. that were material in the basis for the decision.
DISCLOSURE
o SCM will ensure that Part II of Form ADV is updated as necessary to reflect: (i) all material changes to the Proxy Voting Policy and Procedures; and (ii) information about how clients may obtain information on how SCM voted their securities.
PROXY SOLICITATION
As a matter of practice, it is SCM's policy to not reveal or disclose to any client how SCM may have voted (or intends to vote) on a particular proxy until after such proxies have been counted at a shareholder's meeting.
The Director of Client Services is to be promptly informed of the receipt of any solicitation from any person to vote proxies on behalf of clients. At no time may any Staff Member accept any remuneration in the solicitation of proxies. The Director of Client Services shall handle all responses to such solicitations.
RESPONSIBILITY
The Director of Client Services is responsible for overseeing and implementing this Proxy Voting Policy and Procedures.
ATTACHMENT C
PROXY VOTING GUIDELINES
One of the primary factors SCM considers when determining the desirability of investing in a particular company is the quality and depth of its management. Accordingly, SCM believes that the recommendation of management on any issue should be given substantial weight in determining how proxy issues are resolved. As a matter of practice, SCM will vote on most issues presented in a portfolio company proxy statement in accordance with the position of the company's management, unless SCM determines that voting in accordance with management's recommendation would adversely affect the investment merits of owning the stock. However, SCM will consider each issue on its own merits, and will not support the position of the company's management in any situation where, in SCM's judgment, it would not be in the best interests of the client to do so.
I. THE BOARD OF DIRECTORS
A. VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees are made on a CASE-BY-CASE basis, and may consider the following factors:
o Long-term corporate performance record relative to a market index;
o Composition of board and key board committees;
o Corporate governance provisions and takeover activity;
o Board decisions regarding executive pay;
o Director compensation;
B. DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Proposals concerning director and officer indemnification and liability protection are evaluated on a case-by-case basis.
C. VOTING FOR DIRECTOR NOMINEES IN CONTEST ELECTIONS
Votes in a contested election of directors are evaluated on a CASE-BY-CASE basis, and may consider the following factors:
o long-term financial performance of the target company relative to its industry;
o management's track record;
o background to the proxy contest;
o qualifications of director nominees (both slates);
o evaluation of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met; and
o stock ownership positions.
D. SIZE OF THE BOARD
Proposals to limit the size of the Board should be evaluated on a case-by-case basis.
II. AUDITORS
RATIFYING AUDITORS
We generally vote FOR proposals to ratify auditors, unless: an auditor has a financial interest in or association with the company, and is therefore not independent; or there is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company's financial position.
III. PROXY CONTEST DEFENSES
CUMULATIVE VOTING
We vote AGAINST proposals to eliminate cumulative voting.
We vote FOR proposals to permit cumulative voting.
IV. ANTI-TAKEOVER ISSUES
We generally oppose anti-takeover measures because they reduce shareholder rights. However, as with all proxy issues, we conduct and independent review of each anti-takeover proposal. On occasion, we may vote with management when it is concluded that the proposal is not onerous and would not harm clients' interests as shareholders. Anti-takeover issues include the following:
A. POISON PILLS
The "poison pill" entitles shareholders to purchase certain securities at discount prices in the event of a change in corporate control. Such a measure would make a potential takeover prohibitively expensive to the acquirer.
We review on a CASE-BY-CASE basis management proposals to ratify a poison pill.
B. FAIR PRICE PROVISIONS
Fair price provisions attempt to ensure approximately equal treatment for all shareholders in the event of a full-scale takeover. Typically, such a provision requires would-be acquirers that have established threshold positions in target companies at given per-share prices to pay at least as much if they opt for complete control, unless certain conditions are met.
We vote FOR fair price proposals, as long as the shareholder vote requirement embedded in the provision is no more than a majority of disinterested shares.
We vote FOR shareholder proposals to lower the shareholder vote requirement in existing fair price provisions.
C. GREENMAIL
Proposals relating to the prohibition of "greenmail" are designed to disallow the repurchase of stock from a person or group owning 5% or more of the company's common stock, unless approved by the disinterested holders of two-thirds or more of the outstanding stock. They could also prevent the company from repurchasing any class of stock at a price more than 5% above the current fair market price, unless an offer is made to all shareholders.
We vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company's ability to make greenmail payments.
We review on a CASE-BY-CASE basis anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
D. SUPERSTOCK
Another takeover defense is superstock, I.E., shares that give holders disproportionate voting rights. For example, one company proposed authorizing a class of preferred stock which "could be issued in a private placement with one or more institutional investors" and "could be designated as having voting rights which might dilute or limit the present voting rights of the holders of common stock . . ." The purpose of this additional class of stock would be to give insiders an edge in fending off an unsolicited or hostile takeover attempt.
We will review on case-by-case basis proposals that would authorize the creation of new classes of "superstock".
E. SUPERMAJORITY RULES
Supermajority provisions require approval by holders of minimum amounts of the common shares (usually 75% to 80%). While applied mainly to merger bids, supermajority rules also may be extended to cover substantive transfers of corporate assets, liquidations, reverse splits and removal of directors for reasons other than cause. A supermajority provision would make it nearly impossible in some cases for shareholders to benefit from a takeover attempt.
1. SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO APPROVE MERGERS
We vote AGAINST management proposals to require a supermajority shareholder vote to approve mergers and other significant business combinations.
We vote FOR shareholder proposals to lower supermajority shareholder vote requirements for mergers and other significant business combinations.
2. SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO AMEND THE CHARTER OR BYLAWS
We vote AGAINST management proposals to require a supermajority shareholder vote to approve charter and bylaw amendments.
We vote FOR shareholder proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments.
F. BOARD CLASSIFICATION
High on the agenda of defense-minded corporate executives are staggered terms for directors, whereby only some (typically one-third) of the directors are elected each year. The "staggered board" acts as a bar to unwelcome takeover bids. An aggressive, affluent acquirer would need two years to gain a working majority of directors at a company whose board members are elected to staggered three-year terms of office.
We vote AGAINST proposals to classify the board.
We vote FOR proposals to repeal classified boards and elect all directors annually.
IV. MISCELLANEOUS GOVERNANCE PROVISION
BUNDLED PROPOSALS
We review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals. In this case where items are conditioned upon each other, we examine the benefits and costs of the packages items. In instances when the joint effect of the conditioned items is not in shareholder's best interests, we vote against the proposals. If the combined effect is positive, we support such proposals.
V. CAPITAL STRUCTURE
A. COMMON STOCK AUTHORIZATION
We review on a CASE-BY-CASE basis proposals to increase the number of shares of common stock authorized for issue.
B. DEBT RESTRUCTURING
We review on a CASE-BY-CASE basis proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan.
VI. EXECUTIVE AND DIRECTOR COMPENSATION
In general, we vote on a CASE-BY-CASE basis on executive and director compensation plans, including stock option plans, with the view that viable compensation programs reward the creation of stockholder wealth.
VII. STATE OF INCORPORATION
A. VOTING ON STATE TAKEOVER STATUTES
We review on a case-by-case basis proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freeze-out provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, anti-greenmail provisions and disgorgement provisions).
B. VOTING ON REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation are examined on a CASE-BY-CASE basis.
VIII. MERGERS AND CORPORATE RESTRUCTURINGS
A. MERGERS AND ACQUISITIONS
Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis.
B. CORPORATE RESTRUCTURING
Votes on corporate restructuring proposals, including minority squeezeouts, leveraged buyout, spin-offs, liquidations and asset sales are considered on a CASE-BY-CASE basis.
C. SPIN-OFFS
Votes on spin-offs are considered on a CASE-BY-CASE basis.
D. CHANGING CORPORATE NAME
We generally vote FOR changing the corporate name.
IX. SOCIAL AND ENVIRONMENTAL ISSUES
Consistent with its fiduciary duty to clients, SCM will vote on social issues with a view toward promoting good corporate citizenship. However, SCM realizes that it cannot require a portfolio company to go beyond applicable legal requirements or put itself in a non-competitive position. Social responsibility issues may include proposals regarding the following:
o Ecological issues, including toxic hazards and pollution of the air and water;
o Employment practices, such as the hiring of women and minority groups;
o Product quality and safety;
o Advertising practices;
o Animal rights, including testing, experimentation and factory farming;
o Military and nuclear issues; and
o International politics and operations, including the world debt crisis, infant formula, U.S. corporate activity in Northern Ireland, and the policy of apartheid in South Africa.
We review on a CASE-BY-CASE basis proposals regarding social or environmental issues.
STATEMENT OF ADDITIONAL INFORMATION
THOMSON HORSTMANN & BRYANT MICROCAP FUND
(INSTITUTIONAL CLASS SHARES: THBIX)
(INVESTOR CLASS SHARES: THBVX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
THOMSON HORSTMANN & BRYANT, INC.
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Thomson Horstmann & Bryant MicroCap Fund (the "Fund"). This SAI is incorporated by reference into and should be read in conjunction with the Fund's prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements for the Fund, including the notes thereto and the report of Ernst & Young LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at Thomson Horstmann & Bryant MicroCap Fund, P.O. Box 219009, Kansas City, MO 64121-9009, or calling the Fund at 1-855-THB-FUND.
TABLE OF CONTENTS
THE TRUST ........................................................ S-1 DESCRIPTION OF PERMITTED INVESTMENTS ............................. S-1 INVESTMENT LIMITATIONS ........................................... S-24 THE ADVISER ...................................................... S-26 THE PORTFOLIO MANAGERS ........................................... S-27 THE ADMINISTRATOR ................................................ S-28 THE DISTRIBUTOR .................................................. S-29 SHAREHOLDER SERVICES ............................................. S-30 PAYMENTS TO FINANCIAL INTERMEDIARIES ............................. S-30 THE TRANSFER AGENT ............................................... S-31 THE CUSTODIAN .................................................... S-31 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .................... S-31 LEGAL COUNSEL .................................................... S-31 TRUSTEES AND OFFICERS OF THE TRUST ............................... S-31 PURCHASING AND REDEEMING SHARES .................................. S-41 DETERMINATION OF NET ASSET VALUE ................................. S-42 TAXES ............................................................ S-42 FUND TRANSACTIONS ................................................ S-47 PORTFOLIO HOLDINGS ............................................... S-50 DESCRIPTION OF SHARES ............................................ S-51 SHAREHOLDER LIABILITY ............................................ S-51 LIMITATION OF TRUSTEES' LIABILITY ................................ S-51 PROXY VOTING ..................................................... S-52 CODE OF ETHICS ................................................... S-52 5% AND 25% SHAREHOLDERS .......................................... S-52 APPENDIX A -- DESCRIPTION OF RATINGS ............................. A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ............... B-1 |
March 1, 2013 THB-SX-001-0200
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. Each fund of the Trust pays its: (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses; and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate statements of additional information.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer shares of the Fund in Investor Class and Institutional Class Shares. The different classes provide for variations in certain distribution and shareholder servicing expenses and in the minimum investment requirements. Minimum investment requirements and investor eligibility are described in the Prospectus. The Trust reserves the right to create and issue additional classes of shares. For more information on shareholder servicing and distribution expenses, see "The Distributor."
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. Under the Declaration of Trust, the Trustees have the power to liquidate the Fund without shareholder approval. While the Trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
The Fund's investment objective and principal investment strategies are described in the prospectus. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The following information supplements, and should be read in conjunction with, the prospectus.
The following are descriptions of the permitted investments and investment practices of the Fund and the associated risk factors. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs, as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository" and may be sponsored or unsponsored. These certificates are issued by
depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer's home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. While the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts agree to distribute notices of shareholders meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequency is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
For purposes of the Fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depositary receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers.
Investments in the securities of foreign issuers may subject the Fund to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments, possible imposition of withholding taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition, foreign issuers are, generally speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States.
EQUITY SECURITIES. Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants to acquire common stock, securities convertible into common stock, and investments in master limited partnerships. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the United States on registered
exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o ROYALTY TRUSTS. Royalty trusts are structured similarly to REITs. A royalty trust generally acquires an interest in natural resource companies or chemical companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields.
o EXCHANGE-TRADED FUNDS. An ETF is a fund whose shares are bought and sold on a securities exchange as if it were a single security. An ETF holds a portfolio of securities designed to track a particular market segment or index. Some examples of ETFs are SPDRs([R]), DIAMONDS(SM), NASDAQ 100 Index Tracking Stock(SM) ("QQQs(SM)") and iShares([R]). The Fund could purchase an ETF to gain exposure to a particular market or to manage cash flows. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities and ETFs have management fees that increase their costs versus the costs of owning the underlying securities directly. See also "Investment Company Shares" below.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non- convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the
repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in general financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
o MICRO, SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of micro, small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of micro and smaller companies are often traded in the over-the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of micro and smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
MASTER LIMITED PARTNERSHIPS (MLPS"). MLPs are limited partnerships or limited liability companies, whose partnership units or limited liability interests are listed and traded on a U.S. securities exchange, and are treated as publicly traded partnerships for federal income tax purposes. To qualify to be treated as a partnership for tax purposes, an MLP must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). These qualifying sources include activities such as the exploration, development, mining, production, processing, refining, transportation, storage and marketing of mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. MLPs that are formed as limited liability companies generally have two analogous classes of owners, the managing member and the members. For purposes of this section, references to general partners also apply to managing members and references to limited partners also apply to members. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an equity interest of as much as 2% in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the MLP through ownership of common
units and have a limited role in the MLP's operations and management.
MLPs are typically structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount ("minimum quarterly distributions" or "MQD"). Common and general partner interests also accrue arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the partnership's cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such results benefit all security holders of the MLP.
General partner interests of MLPs are typically retained by an MLP's original sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and investors such as us. A holder of general partner interests can be liable under certain circumstances for amounts greater than the amount of the holder's investment in the general partner interest. General partner interests often confer direct board participation rights and in many cases, operating control, over the MLP. These interests themselves are not publicly traded, although they may be owned by publicly traded entities. General partner interests receive cash distributions, typically 2% of the MLP's aggregate cash distributions, which are contractually defined in the partnership agreement. In addition, holders of general partner interests typically hold incentive distribution rights ("IDRs"), which provide them with a larger share of the aggregate MLP cash distributions as the distributions to limited partner unit holders are increased to prescribed levels. General partner interests generally cannot be converted into common units. The general partner interest can be redeemed by the MLP if the MLP unitholders choose to remove the general partner, typically with a supermajority vote by limited partner unitholders.
FIXED INCOME SECURITIES. Fixed income securities include bonds, notes, debentures and other interest-bearing securities that represent indebtedness. The market value of the fixed income investments in which the Fund invests will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. Changes by recognized agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of these securities will not necessarily affect cash income derived from these securities but will affect the Fund's net asset value.
FOREIGN SECURITIES. Foreign securities include equity securities of foreign entities, obligations of foreign branches of U.S. banks and of foreign banks, including, without limitation, European Certificates of Deposit, European Time Deposits, European Bankers' Acceptances, Canadian Time Deposits, Europaper and Yankee Certificates of Deposit, and investments in Canadian Commercial Paper and foreign securities. These instruments have investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include future adverse political and economic developments, the possible imposition of withholding taxes on interest or other income, possible seizure, nationalization, or expropriation of foreign deposits, the possible establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations. Such investments may also entail higher custodial fees and sales commissions than domestic investments. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks.
EMERGING MARKETS -- An "emerging country" is generally a country that the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products (GNP) than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS -- Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If the Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses (including operating expenses and the fees of the Adviser), but also will bear indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS -- Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict or control foreign investments in its securities markets. These restrictions could limit the Fund's ability to invest in a particular country or make it very expensive for the Fund to invest in that country. Some countries require prior governmental approval or limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION -- There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign countries more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK -- The Fund's investment managers anticipate that in most cases an exchange or over-
the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than those in U.S. markets; and
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards;
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis;
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States;
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated;
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights; and
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK -- While the Fund denominates its net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES -- Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries
it is possible for the Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income the Fund receives from its investments.
EMERGING MARKETS -- Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Rating Services ("S&P") or Moody's Investor Services, Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Description of Ratings" to this SAI.
REAL ESTATE INVESTMENT TRUSTS ("REITS"). A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Internal Revenue Code. The Internal Revenue Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Internal Revenue Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which the Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Fund invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By
investing in REITs indirectly through the Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation ("Farmer Mac").
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency. While other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S.
Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U. S. TREASURY OBLIGATIONS. U. S. Treasury obligations consist of bills, notes and bonds issued by the U. S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities
held by the Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Adviser will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by GNMA, FNMA and Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES - Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. The most significant differences of mortgage-backed securities are: 1) payments of interest and principal are more frequent (usually monthly) and 2) falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing the Fund to reinvest the money at a lower interest rate. In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. When prepayment occurs, the Fund may have to
reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
MORTGAGE DOLLAR ROLLS -- A mortgage dollar roll involves the sale of a security by the Fund and its agreement to repurchase the instrument at a specified time and price, and may be considered a form of borrowing for some purposes. The Fund will designate assets determined to be liquid in an amount sufficient to meet its obligations under the transactions. A dollar roll involves potential risks of loss that are different from those related to the securities underlying the transactions. The Fund may be required to purchase securities at a higher price than may otherwise be available on the open market. Since the counterparty in the transaction is required to deliver a similar, but not identical, security to the Fund, the security that the Fund is required to buy under the dollar roll may be worth less than an identical security. There is no assurance that the Fund's use of the cash that it receives from a dollar roll will provide a return that exceeds borrowing costs.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Fund may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND COLLATERALIZED DEBT OBLIGATIONS ("CDOS") -- CMOs are one type of mortgage-backed security, which were first introduced in the early 1980's, and may be issued either by U.S. government instrumentalities or non-government entities. CMOs generally retain many of the yield and credit quality characteristics as mortgage pass-through securities, while reducing some of the disadvantages of pass-throughs. CMOs may be backed by several types of varying mortgage collateral. The most prevalent types of collateral are: U.S. agency (e.g., GNMA, FNMA, or FHLMC) guaranteed mortgage pass-through securities, non-agency guaranteed mortgage loans, and commercial mortgage loans.
Some CMOs are also characterized as a Real Estate Mortgage Investment Conduit ("REMIC"). A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code and invests in certain mortgages primarily secured by
interests in real property and other permitted investments.
A key difference between traditional mortgage pass-through securities and CMOs is the mechanics of the principal payment process. Unlike pass-through securities, which simply pay a pro rata distribution of any principal and interest payments from the underlying mortgage collateral, CMOs are structured into multiple classes, each bearing a different stated maturity and each potentially having different credit rating levels. Each class of CMO, often referred to as a "tranche", may be issued with a specific fixed interest rate or may pay a variable interest rate, which may change monthly. Each tranche must be fully retired by its final distribution date. Generally, all classes of CMOs pay or accrue interest monthly similar to pass-through securities.
The credit risk of all CMOs is not identical and must be assessed on a security by security basis. Generally, the credit risk of CMOs is heavily dependent upon the type of collateral backing the security. For example, a CMO collateralized by U.S. agency guaranteed pass-through securities will have a different credit risk profile compared to a CMO collateralized by commercial mortgage loans. Investing in the lowest tranche of CMO or REMIC certificates often involves risk similar to those associated with investing in non-investment grade rated corporate bonds. Additionally, CMOs may at times be less liquid than a regular mortgage pass-through security.
CDOs are similar to CMOs but may include both mortgage-related and other fixed income securities. They generally are not issued by U.S. government issuers, although the underlying mortgages may be issued or guaranteed by the U.S. government or an agency or instrumentality thereof. They may also include corporate issuers.
The Fund may also invest in resecuritized CMOs (Re-REMICs, for example) or CDOs, in which tranches of existing CMOs or CDOs are combined and used to collateralize new securities. These may be more or less risky than the underlying tranches. The increased complexity of resecuritized pools may result in less transparency, which could heighten the investment risk associated with these investments.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. It is the current policy of the Fund not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% of the Fund's total assets. The investments of the
Fund in repurchase agreements, at times, may be substantial when, in the view
of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. Generally, the effect of such a transaction is that the Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will
be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Fund intends to use the reverse repurchase technique only when it will be advantageous to the Fund. The Fund will in each instance establish a segregated account with the Trust's custodian bank in which the Fund will maintain cash or cash equivalents or other portfolio securities equal in value to the Fund's obligations in respect of reverse repurchase agreements.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering
of expenses, such that shareholders would indirectly bear a proportionate share
of the operating expenses of such investment companies, including advisory
fees, in addition to paying the Fund's expenses. Unless an exception is
available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i)
acquiring more than 3% of the voting shares of any one investment company, (ii)
investing more than 5% of its total assets in any one investment company, and
(iii) investing more than 10% of its total assets in all investment companies
combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise complies with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, or an underlying economic factor, such as an interest rate or a market benchmark. Unless otherwise stated in the Fund's prospectus, the Fund may use derivatives for risk management purposes, including to gain exposure to various markets in a cost efficient manner, to reduce transaction costs or to remain fully invested. The Fund may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates (a practice known as "hedging"). When hedging is successful, the Fund will have offset any depreciation in the value of its portfolio securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of the Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets (or such assets are "earmarked" by the Custodian) in accordance with the requirements and interpretations of the SEC and its staff.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade - known as "contract markets" - approved for such trading and regulated by the Commodity Futures Trading Commission ("CFTC"). These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC" options). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counter-party will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When the Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). The Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost
of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. The Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, the Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When the Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when the Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. The Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an OTC option by entering into an offsetting transaction with the counter-party to the option.
The Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, the Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, the Fund would hope to profit by closing out the put option at a lower price. If security prices fall, the Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive the Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. The Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, the Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Fund is permitted only to write covered options. At the time of selling the call option, the Fund may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency
or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, the Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (I.E., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
The Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. The Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. The Fund may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to the Fund.
o COMBINED POSITIONS
The Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, the Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, the Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (I.E., the parties to the contract may fix the maturity date and the amount);
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC;
o Do not require an initial margin deposit; and
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect the Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which the Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a
foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause the Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross-hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, the Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, the Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of the Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, if the counter-party's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. The Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counter-party is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Fund's gains or losses. In order to reduce the risk associated with leveraging, the Fund may cover its current obligations under swap agreements according to guidelines established by the Securities and Exchange Commission (the "SEC"). If the Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If the Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a stock, stock index or basket of stocks in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to stocks making up the index of securities without actually purchasing those stocks. Equity index swaps involve not only the risk associated with investment in the securities represented in the index, but also the risk that the performance of such securities, including dividends, will not exceed the return on the interest rate that the Fund will be committed to pay.
o TOTAL RETURN SWAPS
Total return swaps are contracts in which one party agrees to make payments of the total return from a reference instrument -- which may be a single asset, a pool of assets or an index of assets -- during a specified period, in return for payments equal to a fixed or floating rate of interest or the total return from another underlying reference instrument. The total return includes appreciation or depreciation on the underlying asset, plus any interest or dividend payments. Payments under the swap are based upon an agreed upon principal amount but, since the principal amount is not exchanged, it represents neither an asset nor a liability to either counterparty, and is referred to as notional. Total return swaps are marked to market daily using different sources, including quotations from counterparties, pricing services, brokers or market makers. The unrealized appreciation (depreciation) related to the change in the valuation of the notional amount of the swap is combined with the amount due to a fund at termination or settlement. The primary risks associated with total return swaps are credit risks (if the counterparty fails to meet its obligations) and market risk (if there is no liquid market for the agreement or unfavorable changes occur to the underlying reference instrument).
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, the Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if the Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, the Fund may have to pay more money than it receives. Similarly, if the Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, the Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. The Fund may enter into a currency swap when it has one currency and desires a different currency. Typically, the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance of the Fund than if it had not entered into any derivatives transactions. Derivatives may magnify the Fund's
gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose the Fund to greater risks.
CORRELATION OF PRICES - The Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities the Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if the Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, the Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of the Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect the Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of the Fund's foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of the Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, the Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, the Fund may close out a futures contract only on the exchange the contract was initially traded. Although the Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, the Fund may not be able to close out its position. In an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and/or
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (I.E., difficult to sell at a desired time and price) under a variety of market conditions. For
example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, the Fund may lose money by investing in derivatives. For example, if the Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if the Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into the Fund. If the Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to the Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. The Fund may lose its margin deposits if a broker-dealer with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (I.E., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Fund may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment.
Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by the Fund, and therefore such a transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with these requirements, and subject to certain risks.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (i.e. within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board. Despite such good faith efforts to determine fair value prices, the Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon its sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Trust's Board, the Adviser determines the liquidity of the Fund's investments. In determining the liquidity of the Fund's investments, the Adviser may consider various factors, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not hold more than 15% of its net assets in illiquid securities.
RESTRICTED SECURITIES. The Fund may purchase restricted securities. Restricted securities are securities that may not be sold freely to the public absent registration under the U.S. Securities Act of 1933, as amended (the "1933 Act") or an exemption from registration. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor" from 1933 Act registration requirements for qualifying sales to institutional investors. When Rule 144A restricted securities present an attractive investment opportunity and meet other selection criteria, the Fund may make such investments whether or not such securities are "illiquid" depending on the market that exists for the particular security. The Board has delegated the responsibility for determining the liquidity of Rule 144A restricted securities that the Fund may invest in to the Adviser.
SHORT SALES. As consistent with the Fund's investment objective, the Fund may engage in short sales that are either "uncovered" or "against the box." A short sale is "against the box" if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
Uncovered short sales are transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund may: (a) segregate cash or liquid securities at such a level that the amount segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short; or (b) otherwise cover the Fund's short position.
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed-delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities the Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. The Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
The Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When the Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, the Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because the Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. The Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
In addition to the Fund's investment objective, the following investment limitations are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
6. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
The following limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
The Fund may not:
1. Hold illiquid securities in an amount exceeding, in the aggregate, 15% of the Fund's net assets.
2. The Fund may not borrow money in an amount exceeding 33 1/3% of the value of its total assets, provided that investment strategies which either obligate the Fund to purchase securities or require the Fund to cover a position by segregating assets or entering into an offsetting position shall not be subject to this limitation. To the extent that its borrowings exceed 5% of its assets, the Fund will not make any further investments.
3. The Fund may not change its investment strategy to invest at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in equity securities of micro-capitalization companies at the time of purchase without 60 days' prior notice to shareholders.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitation within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's outstanding voting securities would be held by the fund.
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an investment company's net assets in an industry or group of industries, with certain exceptions.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Fund's current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies and (ii) enter into repurchase agreements.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The 1940 Act does not directly restrict an investment company's
ability to invest in real estate, but does require that every investment
company have a fundamental investment policy governing such investments. The
Fund will not purchase or sell real estate, except that the Fund may purchase:
marketable securities issued by companies which own or invest in real estate
(including REITs).
COMMODITIES. The 1940 Act does not directly restrict an investment company's ability to invest in commodities, but does require that every investment company have a fundamental investment policy governing such investments. The Fund will not purchase or sell physical commodities or commodities contracts, except that the Fund may purchase: (i) marketable securities issued by companies which own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
THE ADVISER
GENERAL. Thomson Horstmann & Bryant, Inc., a Delaware corporation formed in 1982, located at 501 Merritt 7, Norwalk, CT 06851, is a 100% employee-owned professional investment management firm registered with the SEC under the 1940 Act. As of December 31, 2012, the Adviser had approximately $1.3 billion in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Fund and continuously reviews, supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 1.25% of the average daily net assets of the Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep the Fund's net
operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 1.25% and 1.75% of the Fund's Institutional Class and Investor Class Shares net assets, respectively, until February 28, 2014.
For the fiscal year ended October 31, 2012, the Fund paid the following in advisory fees:
----------------------------------------------------------------------------------------------------------------
CONTRACTUAL ADVISORY FEES PAID FEES WAIVED BY THE ADVISER TOTAL FEES PAID TO THE ADVISER
----------------------------------------------------------------------------------------------------------------
2012(1) 2012(1) 2012(1)
----------------------------------------------------------------------------------------------------------------
$3,353 $3,353 $0
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(1) Represents the period between March 30, 2012 (commencement of Fund operations) and October 31, 2012.
THE PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates the Fund's portfolio managers for their management of the Fund. The Fund's portfolio managers' receive a majority of their compensation from their direct equity ownership in the Adviser and therefore compensation is based in part on the long-term success of the Fund, other client accounts and the Adviser as a whole. The amount of such compensation is based on the proportionate amount of each portfolio manager's ownership, and is paid out periodically as determined by the Adviser's Board of Directors The Fund's portfolio managers also receive a fixed annual salary and 401(k) plan contributions.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Fund is required to show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES OWNED(1) -------------------------------------------------------------------------------- Chad M. Nelson [$100,001- $500,000] -------------------------------------------------------------------------------- Christopher N. Cuesta [$100,001 - $500,000] -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Fund, certain portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
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REGISTERED OTHER POOLED
INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS(1)
--------------------------------------------------------------------------------
NUMBER OF NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS ($ MILLIONS) ACCOUNTS ($ MILLIONS)
--------------------------------------------------------------------------------------------------------
Chad M. Nelson 0 $0 2 $123 27 $1,100
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Christopher N. Cuesta 0 $0 2 $123 27 $1,100
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(1) Includes two (2) accounts managed with a performance-based fee, representing approximately $390 million in assets.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. Subject to their fiduciary obligations to the Fund and to any applicable laws, the Adviser (and its principals and employees) engage in a wide variety of investment activities for their own accounts and for other entities and accounts, including private investment funds. Such other entities and accounts may have investment objectives or may implement investment strategies similar to those of the Fund. The Adviser's principals and employees have a financial interest in certain funds managed by the Adviser directly, as investors in the funds, or indirectly, as owners of the Adviser. As a result of the foregoing, the Adviser and its principals or employees may have conflicts of interest in allocating their time and activity between the Fund and other entities and in allocating investments among the Fund and other entities, including ones in which the Adviser and its principals or employees may have a greater financial interest. For example, an incentive exists to allocate limited investment opportunities to such a fund. In addition, an incentive exists to recommend that clients invest in such funds in order to increase the Adviser's investment advisory fees. The Adviser prohibits employees from allocating trades or investment opportunities that favor any particular client, group of clients or affiliated and proprietary accounts.
In addition, whenever a portfolio manager of a fund manages other accounts, potential conflicts of interest exist, including potential conflicts between the investment strategy of the Fund and the investment strategy of the other accounts. For example, in certain instances, a portfolio manager may take conflicting positions in a particular security for different accounts, by selling a security for one account and continuing to hold it for another account. In addition, the fact that other accounts require the portfolio manager to devote less than all of his or her time to a fund may be seen itself to constitute a conflict with the interest of the fund. The portfolio managers may also execute transactions for another fund or account at the direction of such fund or account that may adversely impact the value of securities held by the Fund. Securities selected for funds or accounts other than the Fund may outperform the securities selected for the Fund. Finally, if a portfolio manager identifies a limited investment opportunity that may be suitable for more than one fund or other account, the Fund may not be able to take full advantage of that opportunity due to an allocation of that opportunity across all eligible funds and accounts.
The Adviser has adopted certain compliance procedures that are designed to address these, and other, types of conflicts. However, there is no guarantee that such procedures will detect each and every situation where a conflict arises. Additional information regarding conflicts related to these arrangements is provided under "Brokerage Transactions" and "Code of Ethics" below.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12 First $500 million
--------------------------------------------------------------------------------
0.10 $500 million - $1 billion
--------------------------------------------------------------------------------
0.08 Over $1 billion
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The foregoing fee is subject to a minimum annual fee of $125,000 for the Thomson Horstmann & Bryant, Inc. fund complex, and is applicable to each portfolio within the fund complex.
o For each additional class of shares of a fund established after the initial (1) class of shares per fund, the minimum annual fee will be increased by $15,000.
For the fiscal year ended October 31, 2012, the Fund paid the Administrator the following fees:
--------------------------------------------------------------------------------
CONTRACTUAL FEES PAID FEES WAIVED BY THE ADMINISTRATOR TOTAL FEES PAID
--------------------------------------------------------------------------------
2012(1) 2012(1) 2012(1)
--------------------------------------------------------------------------------
$82,240 $0 $82,240
--------------------------------------------------------------------------------
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(1) Represents the period between March 30, 2012 (commencement of Fund operations) and October 31, 2012.
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
DISTRIBUTION PLAN. The Distribution Plan (the "Plan") provides that Investor Class Shares of the Fund pay the Distributor an annual fee of up to a maximum of 0.25% of the average daily net assets of the Investor Class Shares. Under the Plan, the Distributor may make payments pursuant to written agreements to financial institutions and intermediaries such as banks, savings and loan associations and insurance companies including, without limit, investment counselors, broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for services and reimbursement of expenses incurred in connection with distribution assistance. The Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution expenses incurred by the Distributor or the amount of payments made to other financial institutions and intermediaries. The Trust intends to operate the Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
The Trust has adopted the Plan in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or any agreements related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the affected Fund(s). All material amendments of the Plan will require approval by a majority of the Trustees of the Trust and of the Qualified Trustees.
For the fiscal year ended October 31, 2012, the Fund paid the Distributor the following fees pursuant to the Plan:
--------------------------------------------------------------------------------
12B-1 FEES PAID 12B-1 FEES RETAINED BY THE DISTRIBUTOR
--------------------------------------------------------------------------------
2012(1) 2012(1)
--------------------------------------------------------------------------------
$73 $73
--------------------------------------------------------------------------------
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(1) Represents the period between March 30, 2012 (commencement of Fund operations) and October 31, 2012.
SHAREHOLDER SERVICES
SHAREHOLDER SERVICING PLAN. The Fund has adopted a shareholder servicing plan (the "Service Plan") under which a shareholder servicing fee of up to 0.25% of average daily net assets of Investor Class Shares of the Fund will be paid to other service providers. Under the Service Plan, other service providers may perform, or may compensate other service providers for performing certain shareholder and administrative services as discussed below.
DESCRIPTION OF SHAREHOLDER SERVICES. Shareholder services may include: (i) maintaining accounts relating to clients that invest in shares; (ii) arranging for bank wires; (iii) responding to client inquiries relating to the services performed by the services provider; (iv) responding to inquiries from clients concerning their investment in shares; (v) assisting clients in changing dividend options, account designations and addresses; (vi) providing information periodically to clients showing their position in shares; (vii) forwarding shareholder communications from the Fund such as proxies, shareholder reports, annual reports, and dividend distribution and tax notices to clients; and (viii) processing dividend payments from the Fund on behalf of clients.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
Union Bank, N.A., 350 California Street, 6th Floor, San Francisco, California 94104 (the "Custodian"), serves as the custodian of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by Ernst & Young LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service
providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
----------------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
----------------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust,
Administrator and the SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
Management (UK) Limited. Director
of the Distributor since 2003.
----------------------------------------------------------------------------------------------------------------------
S-34
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POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
----------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
----------------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Current Directorships: Trustee of The
(08/20/34) (since 2005) Business Consultant, Advisors' Inner Circle Fund II and
Business Projects Inc., Bishop Street Funds. Director of
since 1997. Oregon Transfer Co.
----------------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and
Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
----------------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since Advisors' Inner Circle Fund II and
January 2012. Director Bishop Street Funds. Director of The
of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
----------------------------------------------------------------------------------------------------------------------
S-35
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----------------------------------------------------------------------------------------------------------------------
POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
----------------------------------------------------------------------------------------------------------------------
Mitchell A. Johnson Trustee Retired. Private Current Directorships: Trustee of The
(03/01/42) (since 2005) Investor since 1994. Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
----------------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
----------------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
----------------------------------------------------------------------------------------------------------------------
S-36
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----------------------------------------------------------------------------------------------------------------------
POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
----------------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
----------------------------------------------------------------------------------------------------------------------
George J. Sullivan, Jr. Trustee Retired since January Current Directorships: Trustee/
(11/13/42) (since 1999) 2012. Self-employed Director of State Street Navigator
Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II,
1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
----------------------------------------------------------------------------------------------------------------------
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's
independent registered public accounting firm and whether to terminate this relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence; (iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities; (iv) serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
--------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN FUND COMPLEX)(1,2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Doran None None
--------------------------------------------------------------------------------
Nesher None None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Carlbom None None
--------------------------------------------------------------------------------
Darr None None
--------------------------------------------------------------------------------
Grause None None
--------------------------------------------------------------------------------
Johnson None Over $100,000
--------------------------------------------------------------------------------
Krikorian None None
--------------------------------------------------------------------------------
Speca None None
--------------------------------------------------------------------------------
Storey None None
--------------------------------------------------------------------------------
Sullivan None None
--------------------------------------------------------------------------------
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION FROM THE TRUST
NAME FROM THE TRUST OF FUND EXPENSES RETIREMENT AND FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on (1) board
-------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on (1) board
-------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
-------------------------------------------------------------------------------------------------------------------
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
--------------------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
--------------------------------------------------------------------------------------------------------------------
Michael President Director of Client Service, SEI Investments Company,
Beattie (since 2011) since 2004.
(03/13/65)
--------------------------------------------------------------------------------------------------------------------
Michael Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting since
Lawson Financial Officer July 2005. Manager, SEI Investments, Fund
(10/08/60) (since 2005) Accounting at SEI Investments AVP from April 1995
to February 1998 and November 1998 to July 2005.
--------------------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured Credit
(12/18/62) (since 2006) Fund, LP and SEI Alpha Strategy Portfolios, LP since
June 2007. Chief Compliance Officer of The
Advisors' Inner Circle Fund II, Bishop Street Funds,
SEI Institutional Managed Trust, SEI Asset Allocation
Trust, SEI Institutional International Trust, SEI
Institutional Investments Trust, SEI Daily Income
Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
Adviser Managed Trust and New Covenant Funds.
Chief Compliance Officer of SEI Opportunity Fund,
L.P. until 2010. Director of Investment Product
Management and Development, SEI Investments,
since February 2003; Senior Investment Analyst --
Equity Team, SEI Investments, from March 2000 to
February 2003.
--------------------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of SIMC
(03/28/68) (since 1999) and the Administrator since 1999. Vice President and
Assistant Secretary of SEI Investments since 2001.
Assistant Secretary of SIMC, the Administrator and
the Distributor, and Vice President of the Distributor,
from 1999 to 2003.
--------------------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010. Associate at
Sulzbach (since 2011) Morgan, Lewis & Bockius LLP from 2006 to 2010.
(07/18/77) Associate at Morrison & Foerster LLP from 2003 to
2006. Associate at Stradley Ronon Stevens & Young
LLP from 2002 to 2003.
--------------------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since 2001.
(05/07/71) Secretary General Counsel, SEI Investments Distribution Co.,
(since 2012) since 2004.
--------------------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since 2003.
(8/24/80) (since 2009)
AML Officer
(since 2011)
--------------------------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the
Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
This general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the Regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elect to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which they may be subject. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to be taxable as a RIC, the Fund must distribute at least 90% of their net investment income (which, includes dividends, taxable interest, and the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities, or foreign currencies, or certain other income, including gains from options, futures and forward contracts, derived with respect to its business of investing in such stocks, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership (the "Qualifying Income Test"); (ii) at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount that does not exceed 5% of the value of the Fund's assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of the Fund's assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer or the securities (other than the securities of another RIC) of two or more issuers that the Fund controls and that are engaged in the same, similar or related trades or business, or the securities of one or more qualified publicly traded partnerships (the "Asset Diversification Test"). Although the Fund intends to distribute substantially all of their net investment income and may distribute their capital gains for any taxable year, the Fund will be subject to federal income taxation to the extent any such income or gains are not timely distributed.
If the Fund fails to satisfy the Qualifying Income or Asset Diversification Test requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to qualify for any taxable year as a RIC and these relief provisions are not available, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and such distributions generally will be taxable to shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits. In this event, distributions generally will be eligible for the dividend-received deduction for corporate shareholders and for the lower capital gains rates applicable to qualified dividend income for individual shareholders to the extent they would qualify if the Fund was a regular corporation. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
For taxable years beginning after December 22, 2010, the Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other
late-year losses.
If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. If the Fund fails to distribute in a calendar year at least 98% of its ordinary income for the year and 98.2% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses) for the one-year period ending October 31 of that year (and any retained amount from the prior calendar year on which the Fund paid no federal income tax), the Fund will be subject to a nondeductible 4% federal excise tax on the undistributed amounts. The Fund intends to make sufficient distributions to avoid imposition of this tax, or to retain, at most their net capital gains and pay tax thereon.
DISTRIBUTIONS TO SHAREHOLDERS. Certain distributions from the Fund may qualify as qualified dividend income. Qualified dividend income distributed to an individual is taxable at the lower, long-term capital gains rates. A distribution from the Fund generally qualifies as qualified dividend income to the extent it is designated as such by the Fund and was distributed from dividends received by the Fund from taxable domestic corporations and certain qualified foreign corporations, subject to limitations including holding period limitations, imposed on the Fund and its shareholders. Distributions of dividends to individual shareholders will be taxed as ordinary income except that distributions of qualified dividend income will be taxed at a rate of 20% (lower rates apply to individuals in lower income brackets).
The Fund may derive capital gains and losses in connection with sales or other dispositions of their portfolio of securities. Distributions of net short-term capital gains will be taxable to you as ordinary income. Distributions of net long-term capital gains will be taxable to you as long-term capital gain at a maximum rate of 20%, regardless of how long you have held your shares.
The Fund will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Fund. If you are a taxable investor, you may want to avoid buying shares when the Fund is about to declare a distribution or dividend, because it will be taxable to you even though it may in effect be a return of a portion of your investment.
In the case of corporate shareholders, Fund distributions (other than capital gains distributions) generally qualify for the dividend-received deduction to the extent such distributions are so designated and do not exceed the gross amount of qualifying dividends received by the Fund for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
SALES, EXCHANGES, OR REDEMPTIONS. Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses. In turn, those rules may affect the amount, timing or character of the income distributed to you by the Fund.
With respect to investments in STRIPS, TRs and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, the Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because the Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
The Fund intends to invest in certain MLPs which may be treated as qualified publicly traded partnerships. Income from qualified publicly traded partnerships is qualifying income for purposes of the Qualifying Income Test, but the Fund's investment in one or more of such qualified publicly traded partnerships is limited under the Asset Diversification Test to no more than 25% of the value of the Fund's assets. The Fund will monitor its investment in such qualified publicly traded partnerships in order to ensure compliance with the Asset Diversification Test.
The Fund intends to invest in certain royalty trusts. The taxation of a royalty trust for federal income tax purposes depends on the particular structure used by such trust and may be different from trust to trust. For example, some royalty trusts are taxable for federal income tax purposes as grantor trusts, while others are taxable as corporations for federal income tax purposes. The Fund will monitor its investment in such royalty trusts in order to ensure compliance with both the Asset Diversification Test and the Qualifying Income Test.
There may be uncertainty regarding the Fund's compliance with the Qualifying Income Test because it depends on the amount and character of income it receives. As a result, the Fund may fail to qualify as a RIC in a given tax year in which it fails the Qualifying Income Test or the Asset Diversification Test. See the discussion regarding the consequences of failing to qualify as a RIC above.
If the Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies" or "PFIC," the Fund will be subject to one of the following special tax regimes: (i) the Fund will be liable for federal income tax, and an additional interest charge, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund is able and elect to treat a PFIC as a "qualifying electing fund" or "QEF," the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements
set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the PFIC, whether or not such earnings or gains are distributed to the Fund; or (iii) annually the Fund may be entitled to mark-to-market shares of the PFIC, and in such event, would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
The Fund may invest in REITs. Investments in REIT equity securities may require the Fund to accrue and distribute income not yet received. To generate sufficient cash to make the requisite distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. The Fund's investments in REIT equity securities may at other times result in the Fund's receipt of cash in excess of the REIT's earnings if the Fund distributes these amounts, these distributions could constitute a return of capital to Fund shareholders for federal income tax purposes. Dividends received by the Fund from a REIT generally will not constitute qualified dividend income and will not qualify for the dividends received deduction.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
Under U.S. Treasury regulations, generally, if an individual shareholder recognizes a loss of $2 million or more or a corporate shareholder recognizes a loss of $10 million or more, the shareholder must file with the Internal Revenue Service ("IRS") a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
FOREIGN TAXES. Dividends and interest received by the Fund from an investment in foreign securities may be subject to income, withholding or other taxes imposed by foreign countries and United States possessions that would reduce the yield on such securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors. If more than 50% of the value of the Fund's total assets at the close of its taxable year consists of stock or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that will enable shareholders, in effect, to receive the benefit of the foreign tax credit with respect to any foreign and United States possessions income taxes paid by the Fund. Pursuant to the election, the Fund will treat those taxes as dividends paid to its shareholders. Each shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating the foreign tax credit (subject to significant limitations) against the shareholder's federal income tax. If the Fund makes the election, it will report annually to its shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and United States possessions.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxed to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
The Fund (or its administrative agent) must report to the IRS and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and
indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
In certain cases, the Fund will be required to withhold at a rate of 28% and remit to the United States Treasury, backup withholding on any distributions paid to a shareholder who (1) has failed to provide a correct taxpayer identification number, (2) is subject to backup withholding by the IRS, (3) has not certified to the Fund that such shareholder is not subject to backup withholding, or (4) has failed to certify that he or she is a U.S. citizen or U.S. resident alien.
Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their unrelated business taxable income ("UBTI"). Under current law, the Fund generally serves to block UBTI from being realized by their tax-exempt shareholders. However, notwithstanding the foregoing, the tax-exempt shareholder could realize UBTI by virtue of an investment in the Fund where, for example: (i) the Fund invests in residual interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund invests in a REIT that is a taxable mortgage pool (TMP) or that has a subsidiary that is TMP or that invests in the residual interest of a REMIC, or (iii) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of section 514(b) of the Code. Charitable remainder trusts are subject to special rules and should consult their tax advisor. The IRS has issued guidance with respect to these issues and prospective shareholders, especially charitable remainder trusts, are encouraged to consult with their tax advisors regarding these issues.
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
STATE TAXES. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes. Distributions by the Fund to shareholders and the ownership of shares may be subject to state and local taxes. Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a fund. Investment in Ginnie Mae or Fannie Mae securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for
such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Fund executes transactions in the over-the-counter market, they will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in the best combination of price and execution under the circumstances. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. The Adviser's current policy regarding such allocations is described further below. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
Generally, the Adviser aggregates orders on behalf of its clients when it believes that such aggregation facilitates its duty to seek best execution. If the aggregate order is partially filled, client accounts are allocated the securities on a pro-rata basis, subject to rounding to ensure that each account receives round lots. If a partially filled order results in a client's account receiving a de minimis allocation, the Adviser re-allocates the de minimis amount to other clients' accounts participating in the aggregated order. Such re-allocation is made based on the size of cash positions in the participating clients' accounts, subject to anticipated cash needs and any client instructions regarding cash.
The Adviser considers the following factors when determining which client accounts will participate in an IPO or secondary offering of securities: 1) investment objectives, policies and time horizons of a particular account; 2) availability of cash in the account; and 3) number of shares allotted from the underwriter. For client accounts that meet the above criteria, the Adviser generally allocates the shares pro rata across all such accounts, subject to an account having sufficient cash available and rounding to ensure each account receives round lots. The Adviser frequently receives small allotments of an IPO or secondary offering from underwriters that does not allow for meaningful allocations to all participating client accounts. On each occasion where the Adviser receives a small IPO or secondary offering allotment, the Adviser allocates the shares randomly to one or more participating client accounts. The Adviser makes exceptions to its general allocation policy, as long as such exceptions are determined by it to be equitable.
For the fiscal year ended October 31, 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
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FUND AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
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2012(1)
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Thomson Horstmann & Bryant MicroCap Fund $3,835
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(1) Represents the period between March 30, 2012 (commencement of Fund operations) and October 31, 2012.
BROKERAGE SELECTION. The Adviser selects brokers based on their ability to provide the best combination of price and execution on client transactions, under the circumstances. The factors considered in making this determination include: 1) price, 2) commissions, 3) liquidity, 4) promptness and reliability of execution, 5) confidentiality, 6) the ability of the broker to accommodate step-out trades, and 7) access to IPO's and other offerings. The Adviser also considers the quality and quantity of research services that brokers provide such as research reports on companies and industries and economic and financial data. The Adviser is not obligated to select the broker with the lowest available commission rate.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in
connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance, and other reports or analysis, such as financial news, forensic accounting research, data services, portfolio attribution data, corporate insider buying/selling data, historical stock level analytics, and portfolio optimization systems. The amount of soft dollar benefits received depends on the amount of brokerage transactions effected with the brokers. A conflict of interest exists because there is an incentive to: 1) cause clients to pay a higher commission than the firm might otherwise be able to negotiate; 2) cause clients to engage in more securities transactions than would otherwise be optimal; and 3) only recommend brokers that provide soft dollar benefits.
If the Adviser believes it is in the overall best interests of its clients, the Adviser executes transactions through brokers who charge commissions that are higher than commissions charged by brokers who do not provide the soft dollar benefits described above. The Adviser does not allocate soft dollar benefits to client accounts proportionately to the amount of soft dollar credits generated, if any, in the account. In addition, the Adviser uses soft dollar benefits to service all of its client accounts; however, soft dollar benefits may not be equally useful and valuable in managing the account of a given client. Certain products or services obtained with soft dollars also provide administrative assistance to the Adviser. The Adviser estimates the portion of the use that is for administrative purposes and pays for that portion of the cost in cash. A conflict of interest exists in making this determination since there is an incentive to designate a small amount of the cost as administrative in order to minimize the portion that the Adviser must pay directly with cash. The Adviser has policies and procedures to address the conflicts of interest associated with its brokerage practices. The Adviser periodically reviews the quality of the brokers used and evaluates the overall reasonableness of brokerage commissions paid on client transactions.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal period between March 30, 2012 (commencement of Fund operations) and October 31, 2012, the Fund paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR AMOUNT OF TRANSACTIONS
TOTAL DOLLAR AMOUNT OF BROKERAGE INVOLVING BROKERAGE COMMISSIONS FOR
FUND COMMISSIONS FOR RESEARCH SERVICES RESEARCH SERVICES
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Thomson Horstmann & $309 $170,353
Bryant MicroCap Fund
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BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Fund, the Adviser or the Distributor for a commission in conformity with the 1940
Act, the 1934 Act and rules promulgated by the SEC. These rules require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal period between March 30, 2012 (commencement of Fund operations) and October 31, 2012, the Fund did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. The Fund did not hold any securities of "regular brokers or dealers" during the fiscal period between March 30, 2012 (commencement of Fund operations) and October 31, 2012.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the greater of the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Fund may invest since such contracts generally have remaining maturities of less than one-year. The Fund may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover. For the fiscal year ended October 31, 2012, the Fund's portfolio turnover rate was as follows:
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PORTFOLIO TURNOVER RATE
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FUND 2012(1)
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Thomson Horstmann & Bryant MicroCap Fund 17%
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(1) Represents the period between March 30, 2012 (commencement of Fund operations) and October 31, 2012.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Fund's shareholders, on the one hand, and those of the Fund's Adviser, principal underwriter or any affiliated person of the Fund, its Adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer (the "Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person reports at least quarterly to the Board regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31 and October 31). The Fund discloses a complete schedule of investments in each Semi-Annual Report and Annual Report to Fund shareholders or, following the first and third fiscal quarters, in quarterly holdings reports filed with the SEC on Form N-Q. Semi-Annual and Annual Reports are distributed to Fund shareholders. Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders, but are available, free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV. In addition, the Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that
each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://aicfundholdings.com/THB. This information will generally remain available until it is replaced by new portfolio holdings information as described above.
The Fund's policies and procedures provide that the Authorized Persons, may authorize disclosure of portfolio holdings information to third parties at differing times and/or with different lag times then the information posted to the internet; provided that the recipient is, either by contractual agreement or otherwise by law, (i) required to maintain the confidentiality of the information and (ii) prohibited from using the information to facilitate or assist in any securities transactions or investment program. No compensation or other consideration is paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information. The Fund will review a third party's request for portfolio holdings information to determine whether the third party has legitimate business objectives in requesting such information.
The Trust's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
In addition, the Fund's service providers, such as the Custodian, Administrator and Transfer Agent, may receive portfolio holdings information as frequently as daily in connection with their services to the Fund. In addition to any contractual provisions relating to confidentiality of information that may be included in the service providers contract with the Trust, these arrangements impose obligations on the Fund's service providers that would prohibit them from disclosing or trading on the Fund's non-public information. Financial printers and pricing information vendors may receive portfolio holdings information, as necessary, in connection with their services to the Fund.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or class of shares. All consideration received by the Trust for shares of any additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Fund's shares, when issued, are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the Trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-855-THB-FUND; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
CODE OF ETHICS
The Board on behalf of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Administrator and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to engage in personal securities transactions, but are required to report their personal securities transactions for monitoring purposes. Access Persons are permitted to engage in personal securities transactions in securities that are held by the Fund, subject to certain restrictions. In addition, certain Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of the Trust and Distributor Codes of Ethics are on file with the SEC, and are available to the public.
The Adviser has adopted Codes of Ethics pursuant to Rule 17j-1 that applies to the access persons of the Adviser ("Adviser Access Persons"). Under the Adviser's Code of Ethics, Adviser Access Persons are permitted to engage in personal securities transactions, in the same securities or related securities, (e.g., warrants, options, or futures) for their own accounts that the Adviser recommends and invests in for clients, including the Fund. Further, the Adviser's employees can transact in a security for their own accounts at or about the same time that the Adviser recommends or invests in that same security for a client. The Adviser places restrictions on employee personal securities transactions including: 1) pre-approval for transactions in U.S. dollar denominated domestic equity securities with market capitalizations under $700 million at the time of purchase and/or for securities in which the firm has beneficial ownership on behalf of its clients of greater than 8%; 2) prohibitions from executing a securities transaction at a better price than a client receives on that day; and 3) restrictions on short-term trading in U.S. dollar denominated domestic equity securities with market capitalizations under $1.5 billion at the time of purchase. The Adviser prohibits employees from benefiting from transactions placed on behalf of advisory accounts. Adviser Access Persons are required to report certain of their personal securities transactions for monitoring purposes. In addition, Adviser Access Persons may be required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. A copy of the Adviser's Code of Ethics is on file with the SEC, and is available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Fund. The Fund believes that most of the shares referred to below were held by the persons listed below in accounts for their fiduciary, agency or custodial customers. Any shareholder listed below as owning of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to "control" the Fund within the meaning of the 1940 Act. Shareholders controlling the Fund may have a significant impact on any shareholder vote of the Fund.
---------------------------------------------------------------------------------------------------------- THOMSON HORSTMANN & BRYANT MICROCAP FUND-- INVESTOR CLASS SHARES ---------------------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS ---------------------------------------------------------------------------------------------------------- RICHARD W POOLEY 8,771.9300 49.66% 32 COOPER HILL RD RIDGEFIELD, CT 06877-5904 ---------------------------------------------------------------------------------------------------------- THOMSON HORSTMANN & BRYANT INC 5,036.6170 28.52% 501 MERRITT 7 STE 5 NORWALK, CT 06851-7002 ---------------------------------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 2,294.8310 12.99% SPECIAL CUSTODY A/C FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 ---------------------------------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 1,539.3230 8.72% FOR THE EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN MUTUAL FUNDS DEPT FL 4 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- THOMSON HORSTMANN & BRYANT MICROCAP FUND-- INSTITUTIONAL CLASS SHARES ---------------------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS ---------------------------------------------------------------------------------------------------------- KAREN JOHNSON FAMILY INVESTMENTS 50,415.6430 35.32% PARTNERSHIP 5020 COLLINWOOD AVE STW 300 FORT WORTH, TX 76107-3664 ---------------------------------------------------------------------------------------------------------- KATHERINE OUDT FAMILY INVESTMENTS 50,415.6430 35.32% PARTNERSHIP 5020 COLLINWOOD AVE STE 300 FORT WORTH, TX 76107-3664 ---------------------------------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 29,691.9310 20.80% FOR THE EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN MUTUAL FUNDS DEPT FL 4 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 ---------------------------------------------------------------------------------------------------------- THOMAS A DICKINSON 7,162.0410 5.02% 3255 N COTTONWOOD LN PROVO, UT 84604-4499 ---------------------------------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and indicates
that the degree of safety regarding timely payment is strong. Those issues
determined to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
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- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
- Well-established access to a range of financial markets and assured sources of alternate liquidity.
The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S SHORT-TERM MIG/VMIG RATINGS - US TAX-EXEMPT MUNICIPALS. There are four rating categories for short-term obligations that define an investment grade situation. These are designated Moody's Investment Grade as MIG 1 (best quality) through MIG 4 (adequate quality). Short-term obligations of speculative quality are designated SG.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents an evaluation of the degree of risk associated with scheduled principal and interest payments, and the other represents an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
Issues that are subject to a periodic reoffer and resale in the secondary market in a "dutch auction" are assigned a long-term rating based only on Moody's assessment of the ability and willingness of the issuer to make timely principal and interest payments. Moody's expresses no opinion as to the ability of the holder to sell the security in a secondary market "dutch auction." Such issues are identified by the insertion of the words "dutch auction" into the name of the issue.
Issues or the features associated with MIG or VMIG ratings are identified by date of issue, date of maturity or maturities or rating expiration date and description to distinguish each rating from other ratings. Each rating designation is unique with no implication as to any other similar issue of the same obligor. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection by
established cash flows, superior liquidity support or demonstrated broad-
based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded as
required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
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An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined to
possess a very strong capacity to pay a debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
BAA Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for Bank Deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by actions of the government controlling the currency of denomination. In addition, risks associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer's branch is located are not incorporated into Moody's short-term debt ratings.
Moody's makes no representation that rated bank or insurance company obligations are exempt from the registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within the parenthesis beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B --PROXY VOTING POLICIES AND PROCEDURES
PROXY VOTING POLICIES AND PROCEDURES
At Thomson Horstmann & Bryant Inc (THB), we consider proxy voting to be an important responsibility. THB has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of our clients. In accordance with SEC Rule 206(4)-6 we are required to describe our proxy voting procedures for our clients. THB votes proxies presented to us on behalf of all clients unless we are specifically requested not to.
EXECUTIVE COMPENSATION: THB votes to encourage reasonable compensation of executives, and particularly, compensation that is linked to financial performance. THB votes against stock option and incentive plans that are excessive and inconsistent with a company's overall financial situation.
BOARD OF DIRECTORS: THB will generally vote against a proposal to stagger the length of director's terms.
AUDITORS: THB will generally vote to ratify management's recommendation and selection of auditors.
CORPORATE ACTIONS: THB looks at all mergers and other corporate actions on a case-by-case basis. We evaluate mergers by looking at the financial impact on our investment.
UNUSUAL ITEMS: Companies use various mechanisms to deter attempted takeovers. THB evaluates these situations on a case-by-case basis. However, THB generally votes to discourage the use of these mechanisms such as two classes of stock with different voting rights.
ROUTINE ITEMS: THB supports management proposals on routine items. Any officer of THB can approve voting on routine items.
CLIENT REQUESTS FOR INFORMATION: In response to any request THB will prepare a written response to the client with the information requested.
CONFLICTS OF INTEREST: If a material conflict of interest exists, THB will disclose the conflict to the affected clients, to give the clients an opportunity to vote the proxies themselves, or to address the voting issue through other objective means such as voting in a manner consistent with a predetermined voting policy or receiving an independent third party voting recommendation.
RECORDKEEPING: THB shall retain the following proxy records in accordance with the SEC's retention requirement.
o These policies and procedures and any amendments;
o Each proxy statement that THB receives;
o A record of each vote that THB casts;
o Any document THB created that was material to making a decision how to vote proxies, or that memorializes that decision;
o A copy of each written request from a client for information on how THB voted such client's proxies, and a copy of any written response.
STATEMENT OF ADDITIONAL INFORMATION
TS&W EQUITY PORTFOLIO
TS&W FIXED INCOME PORTFOLIO
EACH, A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
THOMPSON, SIEGEL & WALMSLEY LLC
This Statement of Additional Information ("SAI") is not a prospectus. It is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the TS&W Equity Portfolio and the TS&W Fixed Income Portfolio (each a "Fund" and collectively, the "Funds"). This SAI is incorporated by reference into and should be read in conjunction with the Funds' prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Funds for the fiscal year ended October 31, 2012, including notes thereto and the report of PricewaterhouseCoopers LLP thereon, as contained in the 2012 Annual Report to Shareholders, are herein incorporated by reference into and deemed to be part of this SAI. A copy of the Funds' 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Funds' prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9009 or by calling the Funds at 1-866-4TSW-FUN.
TABLE OF CONTENTS
THE TRUST ......................................................... S-1 DESCRIPTION OF PERMITTED INVESTMENTS .............................. S-2 INVESTMENT POLICIES OF THE FUNDS .................................. S-28 INVESTMENT ADVISORY AND OTHER SERVICES ............................ S-30 PORTFOLIO MANAGERS ................................................ S-31 THE ADMINISTRATOR ................................................. S-32 THE DISTRIBUTOR ................................................... S-33 PAYMENTS TO FINANCIAL INTERMEDIARIES .............................. S-34 TRANSFER AGENT .................................................... S-34 CUSTODIAN ......................................................... S-34 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ..................... S-34 LEGAL COUNSEL ..................................................... S-35 TRUSTEES AND OFFICERS OF THE TRUST ................................ S-35 PURCHASING AND REDEEMING SHARES ................................... S-44 DETERMINATION OF NET ASSET VALUE .................................. S-45 TAXES ............................................................. S-45 BROKERAGE ALLOCATION AND OTHER PRACTICES .......................... S-50 PORTFOLIO HOLDINGS ................................................ S-53 DESCRIPTION OF SHARES ............................................. S-54 SHAREHOLDER LIABILITY ............................................. S-54 LIMITATION OF TRUSTEES' LIABILITY ................................. S-55 PROXY VOTING ...................................................... S-55 CODES OF ETHICS ................................................... S-55 5% AND 25% SHAREHOLDERS ........................................... S-55 APPENDIX A -- DESCRIPTION OF RATINGS .............................. A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ................ B-1 |
March 1, 2013
THE TRUST
GENERAL. Each Fund is a separate series of the Trust. The Trust is an open-end
investment management company established under Massachusetts law as a
Massachusetts voluntary association (commonly known as a business trust) under
a Declaration of Trust dated July 18, 1991, as amended and restated February
18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust
to offer separate series ("funds") of shares of beneficial interest ("shares").
The Trust reserves the right to create and issue shares of additional funds.
Each fund is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. All consideration received by the
Trust for shares of any fund and all assets of such fund belong solely to that
fund and would be subject to liabilities related thereto. Each Fund pays its
(i) operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses, and (ii) pro rata
share of the Fund's other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the
assets of that fund. Expenses not attributable to a specific fund are allocated
across all of the funds on the basis of relative net assets. The other funds
of the Trust are described in one or more separate Statements of Additional
Information. The Trust reserves the right to create and issue additional
classes of shares.
HISTORY OF THE FUNDS. The TS&W Equity Portfolio is the successor to the UAM Funds, Inc. TS&W Equity Portfolio (the "Predecessor Equity Fund"). The TS&W Fixed Income Portfolio is the successor to the UAM Funds, Inc. TS&W Fixed Income Portfolio (the "Predecessor Fixed Income Fund" and, together with the Predecessor Equity Portfolio, the "Predecessor Funds"). The Predecessor Funds were managed by Thompson, Siegel & Walmsley LLC ("TS&W" or the "Adviser") using the same investment objectives, strategies, policies and restrictions as those of the Funds. The date of inception of the Predecessor Funds was July 17, 1992. The Predecessor Equity Fund and the Predecessor Fixed Income Fund dissolved and reorganized into the TS&W Equity Portfolio and the TS&W Fixed Income Portfolio, respectively, on June 24, 2002. All of the assets and liabilities of each Predecessor Fund were transferred to its successor in connection with the Funds' commencement of operations on June 24, 2002.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. Each Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate each Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
WHAT INVESTMENT STRATEGIES MAY THE FUNDS USE?
Each Fund's investment objectives and principal investment strategies are described in the prospectus. Each Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below. The following information supplements, and should be read in conjunction with, the prospectus.
DEBT SECURITIES
Corporations and governments use debt securities to borrow money from investors. Most debt securities promise a variable or fixed rate of return and repayment of the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest and are purchased at a discount from their face value.
TYPES OF DEBT SECURITIES:
U.S. GOVERNMENT SECURITIES -- Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation ("Farmer Mac").
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two
companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
CORPORATE BONDS - Corporations issue bonds and notes to raise money for working capital or for capital expenditures such as plant construction, equipment purchases and expansion. In return for the money loaned to the corporation by investors, the corporation promises to pay investors interest, and repay the principal amount of the bond or note.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests in pools of mortgage loans that various governmental, government-related and private organizations assemble as securities for sale to investors. Unlike most debt securities, which pay interest periodically and repay principal at maturity or on specified call dates, mortgage-backed securities make monthly payments that consist of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Since homeowners usually have the option of paying either part or all of the loan balance before maturity, the effective maturity of a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may insure or guarantee the timely payment of interest and principal of these pools through various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The Adviser will consider such insurance and guarantees and the creditworthiness of the issuers thereof in determining whether a mortgage-related security meets its investment quality standards. It is possible that the private insurers or guarantors will not meet their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
GINNIE MAE -- Ginnie Mae is the principal governmental guarantor of mortgage-related securities. Ginnie Mae is a wholly-owned corporation of the U.S. government within the Department of Housing and Urban Development. Securities issued by Ginnie Mae are treasury securities, which means the full faith and credit of the U.S. government backs them. Ginnie Mae guarantees the timely payment of principal and interest on securities issued by institutions approved by Ginnie Mae and backed by pools of FHA-insured or VA-guaranteed mortgages. Ginnie Mae does not guarantee the market value or yield of mortgage-backed securities or the value of a Fund's shares. To buy Ginnie Mae securities, a Fund may have to pay a premium over the maturity value of the underlying mortgages, which the Fund may lose if prepayment occurs.
FANNIE MAE -- Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. Fannie Mae is regulated by the Secretary of Housing and Urban Development. Fannie Mae purchases conventional mortgages from a list of approved sellers and service providers, including state and federally-chartered savings and
loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Securities issued by Fannie Mae are agency securities, which means Fannie Mae, but not the U.S. government, guarantees their timely payment of principal and interest.
FREDDIE MAC -- Freddie Mac is stockholder-owned corporation established by the U.S. Congress to create a continuous flow of funds to mortgage lenders. Freddie Mac supplies lenders with the money to make mortgages and packages the mortgages into marketable securities. The system is designed to create a stable mortgage credit system and reduce the rates paid by homebuyers. Freddie Mac, not the U.S. government, guarantees timely payment of principal and interest.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS - Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional mortgage loans. In addition to guaranteeing the mortgage-related security, such issuers may service and/or have originated the underlying mortgage loans. Pools created by these issuers generally offer a higher rate of interest than pools created by Ginnie Mae, Fannie Mae and Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES -- Yield characteristics of mortgage-backed securities differ from those of traditional debt securities in a variety of ways. The most significant differences of mortgage-backed securities are:
o payments of interest and principal are more frequent (usually monthly); and
o falling interest rates generally cause individual borrowers to pay off their mortgage earlier than expected, which results in prepayments of principal on the securities, thus forcing a Fund to reinvest the money at a lower interest rate.
In addition to risks associated with changes in interest rates described in "Factors Affecting the Value of Debt Securities," a variety of economic, geographic, social and other factors, such as the sale of the underlying property, refinancing or foreclosure, can cause investors to repay the loans underlying a mortgage-backed security sooner than expected. If the prepayment rates increase, a Fund may have to reinvest its principal at a rate of interest that is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a broad range of assets other than mortgages, such as automobile loans, computer leases and credit card receivables. Like mortgage-backed securities, these securities are pass-through. In general, the collateral supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments with interest rate fluctuations, but may still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may not have the benefit of any security interest in the related assets, which raises the possibility that recoveries on repossessed collateral may not be available to support payments on these securities. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which allow debtors to reduce their balances by offsetting certain amounts owed on the credit cards. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Due to the quantity of vehicles involved and requirements under state laws, asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make payments, the entity administering the pool of assets may agree to ensure the receipt of payments on the underlying pool occurs in a timely fashion ("liquidity protection"). In addition, asset-backed securities may obtain insurance, such as guarantees, policies or
letters of credit obtained by the issuer or sponsor from third parties, for some or all of the assets in the pool ("credit support"). Delinquency or loss more than that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
The Funds may also invest in residual interests in asset-backed securities, which consist of the excess cash flow remaining after making required payments on the securities and paying related administrative expenses. The amount of residual cash flow resulting from a particular issue of asset-backed securities depends in part on the characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of administrative expenses and the actual prepayment experience on the underlying assets.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") -- CMOs are hybrids between mortgage-backed bonds and mortgage pass-through securities. Similar to a bond, CMOs usually pay interest and prepay principal monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed securities guaranteed by GNMA, Freddie Mac, or FNMA and their income streams more typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code of 1986, as amended (the "Code") and invests in certain mortgages primarily secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated maturity. Each class of CMO or REMIC certificate, often referred to as a "tranche," is issued at a specific interest rate and must be fully retired by its final distribution date. Generally, all classes of CMOs or REMIC certificates pay or accrue interest monthly. Investing in the lowest tranche of CMO or REMIC certificates involves risks similar to those associated with investing in equity securities.
SHORT-TERM INVESTMENTS - To earn a return on uninvested assets, meet anticipated redemptions, or for temporary defensive purposes, a Fund may invest a portion of its assets in the short-term securities listed below, U.S. government securities and investment-grade corporate debt securities. Unless otherwise specified, a short-term debt security has a maturity of one year or less.
BANK OBLIGATIONS - The Funds will only invest in a security issued by a commercial bank if the bank:
o has total assets of at least $1 billion, or the equivalent in other currencies (based on the most recent publicly available information about the bank); and
o is a U.S. bank and a member of the Federal Deposit Insurance Corporation; or
o is a foreign branch of a U.S. bank and the Adviser believes the security is of an investment quality comparable with other debt securities that the Funds may purchase.
TIME DEPOSITS - Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation. The Funds may only purchase time deposits maturing from two business days through seven calendar days.
CERTIFICATES OF DEPOSIT - Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or savings and loan association for a definite period of time and earning a specified return.
BANKERS' ACCEPTANCE - A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods).
COMMERCIAL PAPER - Commercial paper is a short-term obligation with a maturity ranging from 1 to 270 days issued by banks, corporations and other borrowers. Such investments are unsecured and usually discounted. The
Funds may invest in commercial paper rated A-1 or A-2 by Standard and Poor's Ratings Services ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service ("Moody's"), or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated A or better by Moody's or by S&P. See "Appendix A - Ratings" for a description of commercial paper ratings.
YANKEE BONDS - Yankee bonds are dollar-denominated bonds issued inside the United States by foreign entities. Investments in these securities involve certain risks that are not typically associated with investing in domestic securities. See "Foreign Securities."
ZERO COUPON BONDS - These securities make no periodic payments of interest, but instead are sold at a discount from their face value. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. The market value of zero coupon securities may exhibit greater price volatility than ordinary debt securities because a stripped security will have a longer duration than an ordinary debt security with the same maturity. A Fund's investments in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of its Fund securities to generate sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once the
holder of the security has stripped or separated corpus and coupons, it may
sell each component separately. The principal or corpus is then sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of
the owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities," a Fund may record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
TERMS TO UNDERSTAND:
MATURITY - Every debt security has a stated maturity date when the issuer must repay the amount it borrowed (principal) from investors. Some debt securities, however, are callable, meaning the issuer can repay the principal earlier, on or after specified dates (call dates). Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, similar to a homeowner refinancing a mortgage. The effective maturity of a debt security is usually its nearest call date.
Mutual funds that invest in debt securities have no real maturity. Instead, they calculate their weighted average maturity. This number is an average of the effective or anticipated maturity of each debt security held by the mutual fund, with the maturity of each security weighted by the percentage of the assets of the mutual fund it represents.
DURATION - Duration is a calculation that seeks to measure the price sensitivity of a debt security, or of a mutual fund that invests in debt securities, to changes in interest rates. It measures sensitivity more accurately than maturity because it takes into account the time value of cash flows generated over the life of a debt security. Future interest payments and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value expressed in years -- the duration.
Effective duration takes into account call features and sinking fund prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1% reduction in interest rates at all maturity levels, the price of a security is estimated to increase by 4%. An increase in rates by the same magnitude is estimated to reduce the price of the security by 4%. By knowing the yield and the effective duration of a debt security, one can estimate total return based on an expectation of how much interest rates, in general, will change. While serving as a good estimator of prospective returns, effective duration is an imperfect measure.
INFLATION-PROTECTED OBLIGATIONS ("TIPS") - The Fixed Income Portfolio may invest in inflation-protected public obligations of major governments and emerging market countries, commonly known as TIPS. TIPS are a type of security issued by a government that are designed to provide inflation protection to investors. TIPS are income-generating instruments whose interest and principal payments are adjusted for inflation - a sustained increase in prices that erodes the purchasing power of money. The inflation adjustment, which is typically applied monthly to the principal of the bond, follows a designated inflation index, such as the Consumer Price Index. A fixed coupon rate is applied to the inflation-adjusted principal so that as inflation rises or falls, both the principal value and the interest payments will increase or decrease. This can provide investors with a hedge against inflation, as it helps preserve the purchasing power of an investment. Because of this inflation adjustment feature, inflation-protected bonds typically have lower yields than conventional fixed-rate bonds.
FACTORS AFFECTING THE VALUE OF DEBT SECURITIES - The total return of a debt instrument is composed of two elements: the percentage change in the security's price and interest income earned. The yield to maturity of a debt security estimates its total return only if the price of the debt security remains unchanged during the holding period and coupon interest is reinvested at the same yield to maturity. The total return of a debt instrument, therefore, will be determined not only by how much interest is earned, but also by how much the price of the security and interest rates change.
o INTEREST RATES
The price of a debt security generally moves in the opposite direction from interest rates (i.e., if interest rates go up, the value of the bond will go down, and vice versa).
o PREPAYMENT RISK
This risk affects mainly mortgage-backed securities. Unlike other debt securities, falling interest rates can adversely affect the value of mortgage-backed securities, which may cause your share price to fall. Lower rates motivate borrowers to pay off the instruments underlying mortgage-backed and asset-backed securities earlier than expected, resulting in prepayments on the securities. A Fund may then have to reinvest the proceeds from such prepayments at lower interest rates, which can reduce its yield. The unexpected timing of mortgage and asset-backed prepayments caused by the variations in interest rates may also shorten or lengthen the average maturity of a Fund. If left unattended, drifts in the average maturity of a Fund can have the unintended effect of increasing or reducing the effective duration of the Fund, which may adversely affect the expected performance of that Fund.
o EXTENSION RISK
The other side of prepayment risk occurs when interest rates are rising. Rising interest rates can cause a Fund's average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This would increase the sensitivity of the Fund to rising rates and its potential for price declines. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. For these reasons, mortgage-backed securities may be less effective than other types of U.S. government securities as a means of "locking in" interest rates.
o CREDIT RATING
Coupon interest is offered to investors of debt securities as compensation for assuming risk, although short-term treasury securities, such as three-month treasury bills, are considered "risk free." Corporate securities offer higher yields than treasury securities because their payment of interest and complete repayment of principal is less certain. The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risks that the issuer will fail to pay interest and return principal. To compensate investors for taking on increased risk, issuers with lower credit ratings usually offer their investors a higher "risk premium" in the form of higher interest rates than those available from comparable treasury securities.
Changes in investor confidence regarding the certainty of interest and principal payments of a corporate debt security will result in an adjustment to this "risk premium." Since an issuer's outstanding debt carries a fixed coupon, adjustments to the risk premium must occur in the price, which affects the yield to maturity of the bond. If an issuer defaults or becomes unable to honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency is called investment-grade because its issuer is more likely to pay interest and repay principal than an issuer of a lower rated bond. Adverse economic conditions or changing circumstances, however, may weaken the capacity of the issuer to pay interest and repay principal. If a security is not rated or is rated under a different system, the Adviser may determine that it is of investment-grade. The Adviser may retain securities that are downgraded, if it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. A corporation may issue a junk bond because of a corporate restructuring or other similar event. Compared with investment-grade bonds, junk bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business condition of the corporation issuing these securities influences their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause a Fund to experience sudden and substantial price declines. A lack of reliable, objective data or market quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based primarily on the rating agency's assessment of the issuer's financial strength. The Funds currently use ratings compiled by Moody's, S&P, and Fitch, Inc. Credit ratings are only an agency's opinion, not an absolute standard of quality, and they do not reflect an evaluation of market risk. The section "Appendix A - Ratings" contains further information concerning the ratings of certain rating agencies and their significance.
The Adviser may use ratings produced by ratings agencies as guidelines to determine the rating of a security at the time a Fund buys it. A rating agency may change its credit ratings at any time. The Adviser monitors the rating of the security and will take such action, if any, it believes appropriate when it learns that a rating agency has reduced the security's rating. The Funds are not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded below the above stated ratings.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a bond, or an underlying economic factor, such as an interest rate or a market benchmark, such as an index. Investors can use derivatives to gain exposure to various markets in a cost efficient manner, to reduce transaction costs, alter duration or to remain fully invested. They may also invest in derivatives to protect it from broad fluctuations in market prices, interest rates or foreign currency exchange rates. Investing in derivatives for these purposes is
known as "hedging." When hedging is successful, a Fund will have offset any depreciation in the value of its Fund securities by the appreciation in the value of the derivative position. Although techniques other than the sale and purchase of derivatives could be used to control the exposure of a Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure. To the extent that a Fund engages in hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by a Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a Fund, if the Fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements and interpretations of the SEC and its staff.
As a result of recent amendments to rules under the Commodity Exchange Act ("CEA") by the Commodity Futures Trading Commission ("CFTC"), a Fund must either operate within certain guidelines and restrictions with respect to the Fund's use of futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a "commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Funds, has claimed an exclusion from the definition of the term CPO under the CEA and, therefore, the Funds are not subject to registration or regulation as CPOs under the CEA. As a result, the Funds will operate within certain guidelines and restrictions with respect to their use of futures, options on such futures, commodity options and certain swaps.
TYPES OF DERIVATIVES:
FUTURES - A futures contract is an agreement between two parties whereby one party sells and the other party agrees to buy a specified amount of a financial instrument at an agreed upon price and time. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Agreeing to buy the underlying financial information is called buying a futures contract or taking a long position in the contract. Likewise, agreeing to sell the underlying financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading and regulated by the CFTC. These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay for or deliver the underlying financial instrument until some future date (the delivery date). Contract markets require both the purchaser and seller to deposit "initial margin" with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a percentage of the contract's value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a party's position declines, that party must make additional "variation margin" payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract call for the actual delivery of and payment for the underlying security, in many cases the parties may close the contract early by taking an opposite position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing
out the contract will realize a loss. If the sale price upon closing out the contract is more than the original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
A Fund may incur commission expenses when it opens or closes a futures position.
OPTIONS - An option is a contract between two parties for the purchase and sale of a financial instrument for a specified price (known as the "strike price" or "exercise price") at any time during the option period. Unlike a futures contract, an option grants a right (not an obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a "call" (the right to buy the security) or a "put" (the right to sell the security). Options have various types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements between the parties (over-the-counter or "OTC options"). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to the risk that the counterparty will not fulfill its obligations under the contract.
o PURCHASING PUT AND CALL OPTIONS
When a Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the "option premium"). A Fund may purchase put options to offset or hedge against a decline in the market value of its securities ("protective puts") or to benefit from a decline in the price of securities that it does not own. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that a Fund obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. A Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or wants to buy. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, a Fund would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When a Fund writes a call option it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. Similarly, when a Fund writes a put option it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. A Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an over-the-counter option by entering into an offsetting transaction with the counterparty to the option.
A Fund could try to hedge against an increase in the value of securities it would like to acquire by writing a put option on those securities. If security prices rise, a Fund would expect the put option to expire and the premium it received to offset the increase in the security's value. If security prices remain the same over time, the Funds would hope to profit by closing out the put option at a lower price. If security prices fall, a Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. A Fund could try to hedge against a decline in the value of securities it already owns by writing a call option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the security's value. However, a Fund must be prepared to deliver the underlying instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Funds are permitted only to write covered options. At the time of selling the call option, the Funds may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying security without additional consideration), index, interest rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser exercise price;
o A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
o In the case of an index, the portfolio of securities that corresponds to the index.
At the time of selling a put option, a Fund may cover the put option by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
o Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or liquid securities in an amount equal to the difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position for the writer
of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
A Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. A Fund may buy a put option on a futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. A Fund may buy call options on futures contracts for the same purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
A Fund may write a call option on a futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost to the Fund.
o COMBINED POSITIONS
A Fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, a Fund could construct a combined position whose risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, a Fund could write a call option at one strike price and buy a call option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
o FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount).
o Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures contracts which are traded only on exchanges regulated by the CFTC.
o Do not require an initial margin deposit.
o May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities exchange.
FOREIGN CURRENCY HEDGING STRATEGIES - A "settlement hedge" or "transaction hedge" is designed to protect a Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. A Fund may also use forward contracts to purchase or sell a foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
A Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. A Fund could also hedge the position by selling another currency expected to perform similarly to the currency in which a Fund's investment is denominated. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that a Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can achieve at some future point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the increase in value of such currency.
A Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross hedging transactions also involve the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, a Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount of foreign currency it is obligated to deliver. Conversely, a Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency it is obligated to deliver.
To the extent a Fund engages in foreign currency hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
SWAPS, CAPS, COLLARS AND FLOORS
SWAP AGREEMENTS - A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of a Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from a Fund. If a swap agreement calls for payments by a Fund, the Fund must be prepared to make such payments when due. In addition, if the counter-party's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. A Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counterparty is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, a Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a Fund's gains or losses. In order to reduce the risk associated with leveraging, a Fund may cover its current obligations under swap agreements according to guidelines established by the U.S. Securities and Exchange Commission ("SEC"). If a Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can
gain exposure to stocks making up the index of securities without actually
purchasing those stocks. Equity index swaps involve not only the risk
associated with investment in the securities represented in the index, but also
the risk that the performance of such securities, including dividends, will not
exceed the return on the interest rate that the Fund will be committed to pay.
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are "fixed-for floating rate swaps," "termed basis swaps" and "index amortizing swaps." Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if a Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, a Fund may have to pay more money than it receives. Similarly, if a Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, a Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. A Fund may enter into a currency swap when it has one currency and desires a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate
of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
CAPS, COLLARS AND FLOORS - Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance of a Fund than if it had not entered into any derivatives transactions. Derivatives may magnify a Fund's gains or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities a Fund holds or intends to acquire should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose a Fund to greater risks.
CORRELATION OF PRICES - A Fund's ability to hedge its securities through derivatives depends on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities a Fund is hedging may not move in the same amount, or even in the same direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if a Fund's prediction of interest and currency rates, market value, volatility or other economic factors is incorrect, a Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that may cause such a divergence:
o current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
o a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments of a Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect a Fund against a price decline resulting from deterioration in the issuer's creditworthiness. Because the value of a Fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of a Fund's investments precisely over time.
LACK OF LIQUIDITY - Before a futures contract or option is exercised or expires, a Fund can terminate it only by entering into a closing purchase or sale transaction. Moreover, a Fund may close out a futures contract only on the exchange the contract was initially traded. Although a Fund intends to purchase options and futures only where there appears to be an active market, there is no guarantee that such a liquid market will exist. If there is no secondary market for the contract, or the market is illiquid, a Fund may not be able to close out its position. In an illiquid market, a Fund may:
o have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an exchange;
o the facilities of the exchange may not be adequate to handle current trading volume;
o equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
o investors may lose interest in a particular derivative or category of derivatives.
MANAGEMENT RISK - If the Adviser incorrectly predicts stock market and interest rate trends, a Fund may lose money by investing in derivatives. For example, if a Fund were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, a Fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if a Fund were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, a Fund could be required to purchase the security upon exercise at a price higher than the current market price.
PRICING RISK - At times, market conditions might make it hard to value some investments. For example, if a Fund has valued its securities too high, you may end up paying too much for Fund shares when you buy into the Fund. If a Fund underestimates its price, you may not receive the full market value for your Fund shares when you sell.
MARGIN - Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to a Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, a Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily margin requirement. A Fund may lose its margin deposits if a broker with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
VOLATILITY AND LEVERAGE - The prices of derivatives are volatile (i.e., they may change rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Funds may not trade that derivative at a price beyond that limit. The daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the derivative.
EQUITY SECURITIES
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Funds invest will cause the net asset value of the Funds to fluctuate. The Funds purchase equity securities traded in the U.S. on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
COMMON STOCKS - Common stocks represent units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are described below, dividends on common stocks are not fixed but are declared at the discretion of the company's board of directors.
PREFERRED STOCKS -- Like common stocks, preferred stocks are also units of ownership in a company. Preferred stocks also have certain debt-like characteristics. For example, preferred stocks normally have preference over common stock in the payment of dividends and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market values of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk. For purposes of its 80% investment policy, the TS&W Fixed Income Portfolio treats preferred stocks as debt securities.
CONVERTIBLE SECURITIES - Convertible securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of the issuer's common stock at a Fund's option during a specified time period (such as convertible preferred stocks, convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same corporation. In general, the market value of a convertible security is at least the higher of its "investment value" (i.e., its value as a fixed income security) or its "conversion value" (i.e., its value upon conversion into its underlying common stock). For purposes of its 80% investment policy, the TS&W Fixed Income Portfolio treats convertible securities as debt securities.
Convertible securities are subject to the same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times of steady interest rates than other types of debt securities. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which a Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics, and other factors. Because a Fund will create synthetic convertible positions only out of high grade fixed income securities, the credit rating associated with a Fund's synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one-month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing "time value" as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss, the market price of the option component generally reflects these differences in maturities, and the Adviser takes such differences into account when evaluating such positions. When a synthetic convertible position "matures" because of the expiration of the associated option, a Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If a Fund does not so extend the maturity of a position, it may continue to hold the associated fixed income security.
REAL ESTATE INVESTMENT TRUSTS ("REITS") - A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Code. The Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which a Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Portfolio invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of a Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through the Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
RIGHTS AND WARRANTS - A right is a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life, usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
RISKS OF INVESTING IN EQUITY SECURITIES:
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows investors to participate in the benefits of owning a company, such investors must accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders, followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production costs; and
o Changes in financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
SMALL AND MEDIUM-SIZED COMPANIES - Investors in small and medium-sized companies typically take on greater risk and price volatility than they would by investing in larger, more established companies. This increased risk may be due to the greater business risks of their small or medium size, limited markets and
financial resources, narrow product lines and frequent lack of management depth. The securities of small and medium-sized companies are often traded in the over-the-counter market and might not be traded in volumes typical of securities traded on a national securities exchange. Thus, the securities of small and medium capitalization companies are likely to be less liquid, and subject to more abrupt or erratic market movements, than securities of larger, more established companies.
TECHNOLOGY COMPANIES - Stocks of technology companies have tended to be subject to greater volatility than securities of companies that are not dependent upon or associated with technological issues. Technology companies operate in various industries. Since these industries frequently share common characteristics, an event or issue affecting one industry may significantly influence other, related industries. For example, technology companies may be strongly affected by worldwide scientific or technological developments and their products and services may be subject to governmental regulation or adversely affected by governmental policies.
INITIAL PUBLIC OFFERINGS ("IPOS") - A Fund may invest a portion of its assets in securities of companies offering shares in IPOs. IPOs may have a magnified performance impact on a Fund with a small asset base. The impact of IPOs on a Fund's performance likely will decrease as the Fund's asset size increases, which could reduce the Fund's total returns. IPOs may not be consistently available to a Fund for investing, particularly as the Fund's asset base grows. Because IPO shares frequently are volatile in price, a Fund may hold IPO shares for a very short period of time. This may increase the turnover of a Fund's portfolio and may lead to increased expenses for a Fund, such as commissions and transaction costs. By selling IPO shares, a Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Holders of IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
A Fund's investment in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which presents risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product lines.
FOREIGN SECURITIES
TYPES OF FOREIGN SECURITIES:
Foreign securities are debt and equity securities that are traded in markets outside of the U.S. The markets in which these securities are located can be developed or emerging. The Funds can invest in foreign securities in a number of ways:
o The Funds can invest directly in foreign securities denominated in a foreign currency;
o The Funds can invest in American Depositary Receipts, European Depositary Receipts and other similar global instruments; and
o The Funds can invest in investment funds.
AMERICAN DEPOSITARY RECEIPTS ("ADRS") -- ADRs as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. A custodian bank or similar financial institution in the issuer's home country holds the underlying shares in trust. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in
their national markets and currencies. ADRs are subject to many of the risks associated with investing directly in foreign securities. European Depositary Receipts are similar to ADRs, except that they are typically issued by European banks or trust companies.
ADRs can be sponsored or unsponsored. While these types are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
EMERGING MARKETS - An "emerging country" is generally a country that the International Bank for Reconstruction and Development ("World Bank") and the International Finance Corporation would consider to be an emerging or developing country. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national products ("GNP") than more developed countries. There are currently over 130 countries that the international financial community generally considers to be emerging or developing countries, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe.
INVESTMENT FUNDS - Some emerging countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds are subject to the provisions of the 1940 Act. If a Fund invests in such investment funds, shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS - Local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments may affect the value of foreign investments. Listed below are some of the more important political and economic factors that could negatively affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the United States in such areas as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, budget deficits and national debt;
o Foreign governments sometimes participate to a significant degree, through ownership interests or regulation, in their respective economies. Actions by these governments could significantly influence the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on international trade and their trading partners and they could be severely affected if their trading partners were to enact protective trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less stable than in the United States. Other countries face significant external political risks, such as possible claims of sovereignty by other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors, including expropriation or nationalization of assets, confiscatory taxation and other restrictions on U.S. investment. A country may restrict or control foreign investments in its securities markets. These restrictions could limit a Fund's ability to invest in a particular country or make it very expensive for a Fund to invest in that country. Some countries require prior governmental approval, limit the types or amount of securities or companies in which a foreigner can invest. Other countries may restrict the ability of foreign investors to repatriate their investment income and capital gains.
INFORMATION AND SUPERVISION - There is generally less publicly available information about foreign companies than companies based in the United States. For example, there are often no reports and ratings published about foreign companies comparable to the ones written about U.S. companies. Foreign companies are typically not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. The lack of comparable information makes investment decisions concerning foreign companies more difficult and less reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK - The Adviser anticipates that in most cases an exchange or over-the-counter ("OTC") market located outside of the United States will be the best available market for foreign securities. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as the markets in the United States. Foreign stock markets tend to differ from those in the United States in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as, those in the United States.
o have substantially less volume.
o trade securities that tend to be less liquid and experience rapid and erratic price movements.
o have generally higher commissions and are subject to set minimum rates, as opposed to negotiated rates.
o employ trading, settlement and custodial practices less developed than those in U.S. markets.
o may have different settlement practices, which may cause delays and increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets because:
o foreign accounting, auditing, and financial reporting requirements may render a foreign corporate balance sheet more difficult to understand and interpret than one subject to U.S. law and standards.
o adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis.
o in general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States.
o OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated.
o economic or political concerns may influence regulatory enforcement and may make it difficult for shareholders to enforce their legal rights.
o restrictions on transferring securities within the United States or to U.S. persons may make a particular security less liquid than foreign securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY RISK - While the Funds denominate their net asset value in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and vice versa;
o Complex political and economic factors may significantly affect the values of various currencies, including U. S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces;
o There may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large round-lot transactions in the inter- bank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
TAXES - Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for a Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income a Fund receives from its investments. The Funds do not expect such foreign withholding taxes to have a significant impact on performance.
EMERGING MARKETS - Investing in emerging markets may magnify the risks of foreign investing. Security prices in emerging markets can be significantly more volatile than those in more developed markets, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries; and
o Have economies that are based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
EXCHANGE-TRADED FUNDS ("ETFS")
Each Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their operation, such as advisory and custody fees. When a Fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, the Fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
INVESTMENT COMPANY SHARES
Each Fund may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by a Fund. A Fund's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying a Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, a Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Funds may invest in the ETFs in excess of the 3% limit described above, provided that the Funds otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with financial institutions. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Funds follow certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by a Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by a Fund,
the custodian or its agent must take possession of the underlying collateral.
In the event of a default or bankruptcy by a selling financial institution, a
Fund will seek to liquidate such collateral. However, the exercising of a
Fund's right to liquidate such collateral could involve certain costs or delays
and, to the extent that proceeds from any sale upon a default of the obligation
to repurchase were less than the repurchase price, the Fund could suffer a
loss. It is the current policy of the Funds, not to invest in repurchase
agreements that do not mature within seven days if any such investment,
together with any other illiquid assets held by that Fund, amounts to more than
15% of the Fund's total assets. The investments of a Fund in repurchase
agreements, at times, may be substantial when, in the view of the Adviser,
liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a Fund. At the time a Fund enters into a reverse repurchase agreement, it will earmark on the books of the Fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by a Fund may increase the Fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to a Fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a Fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the Fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
RESTRICTED AND ILLIQUID SECURITIES
While the Funds do not anticipate doing so, each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. A Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of a Fund's net assets invested in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted
under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board of Trustees (the "Board"). This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
SECURITIES LENDING
Each Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Funds' Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of a Fund (including the loan collateral). A Fund will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of a Fund.
A Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, a Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. Investing cash collateral subjects the Funds to market risk. The Funds remain obligated to return all collateral to the borrower under the terms of their securities lending arrangements, even if the value of investments made with the collateral decline. Accordingly, if the value of a security in which the cash collateral has been invested declines, the loss would be borne by the Funds, and the Funds may be required to liquidate other investments in order to return collateral to the borrower at the end of the loan. Each Fund will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon the Funds' ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
SHORT SALES
DESCRIPTION OF SHORT SALES:
Selling a security short is when an investor sells a security it does not own. To sell a security short an investor must borrow the security from someone else to deliver to the buyer. The investor then replaces the security it borrowed by purchasing it at the market price at or before the time of replacement. Until it replaces the security, the investor repays the person that lent it the security for any interest or dividends that may have accrued during the period of the loan.
Investors typically sell securities short to:
o Take advantage of an anticipated decline in prices.
o Protect a profit in a security it already owns.
A Fund can lose money if the price of the security it sold short increases between the date of the short sale and the date on which the Fund replaces the borrowed security. Likewise, a Fund can profit if the price of the security declines between those dates. Because the market price of the security sold short could increase without limit, the Fund could also be subject to a theoretically unlimited loss.
To borrow the security, a Fund may be required to pay a premium, which would increase the cost of the security sold. The Fund will also incur transaction costs in effecting short sales. A Fund's gains and losses will be decreased or increased, as the case may be, by the amount of the premium, dividends, interest, or expenses the Fund may be required to pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent necessary to meet margin requirements, until the short position is closed out.
SHORT SALES AGAINST THE BOX - In addition, a Fund may engage in short sales "against the box." In a short sale against the box, a Fund agrees to sell at a future date a security that it either currently owns or has the right to acquire at no extra cost. A Fund will incur transaction costs to open, maintain and close short sales against the box. For tax purposes, a short sale against the box may be a taxable event to a Fund.
RESTRICTIONS ON SHORT SALES:
A Fund will not short sell a security if:
o After giving effect to such short sale, the total market value of all securities sold short would exceed 25% of the value of a Fund's net assets.
o The market value of the securities of any single issuer that have been sold short by a Fund would exceed two percent (2%) of the value of a Fund's net assets.
o Any security sold short would constitute more than two percent (2%) of any class of the issuer's securities.
Whenever a Fund sells a security short, the Funds segregate an amount of cash or liquid securities equal to the difference between (a) the current market value of the securities sold short and (b) any cash or U.S. government securities the Fund is required to deposit with the broker in connection with the short sale (not including the proceeds from the short sale). The segregated assets are marked to market daily in an attempt to ensure that the amount deposited in the segregated account plus the amount deposited with the broker is at least equal to the current market value of the securities.
WHEN ISSUED, DELAYED - DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market exists, but which have not been issued. In a forward delivery transaction, a Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. "Delayed delivery" refers to securities transactions on the secondary market where settlement occurs in the future. In each of these transactions, the parties fix the payment obligation and the interest rate that they will receive on the securities at the time the parties enter the commitment; however, they do not pay money or deliver securities until a later date. Typically, no income accrues on securities a Fund has committed to purchase before the securities are delivered, although the Fund may earn income on securities it has in a segregated account to cover its position. A Fund will only enter into these types of transactions with the intention of actually acquiring the securities, but may sell them before the settlement date.
A Fund uses when-issued, delayed-delivery and forward delivery transactions to secure what it considers an advantageous price and yield at the time of purchase. When a Fund engages in when-issued, delayed-delivery or forward delivery transactions, it relies on the other party to consummate the sale. If the other party fails to complete the sale, a Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward delivery basis, a Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market when the delivery takes place also may be higher than those obtained in the transaction itself. Because a Fund does not pay for the security until the delivery date, these risks are in addition to the risks associated with its other investments.
A Fund will segregate cash or liquid securities equal in value to commitments for the when-issued, delayed delivery or forward delivery transactions. A Fund will segregate additional liquid assets daily so that the value of such assets is equal to the amount of its commitments.
INVESTMENT POLICIES OF THE FUNDS
FUNDAMENTAL POLICIES
The following investment policies are fundamental, which means that the Funds cannot change them without approval by the vote of a majority of the outstanding shares of a Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Unless otherwise noted, the Funds will determine compliance with the investment limitation percentages below (with the exception of a limitation relating to borrowing and illiquid securities) and other applicable investment requirements immediately after and as a result of its acquisition of such security or other asset. Accordingly, the Funds generally will not consider changes in values, net assets or other circumstances when determining whether the investment complies with its investment limitations.
Each of the Funds will not:
1. Make any investment inconsistent with its classification as a diversified series of an open-end investment company under the 1940 Act. This restriction does not, however, apply when the Fund is classified as a non- diversified series of an open-end investment company under the 1940 Act.
2. Borrow money, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in a Fund's prospectus and SAI as they may be amended from time to time.
3. Issue senior securities, except to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction.
4. Underwrite securities of other issuers, except insofar as a Fund may technically be deemed to be an underwriter under the 1933 Act in connection with the purchase or sale of its portfolio securities.
5. Concentrate its investments in the securities of one or more issuers conducting their principal business activities in the same industry (other than securities issued or guaranteed by the U.S. government or its agencies or instrumentalities).
6. Purchase or sell real estate, except (1) to the extent permitted by applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction, (2) that a Fund may invest in securities of issuers that deal or invest in real estate and (3) that a Fund may purchase securities secured by real estate or interests therein.
7. Purchase or sell commodities or contracts on commodities except that a Fund may engage in financial futures contracts and related options and currency contracts and related options and may otherwise do so in accordance with applicable law and without registering as a commodity pool operator under the Commodity Exchange Act.
8. Make loans to other persons, except that a Fund may lend its portfolio securities in accordance with applicable law, as amended and interpreted or modified from time to time by any regulatory authority having jurisdiction and the guidelines set forth in a Fund's prospectus and SAI as they may be amended from time to time. The acquisition of investment securities or other investment instruments shall not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
In addition to each Fund's investment objective, the following investment limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval.
Each of the Funds may:
1. not purchase securities of any issuer (except securities of other investment companies, securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of a Fund would be invested in the securities of such issuer; or acquire more than 10% of the outstanding voting securities of any one issuer. This restriction applies to 75% of a Fund's total assets.
2. not borrow money, except that (1) a Fund may borrow from banks (as defined in the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33 1/3% of its total assets (including the amount borrowed), (2) a Fund may borrow up to an additional 5% of its total assets for temporary purposes, (3) a Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, and (4) a Fund may purchase securities on margin and engage in short sales to the extent permitted by applicable law.
Notwithstanding the investment restrictions above, a Fund may not borrow amounts in excess of 33 1/3% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. A Fund will not purchase securities while borrowings are outstanding except to exercise prior commitments and to exercise subscription rights.
3. purchase and sell currencies or securities on a when-issued, delayed delivery or forward-commitment basis.
4. purchase and sell foreign currency, purchase options on foreign currency and foreign currency exchange contracts.
5. invest in the securities of foreign issuers.
6. purchase shares of other investment companies to the extent permitted by applicable law. A Fund may, notwithstanding any fundamental policy or other limitation, invest all of its investable assets in securities of a
single open-end management investment company with substantially the same investment objectives, policies and limitations.
The 1940 Act currently permits a Fund to invest up to 10% of its total assets in the securities of other investment companies. However, a Fund may not invest more than 5% of its total assets in the securities of any one investment company or acquire more than 3% of the outstanding securities of any one investment company, unless permissible under the 1940 Act and the rules and promulgations thereunder.
7. invest in illiquid and restricted securities to the extent permitted by applicable law.
The Funds intend to follow the policies of the SEC as they are adopted from time to time with respect to illiquid securities, including (1) treating as illiquid securities that may not be disposed of in the ordinary course of business within seven days at approximately the value at which a Fund has valued the investment on its books; and (2) limiting its holdings of such securities to 15% of net assets.
8. write covered call options and may buy and sell put and call options.
9. enter into repurchase agreements.
10. lend portfolio securities to registered broker-dealers or other institutional shareholders. These loans may not exceed 33 1/3 % of the Fund's total assets taken at market value. In addition, a Fund must receive at least 100% collateral.
11. sell securities short and engage in short sales "against the box."
12. enter into swap transactions.
Further,
1. The Equity Portfolio may not change its investment strategy to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of companies that are relatively large in terms of revenues and assets, and a market capitalization that exceeds $3 billion at time of purchases without 60 days' prior written notice to shareholders.
2. The Fixed Income Portfolio may not change its investment strategy to invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in fixed income securities without 60 days' prior written notice to shareholders.
The foregoing percentages apply at the time of purchase.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. Thompson, Siegel & Walmsley LLC, a Delaware limited liability company, located at 6806 Paragon Place, Suite 300, Richmond, Virginia 23230, serves as each Fund's investment adviser. The Adviser manages and supervises the investment of each Fund's assets on a discretionary basis. As of December 31, 2012, the Adviser had discretionary management authority with respect to approximately $6.2 billion in assets under management. The Adviser has provided investment management services to governmental, institutional, corporate, other institutions and individuals since 1970. In 1984, the Adviser became a wholly-owned subsidiary of United Asset Management Corporation, which was in turn purchased by London-based global financial services company Old Mutual plc in 2000. Today, the Adviser is a majority-owned subsidiary of Old Mutual (US) Holdings Inc., a subsidiary of Old Mutual plc.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated June 24, 2002, as amended (the "Advisory Agreement") with respect to the Funds. Under the Advisory Agreement, the Adviser serves as investment adviser and makes the investment decisions for the Funds and continuously reviews, supervises and administers the investment program of each Fund, subject to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two year term, the continuance of the Advisory Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of each Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of the Funds, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder or its reckless disregard of its obligation and duties under the Advisory Agreement. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.75% and 0.45% of the average daily net assets of the Equity Portfolio and Fixed Income Portfolio, respectively. The Adviser has voluntarily agreed to reduce fees and reimburse expenses to the extent necessary to keep total annual Fund operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding 1.50% and 0.75% of the average daily net assets of the Equity Portfolio and the Fixed Income Portfolio, respectively. The Adviser intends to continue its fee reductions and expense limitations until further notice, but may discontinue them at any time.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the Adviser the following advisory fees:
------------------------------------------------------------------------------------------------------------------------------------
TOTAL FEES PAID
CONTRACTUAL FEES PAID FEES WAIVED BY THE ADVISER (AFTER WAIVERS)
------------------------------------------------------------------------------------------------------------------------------------
FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
------------------------------------------------------------------------------------------------------------------------------------
Equity Portfolio $338,777 $349,349 $314,852 $0 $0 $0 $338,777 $349,349 $314,852
------------------------------------------------------------------------------------------------------------------------------------
Fixed Income
Portfolio $253,501 $265,861 $288,816 $140,431 $164,150 $188,747 $113,070 $101,711 $100,069
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PORTFOLIO MANAGERS
This section includes information about the Funds' portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates the Funds' portfolio managers for their management of the Funds. The Adviser's compensation strategy is to provide competitive base salaries commensurate with an individual's responsibility and provide incentive bonus awards that may significantly exceed base salary. Annually, the TS&W Remuneration Committee is responsible for determining the discretionary bonus, utilizing an analytical and qualitative assessment process. Factors used to determine compensation are commitment to the Adviser's core values, long-term performance, the product's strategic position in the overall success of the Adviser, and support of marketing/client service commitments. Key associates may be awarded cash bonuses, deferred cash bonuses, and deferred TS&W equity grants. All qualified employees participate in the Adviser's Employees' Retirement Plan.
The Adviser determines profitability for each of the Funds by prorating the respective assets in each Fund to its total firm assets and applying that percentage to the operating expenses of the firm and compensation of the firm.
FUND SHARES OWNED BY THE PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of each Fund as of the end of the most recently completed
fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the "1934 Act").
-------------------------------------------------------------------------------------------------------------
DOLLAR RANGE OF FUND SHARES AGGREGATE DOLLAR RANGE OF
NAME (FUND)(1) FUND SHARES (FUNDS) (1)
-------------------------------------------------------------------------------------------------------------
$100,001 - $500,000 (Equity Portfolio)
Elizabeth Cabell Jennings ---------------------------------------- $100,001 - $500,000
None (Fixed Income Portfolio)
-------------------------------------------------------------------------------------------------------------
William M. Bellamy None (Equity Portfolio) None
----------------------------------------
None (Fixed Income Portfolio)
-------------------------------------------------------------------------------------------------------------
None (Equity Portfolio)
Charles J. Wittmann ---------------------------------------- None
None (Fixed Income Portfolio)
-------------------------------------------------------------------------------------------------------------
|
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts is subject to a performance-based advisory fee. The information below is provided as of October 31, 2012.
-------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED OTHER ACCOUNTS
COMPANIES INVESTMENT VEHICLES
-------------------------------------------------------------------------------------------------------------
NUMBER TOTAL NUMBER
OF ASSETS OF TOTAL NUMBER TOTAL ASSETS(1)
NAME ACCOUNTS (IN MILLIONS) ACCOUNTS ASSETS OF ACCOUNTS (IN MILLIONS)
-------------------------------------------------------------------------------------------------------------
Elizabeth Cabell Jennings 1 $745.9 0 $0 268 $1,277.6
-------------------------------------------------------------------------------------------------------------
Charles J. Wittmann 1 $745.9 0 $0 268 $1,277.6
-------------------------------------------------------------------------------------------------------------
William M. Bellamy 1 $0 0 $0 241 $553.5
-------------------------------------------------------------------------------------------------------------
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(1) TS&W manages most products on a team basis. The numbers reflected in the chart reflects the assignments of all managers on the product team to the total number of accounts and assets managed in that strategy.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Funds' investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Funds. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio managers could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Funds. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration
Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Funds whereby the Administrator provides certain shareholder services to the Funds.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate that is detailed below in the following schedule:
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $250 million
--------------------------------------------------------------------------------
0.10% $250 million - $500 million
--------------------------------------------------------------------------------
0.08% $500 million - $750 million
--------------------------------------------------------------------------------
0.04% Over $750 million
--------------------------------------------------------------------------------
|
The minimum fee is $125,000 for one portfolio, $250,000 for two portfolios, $350,000 for three portfolios, an additional $75,000 for each additional portfolio over three and $20,000 for each additional class per portfolio after the first class, apportioned to the Funds as a percentage of average daily net assets. Due to these minimums, the annual administration fee each Fund pays will exceed the above percentages at low asset levels.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following administration fees:
--------------------------------------------------------------------------------
ADMINISTRATION FEES PAID
--------------------------------------------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
Equity Portfolio $93,683 $102,835 $98,921
--------------------------------------------------------------------------------
Fixed Income Portfolio $116,893 $131,125 $151,079
--------------------------------------------------------------------------------
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THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 ("Distribution Agreement"). The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of each Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Trustees of the Trust or, with respect to a Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates, as incentives to help market and promote the Funds and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Funds, the Distributor or shareholders of the Funds through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Funds in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Funds; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Funds by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Funds shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, Missouri 64105 (the "Transfer Agent"), serves as the Funds' transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
CUSTODIAN
Union Bank, N.A., 350 California Street, 6(th) Floor, San Francisco, CA 94104 (the "Custodian"), serves as the custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700 Philadelphia, PA 19103, serves as independent registered public accounting firm for the Funds. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP, as indicated in their report with respect thereto, and are incorporated by reference hereto in reliance upon the authority of said firm as experts in giving said reports.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to
the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving
as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
----------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
----------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
----------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
----------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust and
Administrator and the SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
Management (UK) Limited. Director
of the Distributor since 2003.
----------------------------------------------------------------------------------------------------------------
-S-37-
|
----------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
----------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
----------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Current Directorships: Trustee of The
(08/20/34) (since 2005) Business Consultant, Advisors' Inner Circle Fund II and
Business Projects Inc., Bishop Street Funds. Director of
since 1997. Oregon Transfer Co.
----------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and
Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
----------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of The
Jr. (since 2011) Consultant since Advisors' Inner Circle Fund II and
(05/28/52) January 2012. Director Bishop Street Funds. Director of The
of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
----------------------------------------------------------------------------------------------------------------
Mitchell A. Johnson Trustee Retired. Private Current Directorships: Trustee of The
(03/01/42) (since 2005) Investor since 1994. Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
----------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
----------------------------------------------------------------------------------------------------------------
-S-38-
|
----------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
----------------------------------------------------------------------------------------------------------------
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
----------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
----------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
----------------------------------------------------------------------------------------------------------------
George J. Sullivan, Trustee Retired since January Current Directorships: Trustee/
Jr. (since 1999) 2012. Self-employed Director of State Street Navigator
(11/13/42) Consultant, Newfound Securities Lending Trust, The
Lead Independent Consultants Inc., April Advisors' Inner Circle Fund II,
Trustee 1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
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-S-39-
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POSITION WITH
NAME AND DATE OF TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
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committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
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(1) Denotes Trustees who may be deemed to be "interested" persons of the Funds as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board
because of their ability to review and understand information about the Funds
provided to them by management, to identify and request other information they
may deem relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on the
management and administration of the Funds, and to exercise their business
judgment in a manner that serves the best interests of the Funds' shareholders.
The Trust has concluded that each of the Trustees should serve as a Trustee
based on their own experience, qualifications, attributes and skills as
described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and
knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and considering any significant
disputes between the Trust's management and the independent registered
public accounting firm that arose in connection with the preparation of
those financial statements; (vii) considering, in consultation with the
independent registered public accounting firm and the Trust's senior
internal accounting executive, if any, the independent registered public
accounting firms' reports on the adequacy of the Trust's internal financial
controls; (viii) reviewing, in consultation with each fund's independent
registered public accounting firm, major changes regarding auditing and
accounting principles and practices to be followed when preparing each
fund's financial statements; and (ix) other audit related matters. Messrs.
Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms.
Krikorian currently serve as members of the Audit Committee. Mr. Sullivan
serves as the Chairman of the Audit Committee. The Audit Committee meets
periodically, as necessary, and met four (4) times during the most recently
completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
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DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF SHARES
NAME FUND SHARES (FUND)(1) (ALL FUNDS IN THE FUND COMPLEX)(1,2)
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INTERESTED TRUSTEES
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Doran None None
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Nesher None None
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INDEPENDENT TRUSTEES
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Carlbom None None
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Darr None None
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Grause None None
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Johnson None Over $100,000
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Krikorian None None
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Speca None None
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Storey None None
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Sullivan None None
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(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
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PENSION OR
RETIREMENT ESTIMATED
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS
COMPENSATION AS PART OF FUND UPON TOTAL COMPENSATION FROM THE
NAME FROM THE TRUST EXPENSES RETIREMENT TRUST AND FUND COMPLEX(1)
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INTERESTED TRUSTEES
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Doran $0 N/A N/A $0 for service on one (1) board
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Nesher $0 N/A N/A $0 for service on one (1) board
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INDEPENDENT TRUSTEES
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Carlbom $52,654 N/A N/A $52,654 for service on one (1)
board
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Darr $52,654 N/A N/A $52,654 for service on one (1)
board
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Grause(2) $40,570 N/A N/A $40,570 for service on one (1)
board
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Johnson $52,654 N/A N/A $52,654 for service on one (1)
board
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Krikorian $52,654 N/A N/A $52,654 for service on one (1)
board
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Speca(2) $40,570 N/A N/A $40,570 for service on one (1)
board
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Storey $52,654 N/A N/A $52,654 for service on one (1)
board
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Sullivan $52,654 N/A N/A $52,654 for service on one (1)
board
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
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NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
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Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
---------------------------------------------------------------------------------------------------------
Michael Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Lawson Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) (since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
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Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed Trust
and New Covenant Funds. Chief Compliance
Officer of SEI Opportunity Fund, L.P. until
2010. Director of Investment Product
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-S-43-
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NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
---------------------------------------------------------------------------------------------------------
Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February
2003.
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Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(03/28/68) (since 1999) SIMC and the Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
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Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
(07/18/77) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
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John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
---------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
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PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange (the "NYSE") is open for business. Shares of each Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by a Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all of the funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of a Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves
the right to suspend sales of shares of any Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. Each of the Funds adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting each Fund and its shareholders that is intended to supplement the discussion contained in the Funds' prospectus. No attempt is made to present a detailed explanation of the tax treatment of each Fund or its shareholders, and the discussion here and in the Funds' prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). Each Fund intends to qualify and elects to be treated as a RIC. By following such a policy, each Fund expects to eliminate or reduce to a nominal amount the
federal taxes to which it may be subject. If a Fund qualifies as a RIC it will not be subject to federal income taxes on the net investment income and net realized capital gains that it timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of a Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, each Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of each Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership; (ii) at the end of each fiscal quarter of each Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership and (iii) at the end of each fiscal quarter of each Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If a Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires a Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, a Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of that year, plus certain other amounts. Each Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. A Fund may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of a Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. Each Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of a Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by a Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by each Fund will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply for individuals in lower tax brackets) to
the extent that the Fund receives qualified dividend income on the securities
it holds and the Fund designates the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from the Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) the Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder, (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. The TS&W Fixed Income Portfolio does not anticipate
making distributions that will be designated as qualified dividend income.
Distributions by the Fund of its net short-term capital gains will be taxable
as ordinary income. Capital gain distributions consisting of the Fund's net
capital gains will be taxable as long-term capital gains. Distributions
reported to Fund shareholders as capital gain dividends shall be taxable as
long-term capital gains at a maximum rate of 20%, regardless of how long the
shareholder has owned the shares. Each Fund's shareholders will be notified
annually by the Fund as to the federal tax status of all distributions made by
the Fund.
The Fund's dividends that are paid to their corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If a Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in a Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of a Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, a Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, a Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, a Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund).
FOREIGN TAXES. If more than 50% of the value of a Fund's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Funds, subject to certain limitations. Pursuant to the election, the Fund will treat those taxes as dividends paid to its shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders' federal income tax. If a Fund makes the election, such Fund will report annually to its shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and U.S. possessions.
TAX TREATMENT OF COMPLEX SECURITIES. Each Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by a Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or
defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by each Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by each Fund. Similarly, foreign exchange losses realized by a Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce a Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce a Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
A Fund may acquire market discount bonds. A market discount bond is a security acquired in the secondary market at a price below its redemption value (or its adjusted issue price if it is also an original issue discount bond). If a Fund invests in a market discount bond, it will be required to treat any gain recognized on the disposition of such market discount bond as ordinary income (instead of capital gain) to the extent of the accrued market discount unless the Fund elects to include the market discount in income as it accrues as discussed above.
A Fund's investment in lower-rated or unrated debt securities may present issues for the Fund if the issuers of these securities default on their obligations because the federal income tax consequences to a holder of such securities are not certain.
If a Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies" or "PFICs," the Fund will generally be subject to one of the following special tax regimes: (i) the Fund may be liable for U.S. federal income tax, and an additional interest charge, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund were able and elected to treat a PFIC as a "qualifying electing fund" or "QEF," the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the passive foreign investment company, whether or not such earnings or gains are distributed to the Fund; or (iii) the Fund may be entitled to mark-to-market annually shares of the PFIC, whether or not any distributions are made to the Fund, and in such event would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold, at a rate of 28%, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. A Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Funds generally serve to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, a Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When a Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including a Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of a Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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Equity Portfolio $31,510 $24,014 $18,886
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Fixed Income Portfolio $308 $691 $746
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Funds' Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause each Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to each Fund.
To the extent that research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to, and not in lieu of, the services required to be performed by the Adviser under the Funds' Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Adviser with research services. FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Funds paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR AMOUNT OF
TOTAL DOLLAR AMOUNT OF TRANSACTIONS INVOLVING
BROKERAGE COMMISSIONS FOR BROKERAGE COMMISSIONS FOR
FUND RESEARCH SERVICES RESEARCH SERVICES
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Equity Portfolio $18,886 $23,997,506
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Fixed Income Portfolio $746 $940,295
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BROKERAGE WITH FUND AFFILIATES. A Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Funds, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of their "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Funds held during their most recent fiscal year. During the fiscal year ended October 31, 2012, the Funds held the following securities of its "regular brokers and dealers:"
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NAME OF DOLLAR AMOUNT AT FISCAL YEAR
FUND BROKER/DEALER TYPE OF SECURITY HELD END
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Equity Portfolio JP Morgan Chase Equity $832,000
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Citigroup Equity $595,000
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Fixed Income Morgan Stanley Debt $3,572,000
Portfolio -------------------------------------------------------------------------------
JP Morgan Chase Debt $1,011,000
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Goldman Sachs Debt $887,000
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Goldman Sachs Equity $251,000
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PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. The Funds may at times hold investments in short-term instruments, which are excluded for purposes of computing portfolio turnover. For the Funds' two most recently completed fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for each of the Funds were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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Equity Portfolio 30% 22%
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Fixed Income Portfolio 93% 104%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of Fund shareholders and include procedures to address conflicts between the interests of the Funds' shareholders, on the one hand, and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds, the Adviser, or the principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Adviser CCO") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Adviser CCO, either directly or through reports by the Funds' Chief Compliance Officer reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Funds are required to disclose their complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). Each Fund discloses a complete or summary schedule of investments (which includes each Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. Each Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q and each Fund's complete schedule of investments following the 2nd and 4th fiscal quarters, is available in the Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. Should a Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-866-4TSW-FUN. In addition, the Funds generally publish a complete list of their portfolio holdings on a monthly basis, as of the end of the previous month. For example, each Fund's investments as of the end of January would ordinarily be published at the end of February. Each Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month. The portfolio information described above can be found on the internet at http://aicfundholdings.com/tsw. In addition, each Fund provides information about its top ten holdings, updated as of the most recent calendar quarter, on the internet at https://www.tswinvest.com/products/funds.aspx. This
information is generally provided within 30 days after each calendar quarter. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of a Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the Custodian, Administrator or Transfer Agent, in connection with their services to the Funds. From time to time rating and ranking organizations, such as S&P, Lipper and Morningstar, Inc., may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of a Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Funds believe that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Funds' policies and procedures provide that the Adviser's CCO may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Adviser's CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Funds' shareholders and that to the extent conflicts between the interests of the Funds' shareholders and those of the Funds' Adviser, principal underwriter, or any affiliated person of the Funds exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than monthly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than three days after the date of the information. The Funds' Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Funds require any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Funds, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Funds' policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipients of the Funds' portfolio holdings information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of any fund and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that each Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by each Fund to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically review each Fund's proxy voting record.
The Trust is required to disclose annually the Funds' complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-866-4TSW-FUN; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities, including securities that may be purchased or held by the Funds, but are required to report their personal securities transactions for monitoring purposes. The Codes of Ethics further require certain access persons to obtain approval before investing in initial public offerings and limited offerings. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of the shares of the Funds. The Funds believe that most of the shares referred to below were held by the persons listed below in accounts for their fiduciary, agency or custodial customers. Any shareholder listed below as owning of record or beneficially 25% or more of the outstanding shares of a Fund may be presumed to "control" (as that term is defined in the 1940 Act) that Fund. Shareholders controlling a Fund may have a significiant impact on any shareholder vote of the Fund.
-------------------------------------------------------------------------------- TS&W EQUITY PORTFOLIO -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 2,564,297.0620 74.81% REINVEST ACCOUNT ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TS&W FIXED INCOME PORTFOLIO -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 5,089,034.8900 74.56% REINVEST ACCOUNT ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater then in the "aaa" and "aa" classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each rating classification: the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DEBT RATINGS - TAXABLE DEBT & DEPOSITS GLOBALLY
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch
obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
SHORT-TERM RATINGS
SHORT-TERM PRIME RATING SYSTEM - TAXABLE DEBT & DEPOSITS GLOBALLY
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institution) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
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following characteristics:
o Leading market positions in well-established industries.
o Conservative capitalization structure with moderate reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
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NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S RATING SERVICES
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. Accordingly, in the case of junior debt, the rating may not conform exactly to the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, CCC, CC AND C
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial , or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to non-payment.
C A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking or a similar action if payments on an obligation are jeopardized.
N.R. This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant speculative characteristics. Ratings of 'B-1', 'B-2', and 'B-3' may be assigned to indicate finer distinctions within the 'B' category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term obligation rated 'B-1' is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation rated 'B-2' is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated 'B-3' is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C A short-term obligation rated 'C' is currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
FITCH INC. RATINGS
INTERNATIONAL LONG-TERM CREDIT RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings:
INVESTMENT GRADE
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. 'A' ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that there are currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category
SPECULATIVE GRADE
BB: Speculative.
'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative.
o For issuers and performing obligations, 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
o For individual obligations, may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of 'R1' (outstanding).
CCC: For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. o For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of 'R2' (superior), or 'R3' (good) or 'R4' (average).
CC: For issuers and performing obligations, default of some kind appears probable.
o For individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of 'R4' (average) or 'R5' (below average).
Grade C: For issuers and performing obligations, default is imminent.
o For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor recoveries. Such obligations would possess a Recovery Rating of 'R6' (poor).
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated 'D' upon a default. Defaulted and distressed obligations typically are rated along the continuum of 'C' to 'B' ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation's documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the 'B' or 'CCC-C' categories.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for US public finance, in line with industry standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
RD Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
Notes to Long-term and Short-term ratings: The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' Long-term rating category, to categories below 'CCC', or to Short-term ratings other than 'F1'. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative
Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are 'stable' could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
Program ratings (such as those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, i.e. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.
Variable rate demand obligations and other securities which contain a short-term 'put' or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.
Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.
Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.
Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows.
'PIF': Paid-in --Full; denotes a security that is paid-in-full, matured, called, or refinanced.
'NR' indicates that Fitch Ratings does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES
PROXY VOTING POLICY
Thompson, Siegel & Walmsley LLC (TS&W) acknowledges it has a fiduciary obligation to its clients that requires it to monitor corporate events and vote client proxies. TS&W has adopted and implemented written policies and procedures reasonably designed to ensure that proxies for domestic and foreign stock holdings are voted in the best interest of our clients on a best efforts basis. TS&W recognizes that it (i) has a fiduciary responsibility under the Employee Retirement Income Securities Act (ERISA) to vote proxies prudently and solely in the best interest of plan participants and beneficiaries (ii) will vote stock proxies in the best interest of the client (non-ERISA) when directed (together, our "clients"). TS&W has developed its policy to be consistent with, wherever possible, enhancing long-term shareholder value and leading corporate governance practices. TS&W has retained the services of Institutional Shareholder Services (ISS). ISS is a Registered Investment Adviser under the Investment Advisers Act of 1940. As a leading provider of proxy voting and corporate governance services with 20+ years of experience, ISS serves more than 1,700 institutions. ISS's core business is to analyze proxies and issue informed research and objective vote recommendations for more than 38,000 companies across 115 markets worldwide. ISS provides TS&W proxy proposal research and voting recommendations and votes accounts on TS&W's behalf under the guidance of ISS's standard voting guidelines which include:
o Operational Issues
o Board of Directors
o Proxy Contests
o Anti-takeover Defenses and Voting Related Issues
o Mergers and Corporate Restructurings
o State of Incorporation
o Capital Structure
o Executive & Director Compensation
o Equity Compensation Plans
o Specific Treatment of Certain Award Types in Equity Plan Evaluations
o Other Compensation Proposals & Policies
o Shareholder Proposals on Compensation
o Corporate Responsibility
o Consumer Issues and Public Safety
o Environment and Energy
o General Corporate Issues
o Labor Standards and Human Rights
o Military Business
o Workplace Diversity
o Mutual Fund Proxies
TS&W's proxy coordinator is responsible for monitoring ISS's voting procedures on an ongoing basis. TS&W's general policy regarding the voting of proxies is as follows:
PROXY VOTING GUIDELINES:
Routine and/or non-controversial, general corporate governance issues are normally voted with management; this would include the Approval of Independent Auditors.
Occasionally, ISS may vote against management's proposal on a particular issue; such issues would generally be those deemed likely to reduce shareholder control over management, entrench management at the expense of shareholders, or in some way diminish shareholders' present or future value. From time to time TS&W will receive and act upon the client's specific instructions regarding proxy proposals. TS&W reserves the right to vote against any proposals motivated by political, ethical or social concerns. TS&W and ISS will examine each issue solely from an economic perspective.
o A complete summary of ISS's voting guidelines, domestic & foreign, are available at: www.issgovernance.com/policy.
CONFLICTS OF INTEREST
o Occasions may arise during the voting process in which the best interest of the clients conflicts with TS&W's interests. Conflicts of interest generally include (i) business relationships where TS&W has a substantial business relationship with, or is actively soliciting business from, a company soliciting proxies (ii) personal or family relationships whereby an employee of TS&W has a family member or other personal relationship that is affiliated with a company soliciting proxies, such as a spouse who serves as a director of a public company. A conflict could
also exist if a substantial business relationship exists with a proponent or opponent of a particular initiative. If TS&W determines that a material conflict of interest exists, TS&W will instruct ISS to vote using ISS's standard policy guidelines which are derived independently from TS&W.
PROXY VOTING PROCESS:
o Upon timely receipt of proxy materials, ISS will automatically release vote instructions on client's behalf as soon as custom research is completed. TS&W retains authority to override the votes (before cut-off date) if they disagree with the vote recommendation.
o The Proxy Coordinator will monitor the voting process at ISS via Governance Analytics website (ISS's online voting and research platform). Records of which accounts are voted, how accounts are voted, and how many shares are voted are kept electronically with ISS.
o For proxies not received at ISS, TS&W and ISS will make a best efforts attempt to receive ballots from the clients' custodian.
o TS&W will be responsible for account maintenance -- opening and closing of accounts, transmission of holdings and account environment monitoring.
o Associate Portfolio Manager (proxy oversight representative) will keep abreast of any critical or exceptional events or events qualifying as a conflict of interest via Governance Analytics website and via email. TS&W has the ability to override vote instructions and the Associate Portfolio Manager will consult with TS&W's Investment Policy Committee or product managers in these types of situations.
o All proxies are voted solely in the best interest of clients.
o Proactive communication takes place via regular meetings with ISS's Client Relations Team.
PRACTICAL LIMITATIONS RELATING TO PROXY VOTING
While TS&W makes a best effort to vote proxies, in certain circumstances it may be impractical or impossible for TS&W to do so. Identifiable circumstances include:
o LIMITED VALUE. TS&W may abstain from voting in those circumstances where it has concluded to do so would have no identifiable economic benefit to the client-shareholder,
o UNJUSTIFIABLE COST. TS&W may abstain from voting when the costs of or disadvantages resulting from voting, in TS&W's judgment, outweigh the economic benefits of voting.
o SECURITIES LENDING. Certain of TS&W's clients engage in securities lending programs under which shares of an issuer could be on loan while that issuer is conducting a proxy solicitation. As part of the securities lending program, if the securities are on loan at the record date, the client lending the security cannot vote that proxy. Because TS&W generally is not aware of when a security may be on loan, it does not have an opportunity to recall the security prior to the record date. Therefore, in most cases, those shares will not be voted and TS&W may not be able fully to reconcile the securities held at record date with the securities actually voted.
o FAILURE TO RECEIVE PROXY STATEMENTS. TS&W may not be able to vote proxies in connection with certain holdings, most frequently for foreign securities, if it does not receive the account's proxy statement in time to vote the proxy.
PROXY VOTING RECORDS & REPORTS
o The proxy information is maintained by ISS. on TS&W's behalf and
includes the following: (i) name of the issuer, (ii) the exchange
ticker symbol, (iii) the CUSIP number, (iv) the shareholder meeting
date, (v) a brief description of the matter brought to vote; (vi)
whether the proposal was submitted by management or a shareholder,
(vii) how the proxy was voted (for, against, abstained), (viii)
whether the proxy was voted for or against management, and (ix)
documentation materials to make the decision. TS&W's Proxy Coordinator
coordinates retrieval and report production as required or requested.
o Clients will be notified annually of their ability to request a copy of our proxy policies and procedures. A copy of how TS&W voted on securities held is available free of charge upon request from our clients or by calling us toll free at (800) 697-1056.
STATEMENT OF ADDITIONAL INFORMATION
UNITED ASSOCIATION S&P 500 INDEX FUND
(CLASS I TICKER SYMBOL: UASPX)
(CLASS II TICKER SYMBOL: UAIIX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
PNC CAPITAL ADVISORS, LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the United Association S&P 500 Index Fund (the "Fund"). This SAI is incorporated by reference into and should be read in conjunction with the prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund for the fiscal year ended October 31, 2012, including notes thereto and the report of PricewaterhouseCoopers LLP thereon, contained in the 2012 Annual Report to Shareholders are herein incorporated by reference into and deemed to be part of this SAI. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9000 or by calling the Fund at 1-888-766-8043.
TABLE OF CONTENTS
THE TRUST ............................................................ S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES ...... S-2 DESCRIPTION OF PERMITTED INVESTMENTS ................................. S-3 INVESTMENT LIMITATIONS ............................................... S-14 THE ADVISER .......................................................... S-16 PORTFOLIO MANAGERS ................................................... S-17 THE ADMINISTRATOR .................................................... S-19 THE DISTRIBUTOR ...................................................... S-19 PAYMENTS TO FINANCIAL INTERMEDIARIES ................................. S-20 THE TRANSFER AGENT ................................................... S-21 THE CUSTODIAN ........................................................ S-21 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................ S-21 LEGAL COUNSEL ........................................................ S-21 TRUSTEES AND OFFICERS OF THE TRUST ................................... S-22 PURCHASING AND REDEEMING SHARES ...................................... S-32 DETERMINATION OF NET ASSET VALUE ..................................... S-32 TAXES ................................................................ S-33 BROKERAGE ALLOCATION AND OTHER FUND BROKERAGE PRACTICES .............. S-37 PORTFOLIO HOLDINGS ................................................... S-40 ADDITIONAL INFORMATION ABOUT THE TRUST ............................... S-41 PROXY VOTING ......................................................... S-42 5% AND 25% SHAREHOLDERS .............................................. S-42 INDEX INFORMATION .................................................... S-43 APPENDIX A -- DESCRIPTION OF RATINGS ................................. A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ................... B-1 |
March 1, 2013 UAF-SX-003-0600
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. The Fund pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information. The Trust reserves the right to create and issue additional classes of shares.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer multiple classes of shares of its funds. The Fund currently offers Class I (institutional shares) and Class II (retail shares). Additional classes may be created from time to time. The different classes provide for variations in distribution and shareholder servicing expenses and in the minimum initial investment requirements. Minimum investment requirements and investor eligibility are described in the prospectus. For more information on distribution expenses, see "The Distributor."
HISTORY OF THE FUND. The Fund is the successor to the Financial Investors Trust United Association S&P 500 Index Fund (the "Predecessor Fund"). The Predecessor Fund's date of inception was March 1, 2000. The Predecessor Fund dissolved and reorganized into the Fund on March 10, 2003. Substantially all of the assets of the Predecessor Fund were transferred to the Fund in connection with its commencement of operations on March 10, 2003. The Predecessor Fund was managed by National City Investment Management Company using the same investment objective, strategies, policies and restrictions as those used by the Fund. On June 13, 2005, National City Investment Management Company changed its name to Allegiant Asset Management Company. On September 29, 2009, Allegiant Asset Management Company and its affiliate, PNC Capital Advisors, Inc., merged into PNC Capital Advisors, LLC.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's investment objectives and principal investment strategies are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
THE S&P 500 INDEX. The S&P 500 Index is composed of 500 common stocks, most of which are listed on the New York Stock Exchange ("NYSE"). S&P selects the stocks for the S&P 500 Index on a statistical basis. As of December 31, 2012, the stocks in the S&P 500 Index had an average market capitalization of $105 billion. "Market capitalization" of a company is the market price per share of stock multiplied by the number of shares outstanding.
FUND INVESTMENT STRATEGY. The Fund's investment objective is to provide investment results that, before Fund expenses, approximate the aggregate price and dividend performance of the securities included in the S&P 500 Index. Under normal circumstances, the Fund invests substantially all, but in no event less than 80%, of its net assets (plus any borrowings for investment purposes) in stocks included in the S&P 500 Index. The S&P 500 Index is made up of common stocks of 500 large, publicly traded companies. The vast majority of the Fund's assets will normally be invested in stocks included in the S&P 500 Index in approximately the same relative proportion as those stocks are held in the S&P 500 Index, but the Fund does not simply invest in a portfolio that replicates the precise composition of the S&P 500 Index. PNC Capital Advisors, LLC (the "Adviser") also does not generally "manage" the Fund in the traditional sense (i.e., by using economic, financial or market analysis). However, the Adviser believes that employing certain active management strategies for a percentage of the Fund's assets, if successful, may result in net returns after expenses that may more closely approximate the returns of the S&P 500 Index. For example, the Adviser may invest in S&P 500 Index futures in addition to or in place of S&P 500 Index stocks to attempt to equal the performance of the S&P 500 Index. The Fund may also invest in other S&P 500 Index derivatives, such as options, swaps and options on futures, with economic characteristics similar to the common stocks in the S&P 500 Index. Under normal circumstances, the notional amount of investments in derivatives will not exceed 20% of the Fund's net assets. The Fund may use derivatives as a substitute for taking a position in an underlying asset, to increase returns, to manage risk/volatility or as part of a hedging strategy.
CORRELATION WITH THE S&P 500 INDEX. While there can be no guarantee that the Fund's investment results will precisely match the results of the S&P 500 Index, the Adviser believes that, before deduction of operating expenses, there will be a very high correlation between the returns generated by the Fund and the S&P 500 Index. The Fund will attempt to achieve a correlation between the performance of its asset portfolio and that of the S&P 500 Index of at least 95% before deduction of operating expenses. A correlation of 100% would indicate perfect correlation, which would be achieved when the Fund's net asset value, including the value of its dividend and capital gains distributions, increases or decreases in exact proportion to changes in the Index. The Fund's ability to correlate its performance with the S&P 500 Index, however, may be affected by, among other things: Fund expenses, including brokerage (which may be increased by high portfolio turnover); the Fund holding less than all of the securities in the S&P 500 Index; Fund share prices being rounded to the nearest cent; changes to the S&P 500 Index that are not disseminated in advance; changes in the manner in which S&P calculates its index; the timing of purchases and redemptions; and/or the need to conform the Fund's portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements. The Adviser monitors the correlation of the performance of the Fund in relation to the Index under the supervision of the Board of Trustees (the "Board"). The Fund intends to actively rebalance its portfolio to achieve high correlation of performance with the S&P 500 Index. To reduce transaction costs and minimize shareholders' current capital gains liability, the Fund's investment portfolio will not be automatically rebalanced to reflect changes in the S&P 500 Index.
THE INDEXING APPROACH. The Fund is not managed in a traditional sense, that is, by making discretionary judgments based on analysis of economic, financial and market conditions. Under ordinary circumstances, stocks will only be eliminated from or added to the Fund to reflect additions to or deletions from the S&P 500 Index (including mergers or changes in the composition of the index), to raise cash to meet withdrawals, or to invest cash contributions. Accordingly, sales may result in losses that may not have been realized if the Fund were actively managed and purchases may be made that would not have been made if the Fund were actively managed. The Fund will remain substantially fully invested in common stocks and equity derivative instruments whether stock prices are rising or falling. The Adviser believes that the indexing approach should involve less portfolio turnover, notwithstanding periodic additions to and deletions from the S&P 500 Index, and thus lower brokerage costs, transfer taxes and operating expenses, than in more traditionally managed funds, although there is no assurance that this will be the case.
The inclusion of a security in the S&P 500 Index in no way implies an opinion by S&P as to its attractiveness as an investment. S&P is not a sponsor of, or in any way affiliated with, the Fund.
The common stock of The PNC Financial Services Group, Inc. ("PNC"), the indirect parent company of the Adviser, and the common stock of BlackRock Inc. ("BlackRock"), an affiliate of PNC, are included in the S&P 500 Index. Like the other stocks in the S&P 500 Index, the Fund will invest in the common stock of PNC and BlackRock in approximately the same proportion as the percentage PNC and BlackRock common stock each represents in the S&P 500 Index. As of December 31, 2012, PNC common stock and BlackRock common stock represented 0.24% and 0.21%, respectively, of the S&P 500 Index.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments and investment practices and the associated risk factors. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
BORROWING. The Fund may borrow money to facilitate management of the Fund's portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the Fund promptly.
As required by the 1940 Act, the Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of the Fund's assets should fail to meet this 300% coverage test, the Fund, within three days (not including Sundays and holidays), will reduce the amount of the Fund's borrowings to the extent necessary to meet this 300% coverage. Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment considerations otherwise indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Fund is authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of the value of the Fund's total assets. This borrowing is not subject to the foregoing 300% asset coverage requirement. The Fund is authorized to pledge portfolio securities as the Adviser deems appropriate in connection with any borrowings.
Borrowing may subject the Fund to interest costs, which may exceed the interest received on the securities purchased with the borrowed funds. The Fund may borrow at times to meet redemption requests rather than sell portfolio securities to raise the necessary cash. Borrowing can involve leveraging when securities are purchased with the borrowed money. To avoid this situation, the Fund will not purchase securities while borrowing represents more than 5% of its total assets.
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An
option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Fund will reduce the risk that it will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission. The Fund may use futures contracts and related options for: bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. The Fund intends to use futures and options in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Fund, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Fund is not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When the Fund purchases or sells a futures contract, or sells an option thereon, the Fund is required to "cover" its position in order to limit leveraging and related risks. To cover its position, the Fund may maintain with its custodian bank (and marked-to-market on a daily basis), a segregated account consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund's outstanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the fund arising from such investment activities.
The Fund may also cover its long position in a futures contract by purchasing a put option on the same futures contract with a strike price (I.E., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. The Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
The Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. The Fund may also cover its sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. The Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with the Fund's use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and options on futures. In addition, some strategies reduce the Fund's exposure to price fluctuations, while others tend to increase its market exposure.
OPTIONS. The Fund may purchase and write put and call options on securities or securities indices (traded on U.S. exchanges or over-the-counter markets) and enter into related closing transactions. A put option on a security gives the purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time during the option period. A call option on a security gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is the consideration for undertaking the obligations under the option contract.
Put and call options on indices are similar to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than the price movements in individual securities.
The initial purchase (sale) of an option contract is an "opening transaction." In order to close out an option position, the Fund may enter into a "closing transaction," which is simply the sale (purchase) of an option contract on the same security with the same exercise price and expiration date as the option contract originally opened. If the Fund is unable to effect a closing purchase transaction with respect to an option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security upon exercise.
The Fund may purchase and write options on an exchange or over-the-counter. Over-the-counter options ("OTC options") differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available for exchange-traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information from a market maker. It is the SEC's position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand, interest rates, the pricing volatility of the underlying security and the time remaining until the expiration date.
The Fund must cover all options it writes. For example, when the Fund writes an option on a security, index or foreign currency, it will segregate or earmark liquid assets with the Fund's custodian in an amount at least equal to the market value of the option and will maintain such coverage while the option is open. The Fund may otherwise cover the transaction by means of an offsetting transaction or other means permitted by the 1940 Act or the rules and SEC interpretations thereunder.
The Fund may trade put and call options on securities, securities indices or currencies, as the investment adviser or sub-adviser determines is appropriate in seeking the Fund's investment objective. For example, the Fund may
purchase put and call options on securities or indices to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that the Fund may seek to purchase in the future. The Fund purchasing put and call options pays a premium therefor. If price movements in the underlying securities are such that exercise of the options would not be profitable for the Fund, loss of the premium paid may be offset by an increase in the value of the Fund's securities or by a decrease in the cost of acquisition of securities by the Fund.
In another instance, the Fund may write covered call options on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases in its market value. When the Fund writes an option, if the underlying securities do not increase or decrease to a price level that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised and the Fund will realize as profit the premium received for such option. When a call option written by the Fund is exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate in any increase in the price of such securities above the strike price. When a put option written by the Fund is exercised, the Fund will be required to purchase the underlying securities at a price in excess of the market value of such securities.
There are significant risks associated with the Fund's use of options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the movement in prices of options held by the Fund and the securities underlying them; (3) there may not be a liquid secondary market for options; and (4) while the Fund will receive a premium when it writes covered call options, it may not participate fully in a rise in the market value of the underlying security.
RESTRICTED AND ILLIQUID SECURITIES. While the Fund does not anticipate doing so, it may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of the Fund's net assets held in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that can not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Trust's Board. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
EXCHANGE-TRADED FUNDS ("ETFS")
The Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their operation, such as advisory and custody fees. When a fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, the fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
INVESTMENT COMPANY SHARES. The Fund may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Fund. The Fund's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying the Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
MONEY MARKET SECURITIES. Money market securities include: short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Ratings Service ("Standard & Poor's") or Moody's Investors Services Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase
agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Description of Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
U.S. TREASURY OBLIGATIONS. U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. The Fund may invest in U.S. dollar-denominated obligations of domestic branches of foreign banks and foreign branches of domestic banks only
when the Adviser believes that the risks associated with such investment are minimal and that all applicable quality standards have been satisfied. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. It is the current policy of the Fund, not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% of the Fund's total assets. The Fund's investments in
repurchase agreements, at times, may be substantial when, in the view of the
Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions in which a fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a fund. At the time a fund enters into a reverse repurchase agreement, it will earmark on the books of the fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by a fund may increase the fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to
complete the transaction as scheduled, which may result in losses to a fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by a fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. The Board has adopted procedures reasonably designed to
ensure that the foregoing criteria will be met. Loan agreements involve certain
risks in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
SWAP AGREEMENTS. The Fund may enter into equity index or interest rate swap agreements for purposes of attempting to gain exposure to the stocks making up an index of securities in a market without actually purchasing those stocks, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one-year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," I.E., the return on or increase in value of a particular dollar amount invested in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap," interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or "floor;" and interest rate dollars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Fund calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by segregating assets determined to be liquid. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of the Fund's investment restriction concerning senior securities. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for the Fund's illiquid investment limitations. The Fund will not enter into any swap agreement unless the Adviser believes that the other party to the transaction is creditworthy. 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.
The Fund may enter into swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank, investment banking firm or broker/dealer. The counter-party will generally agree to pay the Fund the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends that would have been received on those stocks. The Fund will agree to pay to the counter-party a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Fund on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of a swap agreement or periodically during its term. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount of payments that the Fund is contractually obligated to make. If the other party to a swap agreement defaults, the Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each equity swap will be accrued on a daily basis and an amount of cash or liquid assets, having an aggregate net asset value at least equal to such accrued excess will be maintained in a segregated account by the Fund's custodian. Inasmuch as these transactions are entered into for hedging purposes or are offset by segregated cash of liquid assets, as permitted by applicable law, the Fund and the Adviser believe that these transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Fund's borrowing restrictions.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments, which are traded in the over-the-counter market. The Adviser, under the supervision of the Board, is responsible for determining and monitoring the liquidity of Fund transactions in swap agreements. The use of equity swaps is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
VARIABLE AND FLOATING RATE INSTRUMENTS. Certain of the obligations purchased by the Fund may carry variable or floating rates of interest, may involve a conditional or unconditional demand feature and may include variable amount master demand notes. Such instruments bear interest at rates that are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. To the extent required by the 1940 Act, the Fund will maintain with the custodian a separate account with liquid high-grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Fund may dispose of a when-issued security or forward commitment prior to settlement if deems it appropriate.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES.
The following investment limitations are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the Fund's outstanding shares. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of the Fund would be invested in the securities of such issuer or more than 10% of the outstanding voting securities of such issuer would be owned by the Fund on the last day of each fiscal quarter. This restriction applies to 75% of the Fund's assets.
2. Purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. government, any territory or possession of the United States, the District of Columbia or any of their authorities, agencies, instrumentalities or political subdivisions and repurchase agreements secured by such instruments, and tax-free state obligations; (b) wholly owned financial companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents; (c) utilities will be divided according to their services, for example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry; (d) personal credit and business credit businesses will be considered separate industries.
3. Make loans, except that the Fund may purchase and hold debt instruments and enter into repurchase agreements in accordance with its investment objective and policies and may lend portfolio securities in an amount not exceeding one-third of its total assets.
4. Borrow money, issue senior securities or mortgage, pledge or hypothecate its assets except to the extent permitted under the 1940 Act.
5. Purchase or sell real estate, except that the Fund may purchase securities of issuers which deal in real estate and may purchase securities which are secured by interests in real estate.
6. Invest in commodities, except that, as consistent with its investment objective and policies, the Fund may: (a) purchase and sell options, forward contracts, futures contracts, including without limitation, those relating to indices; (b) purchase and sell options on futures contracts or indices; (c) purchase publicly traded securities of companies engaging in whole or in part in such activities. For purposes of this investment limitation, "commodities" includes commodity contracts.
7. Act as an underwriter of securities within the meaning of the Securities Act of 1933 except insofar as the Fund might be deemed to be an underwriter upon the disposition of portfolio securities acquired within the limitation on purchases of illiquid securities and except to the extent that the purchase of obligations directly from the issuer thereof in accordance with its investment objective, policies and limitations may be deemed to be underwriting.
NON-FUNDAMENTAL POLICIES.
The Fund is subject to the following non-fundamental limitations, which may be changed without the vote of shareholders:
The Fund may not:
1. Acquire any other investment company or investment company security except in connection with a merger, consolidation, reorganization or acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles, spreads, or any combination thereof, except as consistent with the Fund's investment objective and policies for transactions in options on securities or indices of securities, futures contracts and options on futures contracts and in similar investments.
3. Purchase securities on margin, make short sales of securities or maintain a short position, except that, as consistent with the Fund's investment objective and policies, (a) this investment limitation shall not apply to the Fund's transactions in futures contracts and related options, options on securities or indices of securities and similar instruments, and (b) it may obtain short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising control.
5. Hold more than 15% of its net assets in illiquid securities.
6. Purchase securities while its outstanding borrowings (including reverse repurchase agreements) are in excess of 5% of its total assets. Securities held in escrow or in separate accounts in connection with the Fund's investment practices described in the prospectus or this SAI are not deemed to be pledged for purposes of this limitation.
For purposes of the above investment limitations, and except for the Fund's policy on illiquid securities and borrowing, if a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in the value of the Fund's portfolio securities will not constitute a violation of such limitation for purposes of the 1940 Act. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed the limitation, the Fund will take steps to bring the aggregate amount of illiquid securities back within the limitation as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
THE ADVISER
GENERAL. PNC Capital Advisors, LLC, a Delaware limited liability company, serves as the Fund's investment adviser and manages the Fund's assets on a day-to-day basis. The Adviser is registered with the SEC under the Investment Advisers Act of 1940. The principal business address of the Adviser is One East Pratt Street, 5th Floor, Baltimore, Maryland, 21202. The Adviser is an indirect wholly owned subsidiary of The PNC Financial Services Group, Inc., a diversified financial services organization providing consumer and business banking; specialized services for corporations and government entities including corporate banking, real estate finance and asset-backed lending; wealth management; asset management; and global fund services. As of December 31, 2012, the Adviser had discretionary management authority with respect to approximately $35 billion in assets under management.
On September 29, 2009, Allegiant Asset Management Company, the Fund's former investment adviser, and its affiliate, PNC Capital Advisors, Inc., merged into the Adviser. Other than the change in the principal executive officers and directors of PNC Capital Advisors, LLC, all aspects of the relationship between the Fund and the Adviser, including the operations of the Adviser, the fees payable to the Adviser and the persons responsible for the day-to-day investment management of the Fund, remain unchanged.
ADVISORY AGREEMENT WITH THE TRUST. The Trust, on behalf of the Fund, and the Adviser have entered into an investment advisory agreement dated January 29, 2010 (the "Advisory Agreement"). The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of misfeasance or negligence generally in the performance of its duties hereunder or its negligent disregard of its obligation and duties under the agreement.
After the initial two year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" or any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. (As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act).
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.095% of the average daily net assets of the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Adviser the following advisory fees:
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CONTRACTUAL FEES PAID FEES WAIVED BY ADVISER TOTAL FEES PAID (AFTER WAIVERS)
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2010 2011 2012 2010 2011 2012 2010 2011 2012
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$216,583 $204,259 $129,483 $0 $0 $0 $216,583 $204,259 $129,483
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PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates its portfolio managers with a combination of a fixed cash base salary and variable incentive compensation, which may be comprised of a cash bonus and a stock compensation award.
A portfolio manager's base salary is dependent on his/her level of experience and expertise. The variable incentive compensation for the portfolio managers is determined on a fully discretionary basis as described below. The discretionary incentive compensation is determined by evaluating multiple factors including investment performance, the Adviser's financial performance, PNC's financial performance and individual contribution made by the portfolio management staff. Investment performance is compared relative to a pre-defined peer group and evaluated on a one, three and five year basis with 25%, 50% and 25% weightings, respectively. Peer performance metrics are calculated for each portfolio composite. Portfolio team grand mean investment performance scores are determined by combining composite peer performance scores weighted by composite assets under management. The overall portfolio manager incentive compensation allocation is determined by evaluating the Adviser's and PNC's current year versus prior year, budgeted financial performance and current year assets under management flows. Additionally, the Adviser's management conducts a subjective assessment of each portfolio manager's individual performance, including but not limited to his or her contribution to the investment team-oriented process and overall performance, client feedback, contributions to the business objectives of the firm, leadership, teamwork and management skills. The combination of these factors determines individual incentive compensation payments.
In addition to the compensation described above, portfolio managers may receive compensation in the form of stock of PNC under its stock plan, which is a program that awards a portion of discretionary year-end compensation in restricted stock or stock option awards of PNC that are subject to vesting and other conditions. Eligibility for participation in this incentive program depends on the portfolio manager's performance and seniority.
FUND SHARES OWNED BY THE PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 Act, as amended ("1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES(1) -------------------------------------------------------------------------------- Hitesh Patel, Ph.D. None -------------------------------------------------------------------------------- Chen Chen, Ph.D. None -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
-----------------------------------------------------------------------------
NUMBER NUMBER NUMBER
OF OF OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
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Hitesh Patel, Ph.D. 4 $179,776,325 2 $28,593,374 10 $467,670,777
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Chen Chen, Ph.D. 1 $112,988,151 1 $20,051,728 7 $418,081,864
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CONFLICTS OF INTERESTS. Portfolio managers at the Adviser typically manage multiple accounts. These accounts may include, among others, mutual funds, separate accounts, proprietary accounts and pooled investment vehicles. Portfolio managers make investment decisions for each portfolio based on the investment objectives, policies, practices and other relevant investment considerations that the managers believe are applicable to that portfolio. Consequently, portfolio managers may purchase (or sell) securities for one portfolio and not another portfolio. The Adviser has adopted brokerage and trade allocation policies and procedures which it believes are reasonably designed to address any potential conflicts associated with managing multiple accounts for multiple clients.
If the different accounts have materially and potentially conflicting investment objectives or strategies, a conflict of interest could arise. For example, if a portfolio manager purchases a security for one account and sells the same security short for another account, such trading pattern may disadvantage either the account that is long or short. In making portfolio manager assignments, the Adviser seeks to avoid such potentially conflicting situations. However, where a portfolio manager is responsible for accounts with differing investment objectives and policies, it is possible that the portfolio manager will conclude that it is in the best interest of one account to sell a portfolio security while another account continues to hold or increases the holding in such security.
The results of the investment activities of the Fund may differ significantly from the results achieved by the Adviser for other client accounts. The Adviser will manage the Fund and the other client accounts it manages in accordance with their respective investment objectives and guidelines. However, the Adviser may give advice, and take action, with respect to any current or future other client accounts that may compete or conflict with the advice the Adviser may give to the Fund, or may involve a different timing or nature of action than with respect to the Fund.
Transactions undertaken by the Adviser for other client accounts may adversely impact the Fund. The Adviser on behalf of one or more other client accounts may buy or sell positions while the Fund is undertaking the same or a differing, including potentially opposite, strategy, which could disadvantage the Fund. For example, the Fund may buy a security and the Adviser, on behalf of its other client accounts, may establish a short position in that same security. The subsequent short sale may result in impairment of the price of the security which the Fund holds. Conversely, the Fund may establish a short position in a security and the Adviser, on behalf of its other client accounts, may buy that same security. The subsequent purchase may result in an increase of the price of the underlying position in the short sale exposure of the Fund and such increase in price would be to the Fund's detriment. Conflicts may also arise because portfolio decisions regarding the Fund may benefit other client accounts of the Adviser. For example, the sale of a long position or establishment of a short position by the Fund may impair the price of the same security sold short by (and therefore benefit) the other client accounts of the Adviser, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held by (and therefore benefit) the other client accounts of the Adviser.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.02% of the average daily net assets of the Fund, subject to minimum fees as described in the Administration Agreement. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following administration fees:
--------------------------------------------------------------------------------------------------------------------- CONTRACTUAL FEES PAID FEES WAIVED TOTAL FEES PAID (AFTER WAIVERS) --------------------------------------------------------------------------------------------------------------------- 2010 2011 2012 2010 2011 2012 2010 2011 2012 --------------------------------------------------------------------------------------------------------------------- $45,593 $42,999 30,000 $0 $0 $0 $45,593 $42,999 $30,000 --------------------------------------------------------------------------------------------------------------------- |
THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 (the "Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, PA 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either
party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
DISTRIBUTION PLAN. The Trust has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or in any agreements related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the Trust. All material amendments of the Plan will require approval by a majority of the Board and of the Qualified Trustees.
The Plan provides that Class II shares of the Fund will pay the Distributor a fee not to exceed 0.10% of the Fund's average daily net assets attributable to Class II shares from which the Distributor may make payments pursuant to written agreements to financial institutions and intermediaries such as banks, savings and loan associations, insurance companies including, without limit, investment counselors, broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for services, reimbursement of expenses incurred in connection with distribution assistance or provision of shareholder services. The Fund's distributor has voluntarily agreed to limit this amount to 0.05% of the average daily net assets of the Fund, but may discontinue all or part of this limitation at any time. The Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution or shareholder service expenses incurred by the Distributor or the amount of payments made to other financial institutions and intermediaries. Investors should understand that some Agents may charge their clients fees in connection with purchases of shares or the provision of shareholder services with respect to shares. The Trust intends to operate the Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
12B-1 FEE PAYMENTS. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Distributor the following fees pursuant to the Plan:
2010 2011 2012 2010 2011 2012 -------------------------------------------------------------------------------- $13,815 $14,638 $13,860 $13,817 $14,639 $13,860 -------------------------------------------------------------------------------- |
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's
retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
State Street Bank & Trust Company, State Street Financial Center, One Lincoln Street, Boston, MA 02111 (the "Transfer Agent"), serves as transfer agent and Boston Financial Data Services, Inc. ("BFDS") serves as the servicing agent for the Fund under transfer agency agreements with the Trust. The structure of the fee agreement with the Transfer Agent is based upon the size, type and number of accounts and transactions made by shareholders. The Fund compensates BFDS for its services.
THE CUSTODIAN
PNC Bank, National Association, 1900 East 9th Street, 13th Floor, Cleveland, Ohio 44114 (the "Custodian"), serves as the Fund's custodian under a custody agreement with the Trust. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700 Philadelphia, PA 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP as indicated in their report with respect thereto, and are incorporated by reference hereto in reliance upon the authority of said firm as experts in giving said reports.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund, described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or
material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving
as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
--------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
--------------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust and
Administrator and the SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
--------------------------------------------------------------------------------------------------------------------
-S-24-
|
--------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------
Management (UK) Limited. Director
of the Distributor since 2003.
--------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------------------------------------------
Charles E. Trustee Self-Employed Current Directorships: Trustee of The
Carlbom (since 2005) Business Consultant, Advisors' Inner Circle Fund II and
(08/20/34) Business Projects Inc., Bishop Street Funds. Director of
since 1997. Oregon Transfer Co.
--------------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and
Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
--------------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of The
Jr. (since 2011) Consultant since Advisors' Inner Circle Fund II and
(05/28/52) January 2012. Director Bishop Street Funds. Director of The
of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
--------------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Current Directorships: Trustee of The
Johnson (since 2005) Investor since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
--------------------------------------------------------------------------------------------------------------------
-S-25-
|
--------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
--------------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
--------------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
--------------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
--------------------------------------------------------------------------------------------------------------------
George J. Trustee Retired since January Current Directorships: Trustee/
Sullivan, Jr. (since 1999) 2012. Self-employed Director of State Street Navigator
(11/13/42) Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II,
1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
--------------------------------------------------------------------------------------------------------------------
-S-26-
|
--------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
--------------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and
investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and
considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
------------------------------------------------------------------------------------
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF SHARES
NAME FUND SHARES (FUNDS)(1) (ALL FUNDS IN THE FUND COMPLEX)(1,2)
------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------
Doran None None
------------------------------------------------------------------------------------
Nesher None None
------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------
Carlbom None None
------------------------------------------------------------------------------------
Darr None None
------------------------------------------------------------------------------------
Grause None None
------------------------------------------------------------------------------------
Johnson None Over $100,000
------------------------------------------------------------------------------------
Krikorian None None
------------------------------------------------------------------------------------
Speca None None
------------------------------------------------------------------------------------
Storey None None
------------------------------------------------------------------------------------
Sullivan None None
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|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the "Fund Complex."
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
------------------------------------------------------------------------------------------------------
PENSION OR
RETIREMENT ESTIMATED
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS
COMPENSATION AS PART OF FUND UPON TOTAL COMPENSATION FROM THE
NAME FROM THE TRUST EXPENSES RETIREMENT TRUST AND FUND COMPLEX(1)
------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
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INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
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(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
---------------------------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
---------------------------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
---------------------------------------------------------------------------------------------------------------------------
Michael Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Lawson Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) (since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
---------------------------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed Trust
and New Covenant Funds. Chief Compliance
Officer of SEI Opportunity Fund, L.P. until
2010. Director of Investment Product
Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February
2003.
---------------------------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(03/28/68) (since 1999) SIMC and the Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
---------------------------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
(07/18/77) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
---------------------------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
---------------------------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
---------------------------------------------------------------------------------------------------------------------------
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PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the NYSE is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elects to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. If the Fund qualifies as a RIC it will not be subject to federal income taxes on the net investment income and net realized capital gains that it timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, the Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership; (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
The Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires the Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, the Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of that year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Fund may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. The Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to individuals of 20% (lower rates apply to individuals in lower tax brackets) to the extent that the Fund receives qualified dividend income on the securities it holds and the Fund designates the distributions as qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (e.g.,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, or
the stock of which is readily tradable on an established securities market in
the United States). A dividend will not be treated as qualified dividend income
to the extent that (i) the shareholder has not held the shares on which the
dividend was paid for more than 60 days during the 121-day period that begins
on the date that is 60 days before the date on which the shares become
"ex-dividend" (which is the day on which declared distributions (dividends or
capital gains) are deducted from the Fund's assets before it calculates the net
asset value) with respect to such dividend, (ii) the Fund has not satisfied
similar holding period requirements with respect to the securities it holds
that paid the dividends distributed to the shareholder), (iii) the shareholder
is under an obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to substantially similar or related property, or
(iv) the shareholder elects to treat such dividend as investment income under
section 163(d)(4)(B) of the Code. Distributions by the Fund of its net
short-term capital gains will be taxable as ordinary income. Capital gain
distributions consisting of the Fund's net capital gains will be taxable as
long-term capital gains. The Fund will report annually to its shareholders the
amount of the Fund's distributions that qualify for the reduced tax rates on
qualified dividend income.
The Fund's dividends that are paid to their corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the first-in, first-out method as the default cost basis method. The cost basis method elected by the Fund
shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
FOREIGN TAXES. Dividends and interests received by the Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors.
TAX TREATMENT OF COMPLEX SECURITIES. The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, the Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because the Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold at a rate of 28% and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure
requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by its tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
BROKERAGE ALLOCATION AND OTHER FUND BROKERAGE PRACTICES
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
-----------------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------------
UA S&P 500 Index Fund $22,263 $47,672 $19,943
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser in connection with the account that paid commissions to the broker providing such services. Information so received by the Fund or any other specific client Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the adviser with research services. The FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Fund did not pay any commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act, affiliated broker-dealers are permitted to receive and retain compensation for effecting portfolio transactions for the Fund on an exchange if a written contract is in effect between the affiliate and the Fund expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund did not pay brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. During the fiscal year ended October 31, 2012, the Fund held the following securities of its "regular brokers and dealers:"
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NAME OF BROKER/DEALER TYPE OF SECURITY HELD DOLLAR AMOUNT AT FISCAL YEAR
END
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Citigroup, Inc Equity $1,101,000
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Bank of New York Equity $291,000
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Goldman Sachs Equity $555,000
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JP Morgan Equity $1,554,000
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Morgan Stanley Equity $245,000
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PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under U.S. Securities and Exchange Commission ("SEC") rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include futures contracts and option contracts in which the Fund may invest since such contracts generally have remaining maturities of less than one-year. For the Fund's two most recently completed fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for the Fund were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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UA S&P 500 Index Fund 22% 22%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, on the one hand, and include procedures to address conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund, its Adviser, or its principal underwriter on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person, either directly or through reports by the Fund's Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Fund will disclose a complete or summary schedule of investments (which includes the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. The Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q, and the Fund's complete schedule of investments following the second and fourth fiscal quarters is available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV. Should the Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-866-766-8043. In addition, the Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month, on the internet at http://aicfundholdings.com/allegiant. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month, on the internet at http://aicfundholdings.com/allegiant or at http://uafund.com. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the Custodian, Administrator or Transfer Agent, in connection with their services to the Fund. From time to time rating and ranking organizations, such as Standard and Poor's, Lipper, Morningstar, Inc, Thomson Financial, Bloomberg and ICI (portfolio analysis) may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of the Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Fund believes that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Fund's policies and procedures provide that the Authorized Person may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Authorized Person must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Fund's shareholders and that to the extent conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than quarterly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than five days after the date of the information. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Fund requires any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Fund, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Fund's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
ADDITIONAL INFORMATION ABOUT THE TRUST
DESCRIPTION OF SHARES. The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the portfolio. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY. The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for
indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY. The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a trustee's individual liability in any manner inconsistent with the federal securities laws.
CODES OF ETHICS. The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, including securities that may be purchased or held by the Fund, but are required to report their personal securities transactions for monitoring purposes. In addition, certain Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
PROXY VOTING
The Board has appointed ProxyVote Plus, LLC ("ProxyVote Plus"), a proxy consulting service, to act as the Fund's agent in exercising the proxy voting rights appurtenant to securities held by the Fund in a manner consistent with the policies adopted by ProxyVote Plus, and subject to the general oversight by the Board. ProxyVote Plus' proxy voting policies are designed to vote proxies in favor of shareholder interests following a case-by-case review of the merits of each proxy by ProxyVote Plus. In addition, ProxyVote Plus' proxy voting policies permit ProxyVote Plus to initiate shareholder proposals on the Fund's behalf in cases where ProxyVote Plus reasonably believes that such proposals are in the best interests of the Fund's shareholders. These policies and procedures are included in Appendix B to this SAI.
Because the Fund is distributed primarily to the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada (the "UA"), the Board has considered the recommendations of the UA in appointing ProxyVote Plus as the Fund's proxy voting agent.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-888-766-8043; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Fund. Persons who owned of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to control the Fund within the meaning of the 1940 Act. The Trust believes that most of the shares referred to below were held by the persons below in accounts for their fiduciary, agency or custodial customers. Shareholders controlling the Fund may have a significant impact on any shareholders vote of the Fund.
-------------------------------------------------------------------------------------------- UA S&P 500 INDEX FUND -- CLASS I -------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------------------- Heating Piping & Refrigeration 2,397,220.382 24.99% Pension Fund DTD 06/11/1973 9411 Philadelphia Road, Suite S Baltimore, MD 21237-4168 -------------------------------------------------------------------------------------------- Mercer Trust Company TTEE 1,086,808.221 11.33% FBO Steamfitters Supplemental Retirement Plan Attn: DC Plan Admin MS C4D 523661 1 Investors Way N7L Norwood, MA 02062-1599 -------------------------------------------------------------------------------------------- Trustees of the Northern Illinois Retirement Fund 776,685.423 8.10% State Street Bank & Trust 200 Clarendon Street Boston, MA 02116-5021 -------------------------------------------------------------------------------------------- Plumbers & Pipefitters Local 333 684,133.386 7.13% Pension FD DTD 07/01/2000 700 Tower Drive, Suite 300 Troy, MI 48098-2835 -------------------------------------------------------------------------------------------- Plumbers & Steamfitters Local 615,683.577 6.42% Union 486 911 Ridgebrook Road Sparks Glenco, MD 21152-9460 -------------------------------------------------------------------------------------------- Wilmington Trust RISC TTEE FBO 571,575.212 5.96% Western Washington UA Supplemental Pension Plan PO Box 52129 Phoenix, AZ 85072-2129 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- UA S&P 500 INDEX FUND -- CLASS II -------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------------------- New York Life Trust Company 1,970,614.715 75.58% 169 Lackawanna Avenue Parsippany, NJ 07054-1007 -------------------------------------------------------------------------------------------- |
INDEX INFORMATION
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to IMC (the "Licensee") is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the Licensee or the Fund. S&P has no obligation to take the needs of the Licensee or the owners of the Fund into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by the Fund how it is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSION, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
APPENDIX A -- DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
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following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and assured sources of alternate liquidity.
The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
o Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
o Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES
This statement sets forth the proxy voting policy of ProxyVote Plus, LLC. The Department of Labor has stated that the fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock and that trustees may delegate this duty to an investment manager. ERISA section 3(38) defines an investment manager as any fiduciary who is registered as an investment adviser under the Investment Advisers Act of 1940. ProxyVote Plus is a registered investment adviser under the Investment Advisers Act of 1940.
ProxyVote Plus shall vote the proxies of its clients solely in the best interests of their participants and beneficiaries and for the exclusive purpose of providing benefits to them. ProxyVote Plus shall not subordinate the interests of participants and beneficiaries to unrelated objectives. ProxyVote Plus shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. When proxies due ProxyVote Plus's clients have not been received, ProxyVote Plus will make reasonable efforts to obtain missing proxies. ProxyVote Plus is not responsible for voting proxies it does not receive.
ProxyVote Plus shall report annually to its clients on proxy votes cast on their behalf. These proxy voting reports will demonstrate ProxyVote Plus's compliance with its fiduciary duty and will facilitate clients' monitoring of ProxyVote Plus.
ProxyVote Plus shall consider these guidelines as it evaluates proposals appearing on proxy ballots it votes on behalf of its clients.
BOARD OF DIRECTOR PROPOSALS
ELECTION OF DIRECTORS
The election of directors generally occurs under one of two circumstances: when the director or slate is non-contested or when a director or slate is nominated by some other party and is contested by management.
UNCONTESTED ELECTIONS OF DIRECTORS
ProxyVote Plus will evaluate an uncontested slate of nominees to the board of directors by assessing the performance of the board of directors and the qualifications of individual nominees to the board. Specifically, the following factors will be considered:
o The company's financial performance as judged by total long-term returns to shareholders and other relevant financial indicators in comparison to a group of its peers or appropriate broader markets such as the S&P 500.
o Attendance records of incumbent directors. In general, support will be withheld from directors who have failed to attend at least 75 % of board and committee meetings without adequate justification. A company's failure to disclose this information may also be considered in determining whether to withhold support for nominees to the board.
o The independence of the board and nominees. ProxyVote Plus believes that a board independent from management is of vital importance to a company and its shareholders. Accordingly, ProxyVote Plus will cast votes in a manner that shall encourage the independence of boards. Independence will be evaluated based upon a number of factors, including: Whether the nominee has been employed by the company or an affiliate in an executive capacity within the last five years; whether the nominee has been or is currently employed by a firm that is one of the company's paid advisors or consultants; whether the nominee has any personal services contract with the company; whether the nominee is a relative of an executive or director of the company; whether the nominee is an officer of a company on which the company's chairman or chief executive officer is also a board member.
o The number of other boards of directors on which nominees serve. Service as a director represents a major commitment of time, energy, and talent. The National Association of Corporate Directors has estimated that directors spend as much as 190 hours per year preparing for and attending board and committee meetings. Service on a number of other boards, especially by one who also holds a full- time position, creates the risk that one's obligation as a director may not be fully met.
o The overall conduct of the company. As indicated, directors bear ultimate responsibility to shareholders for the success or failure of the company. Therefore, they should be held accountable for actions taken that may not be in shareholders' best interests, such as awarding excessive compensation to executives or themselves for performance that does not warrant it; for acting against shareholders' properly expressed wishes, such as failing to implement an appropriate proposal approved by a majority of shareholders; for adopting antitakeover provisions not in shareholders' best interests; for refusing to provide information to which shareholders are entitled; or for other actions taken by their company that may not be in shareholders' best interests.
o The performance of the Board's Audit Committee. PVP may withhold support from nominees that serve on an Audit Committee when it is determined that the nominees are not serving shareholders' long-term interests by allowing the company's external auditor to have potential conflicts of interest resulting from the auditor's receipt of non-audit fees from the company.
CONTESTED ELECTIONS OF DIRECTORS
Contested elections of directors frequently occur when a board candidate or slate runs for the purpose of seeking a significant change in corporate policy or control. Competing slates will be evaluated based upon the personal qualifications of the candidates, the policies that they advance, and their expressed and demonstrated commitment to the interests of all shareholders.
DIRECTOR ELECTION MAJORITY VOTE STANDARD
ProxyVote Plus will support shareholder proposals seeking to require that directors be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders. Most companies require that directors receive a plurality of the votes cast, which in practical terms means that a nominee can be elected even if 99.9% of shareholders withhold support from him or her. A majority vote standard serves to make shareholders' right to elect directors more meaningful.
MAJORITY OF INDEPENDENT DIRECTORS
In general, ProxyVote Plus will support shareholder proposals seeking to require that a majority of directors be independent. SEE definition of independence under UNCONTESTED ELECTION OF DIRECTORS. Board independence is critical so that directors may carry out their duties to select, monitor and compensate management.
SEPARATE OFFICES OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER
In general, ProxyVote Plus will support shareholder proposals seeking to require that different persons serve as the chairman and chief executive officer. The chairman's duty to oversee management is obviously compromised when he is required to monitor himself. However, in certain circumstances, such as a small-cap company with a limited group of leaders, it may be appropriate for these positions to be combined for some period of time.
INDEPENDENT NOMINATING, COMPENSATION, AND AUDIT COMMITTEES
ProxyVote Plus will support proposals that all, or a majority of directors on these committees, be independent directors. SEE definition of independence under UNCONTESTED ELECTION OF DIRECTORS. Such independence is necessary to the effective functioning of these committees.
CLASSIFIED BOARDS
ProxyVote Plus will evaluate proposals to establish a classified board or shareholder proposals to declassify the board by taking into consideration that classified boards reduce the ability of shareholders to influence corporate policy and hold directors accountable versus the potential benefit of discouraging transactions that may be detrimental to the long-term economic best interests of plan participants and beneficiaries.
TERM LIMITS
ProxyVote Plus will generally vote against proposals to limit terms of directors because they may result in prohibiting the service of directors who significantly contribute to the company's success and represent shareholders' interests very well. ProxyVote Plus believes that holding individual nominees to high standards when they seek election better advances shareholders' interests.
DIRECTOR LIABILITY
Management proposals typically seek shareholder approval to adopt an amendment to the company's charter to eliminate or limit the personal liability of directors to the company and its shareholders for monetary damages for any breach of fiduciary duty to the fullest extent permitted by state law. In contrast, shareholder proposals seek to provide for personal monetary liability for fiduciary breaches arising from gross negligence. While ProxyVote Plus recognizes that a company may have a more difficult time attracting and retaining directors if they are subject to personal monetary liability, ProxyVote Plus believes the great responsibility and authority of directors justifies holding them accountable for their actions. Each proposal addressing director liability will be evaluated consistent with this philosophy. ProxyVote Plus may support these proposals when the company persuasively argues that such action is necessary to attract and retain directors, but ProxyVote Plus may often oppose management proposals and support shareholder proposals in light of our philosophy of promoting director accountability.
Specifically, ProxyVote Plus will oppose management proposals that limit a director's liability for (i) a breach of the duty of loyalty, (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violations of the law, (iii) acts involving the unlawful purchases or redemptions of stock, (iv) the payment of unlawful dividends, or (v) the receipt of improper personal benefits. In addition, ProxyVote Plus will generally oppose proposals to reduce or eliminate directors' personal liability when litigation is pending against current board members.
INDEMNIFICATION
Indemnification is the payment by a company of the expenses of directors who become involved in litigation as a result of their service to a company. Proposals to indemnify a company's directors differ from those to eliminate or reduce their liability because with indemnification directors may still be liable for an act or omission, but the company will bear the expense. ProxyVote Plus may support these proposals when the company persuasively argues that such action is necessary to attract and retain directors, but will generally oppose indemnification when it is being proposed to insulate directors from actions they have already taken.
OUTSIDE DIRECTOR COMPENSATION AND BENEFITS
In consideration for the significant contributions and responsibilities expected of outside directors, ProxyVote Plus believes reasonable compensation should be awarded to them. Shareholder evaluation of director compensation is especially important since directors are responsible for compensating themselves. As the REPORT OF THE NATIONAL ASSOCIATION OF CORPORATE DIRECTORS BLUE RIBBON COMMISSION ON DIRECTOR COMPENSATION (1995) stated:
The challenge of devising director compensation plans is that both the inside and outside directors have a conflict of interests. Outside directors, of course, have a conflict of interests in being responsible for setting their own pay. Inside directors, who normally do not get additional pay for serving on the board, do not have the same direct conflict, but they do have an indirect conflict because of potential reciprocity with outside members of the board. The outside directors would be unlikely to increase their own compensation over the objections of the CEO and senior officers serving as inside directors. In turn, these same outside directors approve pay plans for these key insiders.
Thus, full disclosure in the proxy statement of the philosophy and process used in establishing director compensation and the total value of the compensation is critically important to shareholders.
ProxyVote Plus supports compensating directors in a fashion that rewards excellent service, not marginal performance, and enhances directors' links to shareholders. Further, director compensation should be accomplished in a manner that does not compromise the independence of directors. For example, a director who is scheduled to receive a large pension if he serves for a certain number of years is less likely to confront management if he believes this may reduce the likelihood that his pension rights will vest.
With these considerations in mind, ProxyVote Plus will support paying directors solely in the form of equity and cash and will support management and shareholder proposals to eliminate pension and benefit programs. ProxyVote Plus will support proposals that encourage a significant component of directors' total compensation be in the form of stock, but will also evaluate the appropriateness of the total value of the compensation package. For example, ProxyVote Plus may not support a proposal to reduce directors' cash compensation from $40,000 to $20,000 if it is replaced with stock awards of 10,000 shares worth $1,000,000. ProxyVote Plus also wishes to encourage significant stock holdings by directors without precluding board service by otherwise qualified individuals who do not possess significant wealth. Such ownership levels without excluding such people may be accomplished by offering compensation in the form of stock and cash, so long as the stock component is significant and the cash component is reasonable. Stock grants should be structured to avoid short-term holdings by directors.
BROADER PARTICIPATION ON THE BOARD
ProxyVote Plus will support proposals requesting companies to make efforts to seek more women and minority group members for service on boards. A more diverse board of qualified directors benefits the company and shareholders.
CHANGES IN CONTROL
ProxyVote Plus will evaluate proposals seeking shareholder approval for a merger, acquisition, restructuring, or spinoff by reviewing the proposed benefits and potential disadvantages to shareholders. In determining the appropriate vote, ProxyVote Plus will recognize that its duty is to advance the long-term economic best interests of our clients' participants and beneficiaries.
CORPORATE GOVERNANCE
AUDITORS
Independent auditors serve a critically important role in helping to protect the integrity and reliability of corporate financial reporting. A company's external auditor must be free of conflicts of interest that may impede its ability to confront management when the auditor has concerns about the company's financial reporting. When a company's external auditor is receiving significant non-audit fees from that company, it may create such conflicts of interest.
ProxyVote Plus will evaluate all fees paid by a company to its auditor and generally will not support management's request to ratify its auditors when it is determined that the auditors are receiving non-audit fees from the company -- in addition to audit fees -- that may compromise the auditor's independence. In addition, in those cases where there has been a change in auditors from the prior years and it is determined that the cause is strict enforcement of accounting principles and practices by the terminated firm, ProxyVote Plus will consider a vote against the new auditing firm. ProxyVote Plus will generally support shareholder proposals seeking to bar auditors from receiving non-audit fees from companies at which they perform audits for such fees increase the auditor's potential conflicts of interest.
INCREASE AUTHORIZED COMMON STOCK
ProxyVote Plus will evaluate management proposals requesting shareholder approval to increase authorized common stock by determining whether management has provided justification for the increase. For example, ProxyVote Plus may support increases in authorized common stock to fund stock splits that are in shareholders' interests. ProxyVote Plus will generally oppose proposals when the company intends to use the additional stock to implement a poison pill or other takeover defense. ProxyVote Plus will evaluate the amount of additional stock requested in comparison to the requests of the company's peers as well as the company's articulated reason for the increase.
BLANK CHECK PREFERRED STOCK
ProxyVote Plus will oppose requests to authorize blank check preferred stock. Blank check preferred stock is preferred stock authorized by shareholders that gives the board of directors broad powers to establish voting, dividend and other rights without any shareholder review. It can be used as an antitakeover device and for this reason ProxyVote Plus will vote against its authorization.
REINCORPORATION
ProxyVote Plus will generally oppose proposals by companies to reincorporate to jurisdictions that may result in a weakening of shareholder rights, management and director accountability or present other risks that outweigh potential benefits. ProxyVote Plus may support management requests to reincorporate when satisfactory business justification has been provided, and there is no overall and significant negative impact on matters of corporate governance or management or director accountability.
POISON PILLS
ProxyVote Plus's analysis will consider whether a poison pill proposal by management requires management to submit the pill periodically to a shareholder vote. In evaluating any poison pill proposal, ProxyVote Plus will consider the impact of acquisition attempts that may be detrimental to the long-term economic best interests of plan participants and beneficiaries.
INSIDER TRADING
ProxyVote Plus will support proposals that establish "zero tolerance" policies for illegal insider trading activity. Illegal insider trading has an extremely deleterious effect on share price and investor confidence.
BOARD SIZE AND COMPOSITION
ProxyVote Plus will generally support management proposals to change the number of directors provided a satisfactory explanation justifying the change is provided in the proxy statement.
SUPERMAJORITY VOTING REQUIREMENTS
ProxyVote Plus's analysis will weigh the consideration that supermajority voting requirements may be used to undermine voting rights against the potential benefit, in some circumstances, of protecting minority stockholder interests.
DUAL CLASS VOTING
ProxyVote Plus will take into consideration the principle of one share, one vote; the impact of any dilution in shareholder voting rights; and any decrease in share price likely to result from issuing a new class of stock with unequal voting rights.
CONFIDENTIAL VOTING AND INDEPENDENT TABULATION OF THE VOTE
ProxyVote Plus will consider the interest in assuring that proxy voting be protected from potential management coercion and management's use of corporate funds to lobby shareholders to change their votes.
CUMULATIVE VOTING
ProxyVote Plus will generally support shareholder proposals to implement cumulative voting and oppose management proposals to eliminate it. Cumulative voting is a method of obtaining minority shareholder representation on a board and of achieving a measure of board independence from management control.
SHAREHOLDERS' RIGHT TO CALL SPECIAL MEETINGS
In analyzing proposals to limit or eliminate the right of shareholders who have
held their shares for at least one year to call special meetings on issues of
importance, ProxyVote Plus will weigh the fact that this right enhances the
opportunity for shareholders to raise issues of concern with the board of
directors against their potential for facilitating changes in control.
APPROVE OTHER BUSINESS
ProxyVote Plus will generally oppose management requests to approve other business because this gives management broad authority to take action without shareholder consent even when shareholders have an interest in the issue.
EMPLOYEE-RELATED PROPOSALS
EMPLOYEE STOCK PURCHASE PLANS
ProxyVote Plus will generally support employee stock purchase plans. These plans cover a large number of a company's employees and allow them to purchase the company's stock at a slight discount. ProxyVote Plus supports employee ownership in companies for it serves to link the interests of employees of the company with shareholders of the company, which benefits shareholders in the long run.
HIGH-PERFORMANCE WORKPLACES
ProxyVote Plus will generally support proposals encouraging high-performance workplace practices at companies. Such practices may include employee training, direct involvement in decision making, compensation linked to performance, employment security and a supportive work environment ---or may include other measures of performance, such as the extent to which a company uses part-time or contract employees to the exclusion of full-time paid employees. High-performance workplace practices can contribute to both a company's productivity and long-term financial performance. However, ProxyVote Plus will review these proposals to ensure that they are in shareholders' best interests and do not unduly interfere with the company's operation.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION PLANS
ProxyVote Plus supports compensation plans that provide challenging performance objectives and serve to motivate executives to excellent performance. However, ProxyVote Plus does not support executive compensation plans that exceed the requirement necessary to attract and retain qualified and skilled managers, that adversely affect shareholders, that are excessively generous, that lack clear and challenging performance goals, or that adversely affect employee productivity and morale. ProxyVote Plus will consider the following factors in evaluating proposed compensation plans for shareholder approval:
o Whether a proposed stock-based compensation plan generally is available to other managers and employees in the company, or is targeted narrowly to the top executives of the company. Broad-based stock option plans may provide a significantly greater improvement in employee productivity and company performance than those narrowly targeted to top managers.
o The effect of a stock-based plan on the potential dilution of outstanding shares. Proposals with relatively high potential dilution levels (more than 10 percent) impose potentially large future liabilities that erode shareholder value. However, ProxyVote Plus will also consider whether the dilution is due to stock compensation targeted to top executives or is a broad- based plan generally available to all employees.
o Whether a compensation plan permits the replacement or repricing of "underwater" stock options; that is, those stock options whose exercise price is above the market price of the company stock. The repricing of stock options -- by lowering the exercise price of the stock --can serve to reward managers for the poor performance of the company' stock, undermining the performance-based nature of stock option awards.
o Whether the stock-based compensation plan provides for stock options that are "premium" priced, linked to a market or industry stock price index or other performance measure. Premium-priced stock options as well as options whose exercise is dependent on exceeding a market index ensure that management compensation is linked clearly to superior stock performance, rather than to stock increases due solely to a broad-based appreciation in the equity markets.
o Whether the compensation plan creates or exacerbates disparities in the workplace that may adversely affect employee productivity and morale. In addition, the voting fiduciary should examine whether the performance goals established in a compensation plan for executives include goals or targets related to employee compensation, benefit levels or other measures of a high-performance workplace.
o Whether a compensation plan permits additional stock option grants or other forms of stock compensation for executives who already hold considerable stock through the exercise of prior stock options or grants, or who have a large number of unexercised stock options or unvested stock grants. While ProxyVote Plus generally supports stock compensation as an appropriate incentive for managers, providing additional stock compensation to these managers may offer diminished incentives and needlessly dilute the company's shares.
o Whether a plan authorizes multiple types of compensation awards, provides for substantial discretion by the compensation committee (or similar entity) to issue a wide range of stock- based awards and/or provides directors with substantial discretion to set and/or amend the performance criteria of a plan. ProxyVote Plus will not support compensation plans that are needlessly complex, inconsistent and complicated, or plans that weaken performance criteria by providing directors with excessive discretionary power.
DISCLOSING OR RESTRICTING EXECUTIVE COMPENSATION
A variety of shareholder proposals seek to limit executive compensation, or to link executive compensation to the achievement of specific performance goals. For example, some shareholder proposals seek to tie executive compensation to the company's compliance with environmental laws, workplace health and safety regulations or nondiscrimination laws or to the company's enforcement of labor standards with foreign and domestic suppliers. In addition, some proposals may restrict the exercise of stock options during periods of substantial layoffs or downsizings, or of reductions in employee pay and benefits. ProxyVote Plus will support proposals requesting that a company reflect the expense of its stock options on its income statement for stock options represent a real and significant cost to the company and such cost should be disclosed to shareholders in the income statement rather than buried in a footnote to the annual report.
ProxyVote Plus will support proposals that link executive compensation to the company's achievement of goals that improve the long-term performance of the company. ProxyVote Plus will also support proposals seeking to expand the disclosure of executive compensation when the information is useful to shareholders. ProxyVote Plus generally believes that shareholders benefit from full disclosure of all forms of compensation received by the highest paid managers of the company.
GOLDEN PARACHUTES
ProxyVote Plus will generally oppose management proposals to award golden parachutes and support shareholder proposals to eliminate them. Golden parachutes are severance agreements given to executives in the event of a merger or takeover. In light of the significant compensation already awarded most executives they are rarely justified.
SHAREHOLDER PROPOSALS
A variety of shareholder proposals are sponsored each year concerning fundamental corporate governance topics and social issues, as well as many unique proposals that are presented for vote for the first time. ProxyVote Plus's position on many of these proposals has already been discussed. In general, ProxyVote Plus will evaluate shareholder proposals to determine whether they are in the best economic interests of the participants and beneficiaries ProxyVote Plus represents.
In general, ProxyVote Plus supports proposals that request the company to furnish information helpful to shareholders in evaluating the company's operations. In order to be able intelligently to monitor their investments shareholders often need information best provided by the company in which they have invested. Requests to report such information merit support. ProxyVote Plus will evaluate proposals seeking the company to cease taking certain actions that the proponent believes is harmful to society or some segment of society with special attention to the company's legal and ethical obligations, its ability to remain profitable, and the potential negative publicity if the company fails to honor the request.
ProxyVote Plus will generally support the following proposals so long as they are determined to protect or advance the long-term economic best interests of plan participants and beneficiaries:
SPECIAL POLICY REVIEW AND SHAREHOLDER ADVISORY COMMITTEES
These resolutions propose the establishment of special committees of the board to address broad corporate policy and provide forums for ongoing dialogue on issues including, but not limited to shareholder relations, the environment, occupational health and safety, and executive compensation.
CORPORATE CONDUCT AND HUMAN RIGHTS
These proposals call for the adoption and/or enforcement of principles or codes relating to a company's investment in countries in which there are patterns of ongoing and systematic violation of human rights, a government is illegitimate or there is a call by human rights advocates, pro-democracy organizations or legitimately elected representatives for economic sanctions.
ADOPTION OF "MACBRIDE PRINCIPLES"
These resolutions call for the adoption of the MacBride Principles on the grounds that U.S. companies operating abroad should support the equal employment opportunity policies that apply in facilities domestically.
ADOPTION OF "CERES PRINCIPLES"
These resolutions call for the adoption of principles that encourage the company to protect the environment and the safety and health of its employees. Many companies have voluntarily adopted these principles.
LEGAL AND REGULATORY COMPLIANCE
These resolutions call for compliance with governmental mandates and corporate policies regarding nondiscrimination, affirmative action, workplace safety and health and other basic labor protections.
SUPPLIER STANDARDS
These resolutions call for the corporation to take reasonable steps, or institute a review process, to ensure that it does not and will not do business with foreign suppliers that manufacture products for sale in the U.S. using forced labor, convict labor or child labor, or that fail to comply with all applicable laws and standards protecting their employees' wages, benefits, working conditions, freedom of association and other rights.
FAIR LENDING
These resolutions call for financial institutions to affirmatively comply with fair-lending regulations and statutes, institute or report on overall fair-lending policies or goals by the parent and financial subsidiaries of the corporation or disclose lending data to shareholders and the public.
OTHER ISSUES
EQUAL ACCESS TO THE PROXY
ProxyVote Plus's analysis will take into consideration the fact that such proposals give shareholders the same ability as management to state their views on contested proxy issues, including director nominations, thereby enhancing corporate accountability.
FAIR-PRICE PROVISIONS
ProxyVote Plus's analysis of the long-term costs and benefits of a fair-price provision will consider the fact that such provisions guard against the coercive pressures of two-tiered tender offers in which some shareholders, including plan participants in some situations, receive less value for their stock than other
shareholders from a bidder who seeks to take a controlling interest in the company. However, ProxyVote Plus will also consider the provision's potential for minimizing the company's debt and the resulting impact on the long-term value of holdings in the event the shareholders do not tender.
GREENMAIL PAYMENTS
ProxyVote Plus will consider the fact that greenmail discriminates against other shareholders and may result in decreased stock price. In the event ProxyVote Plus concludes that the greenmail payment lacks satisfactory long-term business justification (such as stopping an acquisition attempt that would be detrimental to the long-term economic best interests of plan participants and beneficiaries), ProxyVote Plus will oppose the proposal.
STATEMENT OF ADDITIONAL INFORMATION
UNITED ASSOCIATION S&P 500 INDEX FUND
(CLASS I TICKER SYMBOL: UASPX)
(CLASS II TICKER SYMBOL: UAIIX)
A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
PNC CAPITAL ADVISORS, LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the United Association S&P 500 Index Fund (the "Fund"). This SAI is incorporated by reference into and should be read in conjunction with the prospectus dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectus. The financial statements with respect to the Fund for the fiscal year ended October 31, 2012, including notes thereto and the report of PricewaterhouseCoopers LLP thereon, contained in the 2012 Annual Report to Shareholders are herein incorporated by reference into and deemed to be part of this SAI. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Fund's prospectus or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, Missouri 64121-9000 or by calling the Fund at 1-888-766-8043.
TABLE OF CONTENTS
THE TRUST ............................................................ S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES ...... S-2 DESCRIPTION OF PERMITTED INVESTMENTS ................................. S-3 INVESTMENT LIMITATIONS ............................................... S-14 THE ADVISER .......................................................... S-16 PORTFOLIO MANAGERS ................................................... S-17 THE ADMINISTRATOR .................................................... S-19 THE DISTRIBUTOR ...................................................... S-19 PAYMENTS TO FINANCIAL INTERMEDIARIES ................................. S-20 THE TRANSFER AGENT ................................................... S-21 THE CUSTODIAN ........................................................ S-21 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................ S-21 LEGAL COUNSEL ........................................................ S-21 TRUSTEES AND OFFICERS OF THE TRUST ................................... S-22 PURCHASING AND REDEEMING SHARES ...................................... S-32 DETERMINATION OF NET ASSET VALUE ..................................... S-32 TAXES ................................................................ S-33 BROKERAGE ALLOCATION AND OTHER FUND BROKERAGE PRACTICES .............. S-37 PORTFOLIO HOLDINGS ................................................... S-40 ADDITIONAL INFORMATION ABOUT THE TRUST ............................... S-41 PROXY VOTING ......................................................... S-42 5% AND 25% SHAREHOLDERS .............................................. S-42 INDEX INFORMATION .................................................... S-43 APPENDIX A -- DESCRIPTION OF RATINGS ................................. A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ................... B-1 |
March 1, 2013 UAF-SX-003-0600
THE TRUST
GENERAL. The Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under a Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. The Fund pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information. The Trust reserves the right to create and issue additional classes of shares.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer multiple classes of shares of its funds. The Fund currently offers Class I (institutional shares) and Class II (retail shares). Additional classes may be created from time to time. The different classes provide for variations in distribution and shareholder servicing expenses and in the minimum initial investment requirements. Minimum investment requirements and investor eligibility are described in the prospectus. For more information on distribution expenses, see "The Distributor."
HISTORY OF THE FUND. The Fund is the successor to the Financial Investors Trust United Association S&P 500 Index Fund (the "Predecessor Fund"). The Predecessor Fund's date of inception was March 1, 2000. The Predecessor Fund dissolved and reorganized into the Fund on March 10, 2003. Substantially all of the assets of the Predecessor Fund were transferred to the Fund in connection with its commencement of operations on March 10, 2003. The Predecessor Fund was managed by National City Investment Management Company using the same investment objective, strategies, policies and restrictions as those used by the Fund. On June 13, 2005, National City Investment Management Company changed its name to Allegiant Asset Management Company. On September 29, 2009, Allegiant Asset Management Company and its affiliate, PNC Capital Advisors, Inc., merged into PNC Capital Advisors, LLC.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. The Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate the Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if the Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Trust's Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's investment objectives and principal investment strategies are described in the prospectus. The following information supplements, and should be read in conjunction with, the prospectus. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
THE S&P 500 INDEX. The S&P 500 Index is composed of 500 common stocks, most of which are listed on the New York Stock Exchange ("NYSE"). S&P selects the stocks for the S&P 500 Index on a statistical basis. As of December 31, 2012, the stocks in the S&P 500 Index had an average market capitalization of $105 billion. "Market capitalization" of a company is the market price per share of stock multiplied by the number of shares outstanding.
FUND INVESTMENT STRATEGY. The Fund's investment objective is to provide investment results that, before Fund expenses, approximate the aggregate price and dividend performance of the securities included in the S&P 500 Index. Under normal circumstances, the Fund invests substantially all, but in no event less than 80%, of its net assets (plus any borrowings for investment purposes) in stocks included in the S&P 500 Index. The S&P 500 Index is made up of common stocks of 500 large, publicly traded companies. The vast majority of the Fund's assets will normally be invested in stocks included in the S&P 500 Index in approximately the same relative proportion as those stocks are held in the S&P 500 Index, but the Fund does not simply invest in a portfolio that replicates the precise composition of the S&P 500 Index. PNC Capital Advisors, LLC (the "Adviser") also does not generally "manage" the Fund in the traditional sense (i.e., by using economic, financial or market analysis). However, the Adviser believes that employing certain active management strategies for a percentage of the Fund's assets, if successful, may result in net returns after expenses that may more closely approximate the returns of the S&P 500 Index. For example, the Adviser may invest in S&P 500 Index futures in addition to or in place of S&P 500 Index stocks to attempt to equal the performance of the S&P 500 Index. The Fund may also invest in other S&P 500 Index derivatives, such as options, swaps and options on futures, with economic characteristics similar to the common stocks in the S&P 500 Index. Under normal circumstances, the notional amount of investments in derivatives will not exceed 20% of the Fund's net assets. The Fund may use derivatives as a substitute for taking a position in an underlying asset, to increase returns, to manage risk/volatility or as part of a hedging strategy.
CORRELATION WITH THE S&P 500 INDEX. While there can be no guarantee that the Fund's investment results will precisely match the results of the S&P 500 Index, the Adviser believes that, before deduction of operating expenses, there will be a very high correlation between the returns generated by the Fund and the S&P 500 Index. The Fund will attempt to achieve a correlation between the performance of its asset portfolio and that of the S&P 500 Index of at least 95% before deduction of operating expenses. A correlation of 100% would indicate perfect correlation, which would be achieved when the Fund's net asset value, including the value of its dividend and capital gains distributions, increases or decreases in exact proportion to changes in the Index. The Fund's ability to correlate its performance with the S&P 500 Index, however, may be affected by, among other things: Fund expenses, including brokerage (which may be increased by high portfolio turnover); the Fund holding less than all of the securities in the S&P 500 Index; Fund share prices being rounded to the nearest cent; changes to the S&P 500 Index that are not disseminated in advance; changes in the manner in which S&P calculates its index; the timing of purchases and redemptions; and/or the need to conform the Fund's portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements. The Adviser monitors the correlation of the performance of the Fund in relation to the Index under the supervision of the Board of Trustees (the "Board"). The Fund intends to actively rebalance its portfolio to achieve high correlation of performance with the S&P 500 Index. To reduce transaction costs and minimize shareholders' current capital gains liability, the Fund's investment portfolio will not be automatically rebalanced to reflect changes in the S&P 500 Index.
THE INDEXING APPROACH. The Fund is not managed in a traditional sense, that is, by making discretionary judgments based on analysis of economic, financial and market conditions. Under ordinary circumstances, stocks will only be eliminated from or added to the Fund to reflect additions to or deletions from the S&P 500 Index (including mergers or changes in the composition of the index), to raise cash to meet withdrawals, or to invest cash contributions. Accordingly, sales may result in losses that may not have been realized if the Fund were actively managed and purchases may be made that would not have been made if the Fund were actively managed. The Fund will remain substantially fully invested in common stocks and equity derivative instruments whether stock prices are rising or falling. The Adviser believes that the indexing approach should involve less portfolio turnover, notwithstanding periodic additions to and deletions from the S&P 500 Index, and thus lower brokerage costs, transfer taxes and operating expenses, than in more traditionally managed funds, although there is no assurance that this will be the case.
The inclusion of a security in the S&P 500 Index in no way implies an opinion by S&P as to its attractiveness as an investment. S&P is not a sponsor of, or in any way affiliated with, the Fund.
The common stock of The PNC Financial Services Group, Inc. ("PNC"), the indirect parent company of the Adviser, and the common stock of BlackRock Inc. ("BlackRock"), an affiliate of PNC, are included in the S&P 500 Index. Like the other stocks in the S&P 500 Index, the Fund will invest in the common stock of PNC and BlackRock in approximately the same proportion as the percentage PNC and BlackRock common stock each represents in the S&P 500 Index. As of December 31, 2012, PNC common stock and BlackRock common stock represented 0.24% and 0.21%, respectively, of the S&P 500 Index.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments and investment practices and the associated risk factors. The Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by the Fund's stated investment policies, including those stated below.
BORROWING. The Fund may borrow money to facilitate management of the Fund's portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the Fund promptly.
As required by the 1940 Act, the Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of the Fund's assets should fail to meet this 300% coverage test, the Fund, within three days (not including Sundays and holidays), will reduce the amount of the Fund's borrowings to the extent necessary to meet this 300% coverage. Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment considerations otherwise indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Fund is authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of the value of the Fund's total assets. This borrowing is not subject to the foregoing 300% asset coverage requirement. The Fund is authorized to pledge portfolio securities as the Adviser deems appropriate in connection with any borrowings.
Borrowing may subject the Fund to interest costs, which may exceed the interest received on the securities purchased with the borrowed funds. The Fund may borrow at times to meet redemption requests rather than sell portfolio securities to raise the necessary cash. Borrowing can involve leveraging when securities are purchased with the borrowed money. To avoid this situation, the Fund will not purchase securities while borrowing represents more than 5% of its total assets.
EQUITY SECURITIES. Equity securities represent ownership interests in a company and consist of common stocks, preferred stocks, warrants to acquire common stock and securities convertible into common stock. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate. The Fund purchases equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An
option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Fund will reduce the risk that it will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission. The Fund may use futures contracts and related options for: bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. The Fund intends to use futures and options in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Fund, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Fund is not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When the Fund purchases or sells a futures contract, or sells an option thereon, the Fund is required to "cover" its position in order to limit leveraging and related risks. To cover its position, the Fund may maintain with its custodian bank (and marked-to-market on a daily basis), a segregated account consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund's outstanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the fund arising from such investment activities.
The Fund may also cover its long position in a futures contract by purchasing a put option on the same futures contract with a strike price (I.E., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. The Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
The Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. The Fund may also cover its sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. The Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund will maintain in a segregated account cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. The Fund may also cover its sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with the Fund's use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and options on futures. In addition, some strategies reduce the Fund's exposure to price fluctuations, while others tend to increase its market exposure.
OPTIONS. The Fund may purchase and write put and call options on securities or securities indices (traded on U.S. exchanges or over-the-counter markets) and enter into related closing transactions. A put option on a security gives the purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time during the option period. A call option on a security gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is the consideration for undertaking the obligations under the option contract.
Put and call options on indices are similar to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than the price movements in individual securities.
The initial purchase (sale) of an option contract is an "opening transaction." In order to close out an option position, the Fund may enter into a "closing transaction," which is simply the sale (purchase) of an option contract on the same security with the same exercise price and expiration date as the option contract originally opened. If the Fund is unable to effect a closing purchase transaction with respect to an option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security upon exercise.
The Fund may purchase and write options on an exchange or over-the-counter. Over-the-counter options ("OTC options") differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available for exchange-traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information from a market maker. It is the SEC's position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand, interest rates, the pricing volatility of the underlying security and the time remaining until the expiration date.
The Fund must cover all options it writes. For example, when the Fund writes an option on a security, index or foreign currency, it will segregate or earmark liquid assets with the Fund's custodian in an amount at least equal to the market value of the option and will maintain such coverage while the option is open. The Fund may otherwise cover the transaction by means of an offsetting transaction or other means permitted by the 1940 Act or the rules and SEC interpretations thereunder.
The Fund may trade put and call options on securities, securities indices or currencies, as the investment adviser or sub-adviser determines is appropriate in seeking the Fund's investment objective. For example, the Fund may
purchase put and call options on securities or indices to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that the Fund may seek to purchase in the future. The Fund purchasing put and call options pays a premium therefor. If price movements in the underlying securities are such that exercise of the options would not be profitable for the Fund, loss of the premium paid may be offset by an increase in the value of the Fund's securities or by a decrease in the cost of acquisition of securities by the Fund.
In another instance, the Fund may write covered call options on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases in its market value. When the Fund writes an option, if the underlying securities do not increase or decrease to a price level that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised and the Fund will realize as profit the premium received for such option. When a call option written by the Fund is exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate in any increase in the price of such securities above the strike price. When a put option written by the Fund is exercised, the Fund will be required to purchase the underlying securities at a price in excess of the market value of such securities.
There are significant risks associated with the Fund's use of options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the movement in prices of options held by the Fund and the securities underlying them; (3) there may not be a liquid secondary market for options; and (4) while the Fund will receive a premium when it writes covered call options, it may not participate fully in a rise in the market value of the underlying security.
RESTRICTED AND ILLIQUID SECURITIES. While the Fund does not anticipate doing so, it may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of the Fund's net assets held in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities are securities that can not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Trust's Board. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While the Adviser monitors the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's liquidity determinations. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer.
EXCHANGE-TRADED FUNDS ("ETFS")
The Fund may invest in exchange-traded funds. ETFs may be structured as investment companies that are registered under the 1940 Act, typically as open-end funds or unit investment trusts. These ETFs are generally based on specific domestic and foreign market securities indices. An "index-based ETF" seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Alternatively, ETFs may be structured as grantor trusts or other forms of pooled investment vehicles that are not registered or regulated under the 1940 Act. These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual funds, have expenses associated with their operation, such as advisory and custody fees. When a fund invests in an ETF, in addition to directly bearing expenses associated with its own operations, including the brokerage costs associated with the purchase and sale of shares of the ETF, the fund will bear a pro rata portion of the ETF's expenses. In addition, it may be more costly to own an ETF than to directly own the securities or other investments held by the ETF because of ETF expenses. The risks of owning shares of an ETF generally reflect the risks of owning the underlying securities or other investments held by the ETF, although lack of liquidity in the market for the shares of an ETF could result in the ETF's value being more volatile than the underlying securities or other investments.
INVESTMENT COMPANY SHARES. The Fund may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Fund. The Fund's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying the Fund's expenses. Unless an exception is available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more than 3% of the voting shares of any one investment company, (ii) investing more than 5% of its total assets in any one investment company, and (iii) investing more than 10% of its total assets in all investment companies combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Fund may invest in the ETFs in excess of the 3% limit described above, provided that the Fund otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
MONEY MARKET SECURITIES. Money market securities include: short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Ratings Service ("Standard & Poor's") or Moody's Investors Services Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase
agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Description of Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
U.S. TREASURY OBLIGATIONS. U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U. S. government obligations that are issued by banks or brokerage firms and are created by depositing U. S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U. S. Treasury. Receipts are sold as zero coupon securities.
o U. S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U. S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U. S. government are supported by the full faith and credit of the U. S. Treasury, others are supported by the right of the issuer to borrow from the U. S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U. S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. The Fund may invest in U.S. dollar-denominated obligations of domestic branches of foreign banks and foreign branches of domestic banks only
when the Adviser believes that the risks associated with such investment are minimal and that all applicable quality standards have been satisfied. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. It is the current policy of the Fund, not to
invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% of the Fund's total assets. The Fund's investments in
repurchase agreements, at times, may be substantial when, in the view of the
Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions in which a fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a fund. At the time a fund enters into a reverse repurchase agreement, it will earmark on the books of the fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by a fund may increase the fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to
complete the transaction as scheduled, which may result in losses to a fund. Reverse repurchase agreements also involve the risk that the market value of the securities sold by a fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Board. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Adviser or its affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The Fund may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Fund's securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, the Fund may increase its income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. The Board has adopted procedures reasonably designed to
ensure that the foregoing criteria will be met. Loan agreements involve certain
risks in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
SWAP AGREEMENTS. The Fund may enter into equity index or interest rate swap agreements for purposes of attempting to gain exposure to the stocks making up an index of securities in a market without actually purchasing those stocks, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one-year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," I.E., the return on or increase in value of a particular dollar amount invested in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap," interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or "floor;" and interest rate dollars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Fund calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by segregating assets determined to be liquid. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of the Fund's investment restriction concerning senior securities. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for the Fund's illiquid investment limitations. The Fund will not enter into any swap agreement unless the Adviser believes that the other party to the transaction is creditworthy. 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.
The Fund may enter into swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank, investment banking firm or broker/dealer. The counter-party will generally agree to pay the Fund the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends that would have been received on those stocks. The Fund will agree to pay to the counter-party a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Fund on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of a swap agreement or periodically during its term. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount of payments that the Fund is contractually obligated to make. If the other party to a swap agreement defaults, the Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each equity swap will be accrued on a daily basis and an amount of cash or liquid assets, having an aggregate net asset value at least equal to such accrued excess will be maintained in a segregated account by the Fund's custodian. Inasmuch as these transactions are entered into for hedging purposes or are offset by segregated cash of liquid assets, as permitted by applicable law, the Fund and the Adviser believe that these transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Fund's borrowing restrictions.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments, which are traded in the over-the-counter market. The Adviser, under the supervision of the Board, is responsible for determining and monitoring the liquidity of Fund transactions in swap agreements. The use of equity swaps is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
VARIABLE AND FLOATING RATE INSTRUMENTS. Certain of the obligations purchased by the Fund may carry variable or floating rates of interest, may involve a conditional or unconditional demand feature and may include variable amount master demand notes. Such instruments bear interest at rates that are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. To the extent required by the 1940 Act, the Fund will maintain with the custodian a separate account with liquid high-grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Fund may dispose of a when-issued security or forward commitment prior to settlement if deems it appropriate.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES.
The following investment limitations are fundamental, which means that the Fund cannot change them without approval by the vote of a majority of the Fund's outstanding shares. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of the Fund would be invested in the securities of such issuer or more than 10% of the outstanding voting securities of such issuer would be owned by the Fund on the last day of each fiscal quarter. This restriction applies to 75% of the Fund's assets.
2. Purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. government, any territory or possession of the United States, the District of Columbia or any of their authorities, agencies, instrumentalities or political subdivisions and repurchase agreements secured by such instruments, and tax-free state obligations; (b) wholly owned financial companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents; (c) utilities will be divided according to their services, for example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry; (d) personal credit and business credit businesses will be considered separate industries.
3. Make loans, except that the Fund may purchase and hold debt instruments and enter into repurchase agreements in accordance with its investment objective and policies and may lend portfolio securities in an amount not exceeding one-third of its total assets.
4. Borrow money, issue senior securities or mortgage, pledge or hypothecate its assets except to the extent permitted under the 1940 Act.
5. Purchase or sell real estate, except that the Fund may purchase securities of issuers which deal in real estate and may purchase securities which are secured by interests in real estate.
6. Invest in commodities, except that, as consistent with its investment objective and policies, the Fund may: (a) purchase and sell options, forward contracts, futures contracts, including without limitation, those relating to indices; (b) purchase and sell options on futures contracts or indices; (c) purchase publicly traded securities of companies engaging in whole or in part in such activities. For purposes of this investment limitation, "commodities" includes commodity contracts.
7. Act as an underwriter of securities within the meaning of the Securities Act of 1933 except insofar as the Fund might be deemed to be an underwriter upon the disposition of portfolio securities acquired within the limitation on purchases of illiquid securities and except to the extent that the purchase of obligations directly from the issuer thereof in accordance with its investment objective, policies and limitations may be deemed to be underwriting.
NON-FUNDAMENTAL POLICIES.
The Fund is subject to the following non-fundamental limitations, which may be changed without the vote of shareholders:
The Fund may not:
1. Acquire any other investment company or investment company security except in connection with a merger, consolidation, reorganization or acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles, spreads, or any combination thereof, except as consistent with the Fund's investment objective and policies for transactions in options on securities or indices of securities, futures contracts and options on futures contracts and in similar investments.
3. Purchase securities on margin, make short sales of securities or maintain a short position, except that, as consistent with the Fund's investment objective and policies, (a) this investment limitation shall not apply to the Fund's transactions in futures contracts and related options, options on securities or indices of securities and similar instruments, and (b) it may obtain short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising control.
5. Hold more than 15% of its net assets in illiquid securities.
6. Purchase securities while its outstanding borrowings (including reverse repurchase agreements) are in excess of 5% of its total assets. Securities held in escrow or in separate accounts in connection with the Fund's investment practices described in the prospectus or this SAI are not deemed to be pledged for purposes of this limitation.
For purposes of the above investment limitations, and except for the Fund's policy on illiquid securities and borrowing, if a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in the value of the Fund's portfolio securities will not constitute a violation of such limitation for purposes of the 1940 Act. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed the limitation, the Fund will take steps to bring the aggregate amount of illiquid securities back within the limitation as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of borrowing back within the limitations within three days thereafter (not including Sundays and holidays).
THE ADVISER
GENERAL. PNC Capital Advisors, LLC, a Delaware limited liability company, serves as the Fund's investment adviser and manages the Fund's assets on a day-to-day basis. The Adviser is registered with the SEC under the Investment Advisers Act of 1940. The principal business address of the Adviser is One East Pratt Street, 5th Floor, Baltimore, Maryland, 21202. The Adviser is an indirect wholly owned subsidiary of The PNC Financial Services Group, Inc., a diversified financial services organization providing consumer and business banking; specialized services for corporations and government entities including corporate banking, real estate finance and asset-backed lending; wealth management; asset management; and global fund services. As of December 31, 2012, the Adviser had discretionary management authority with respect to approximately $35 billion in assets under management.
On September 29, 2009, Allegiant Asset Management Company, the Fund's former investment adviser, and its affiliate, PNC Capital Advisors, Inc., merged into the Adviser. Other than the change in the principal executive officers and directors of PNC Capital Advisors, LLC, all aspects of the relationship between the Fund and the Adviser, including the operations of the Adviser, the fees payable to the Adviser and the persons responsible for the day-to-day investment management of the Fund, remain unchanged.
ADVISORY AGREEMENT WITH THE TRUST. The Trust, on behalf of the Fund, and the Adviser have entered into an investment advisory agreement dated January 29, 2010 (the "Advisory Agreement"). The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of misfeasance or negligence generally in the performance of its duties hereunder or its negligent disregard of its obligation and duties under the agreement.
After the initial two year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" or any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. (As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act).
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.095% of the average daily net assets of the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Adviser the following advisory fees:
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CONTRACTUAL FEES PAID FEES WAIVED BY ADVISER TOTAL FEES PAID (AFTER WAIVERS)
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2010 2011 2012 2010 2011 2012 2010 2011 2012
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$216,583 $204,259 $129,483 $0 $0 $0 $216,583 $204,259 $129,483
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PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates its portfolio managers with a combination of a fixed cash base salary and variable incentive compensation, which may be comprised of a cash bonus and a stock compensation award.
A portfolio manager's base salary is dependent on his/her level of experience and expertise. The variable incentive compensation for the portfolio managers is determined on a fully discretionary basis as described below. The discretionary incentive compensation is determined by evaluating multiple factors including investment performance, the Adviser's financial performance, PNC's financial performance and individual contribution made by the portfolio management staff. Investment performance is compared relative to a pre-defined peer group and evaluated on a one, three and five year basis with 25%, 50% and 25% weightings, respectively. Peer performance metrics are calculated for each portfolio composite. Portfolio team grand mean investment performance scores are determined by combining composite peer performance scores weighted by composite assets under management. The overall portfolio manager incentive compensation allocation is determined by evaluating the Adviser's and PNC's current year versus prior year, budgeted financial performance and current year assets under management flows. Additionally, the Adviser's management conducts a subjective assessment of each portfolio manager's individual performance, including but not limited to his or her contribution to the investment team-oriented process and overall performance, client feedback, contributions to the business objectives of the firm, leadership, teamwork and management skills. The combination of these factors determines individual incentive compensation payments.
In addition to the compensation described above, portfolio managers may receive compensation in the form of stock of PNC under its stock plan, which is a program that awards a portion of discretionary year-end compensation in restricted stock or stock option awards of PNC that are subject to vesting and other conditions. Eligibility for participation in this incentive program depends on the portfolio manager's performance and seniority.
FUND SHARES OWNED BY THE PORTFOLIO MANAGERS. The following table shows the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 Act, as amended ("1934 Act").
-------------------------------------------------------------------------------- NAME DOLLAR RANGE OF FUND SHARES(1) -------------------------------------------------------------------------------- Hitesh Patel, Ph.D. None -------------------------------------------------------------------------------- Chen Chen, Ph.D. None -------------------------------------------------------------------------------- |
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of October 31, 2012.
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REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
-----------------------------------------------------------------------------
NUMBER NUMBER NUMBER
OF OF OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
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Hitesh Patel, Ph.D. 4 $179,776,325 2 $28,593,374 10 $467,670,777
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Chen Chen, Ph.D. 1 $112,988,151 1 $20,051,728 7 $418,081,864
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CONFLICTS OF INTERESTS. Portfolio managers at the Adviser typically manage multiple accounts. These accounts may include, among others, mutual funds, separate accounts, proprietary accounts and pooled investment vehicles. Portfolio managers make investment decisions for each portfolio based on the investment objectives, policies, practices and other relevant investment considerations that the managers believe are applicable to that portfolio. Consequently, portfolio managers may purchase (or sell) securities for one portfolio and not another portfolio. The Adviser has adopted brokerage and trade allocation policies and procedures which it believes are reasonably designed to address any potential conflicts associated with managing multiple accounts for multiple clients.
If the different accounts have materially and potentially conflicting investment objectives or strategies, a conflict of interest could arise. For example, if a portfolio manager purchases a security for one account and sells the same security short for another account, such trading pattern may disadvantage either the account that is long or short. In making portfolio manager assignments, the Adviser seeks to avoid such potentially conflicting situations. However, where a portfolio manager is responsible for accounts with differing investment objectives and policies, it is possible that the portfolio manager will conclude that it is in the best interest of one account to sell a portfolio security while another account continues to hold or increases the holding in such security.
The results of the investment activities of the Fund may differ significantly from the results achieved by the Adviser for other client accounts. The Adviser will manage the Fund and the other client accounts it manages in accordance with their respective investment objectives and guidelines. However, the Adviser may give advice, and take action, with respect to any current or future other client accounts that may compete or conflict with the advice the Adviser may give to the Fund, or may involve a different timing or nature of action than with respect to the Fund.
Transactions undertaken by the Adviser for other client accounts may adversely impact the Fund. The Adviser on behalf of one or more other client accounts may buy or sell positions while the Fund is undertaking the same or a differing, including potentially opposite, strategy, which could disadvantage the Fund. For example, the Fund may buy a security and the Adviser, on behalf of its other client accounts, may establish a short position in that same security. The subsequent short sale may result in impairment of the price of the security which the Fund holds. Conversely, the Fund may establish a short position in a security and the Adviser, on behalf of its other client accounts, may buy that same security. The subsequent purchase may result in an increase of the price of the underlying position in the short sale exposure of the Fund and such increase in price would be to the Fund's detriment. Conflicts may also arise because portfolio decisions regarding the Fund may benefit other client accounts of the Adviser. For example, the sale of a long position or establishment of a short position by the Fund may impair the price of the same security sold short by (and therefore benefit) the other client accounts of the Adviser, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held by (and therefore benefit) the other client accounts of the Adviser.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of fund evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder services to the Fund.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.02% of the average daily net assets of the Fund, subject to minimum fees as described in the Administration Agreement. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following administration fees:
--------------------------------------------------------------------------------------------------------------------- CONTRACTUAL FEES PAID FEES WAIVED TOTAL FEES PAID (AFTER WAIVERS) --------------------------------------------------------------------------------------------------------------------- 2010 2011 2012 2010 2011 2012 2010 2011 2012 --------------------------------------------------------------------------------------------------------------------- $45,593 $42,999 30,000 $0 $0 $0 $45,593 $42,999 $30,000 --------------------------------------------------------------------------------------------------------------------- |
THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments and an affiliate of the Administrator, are parties to a distribution agreement dated November 14, 1991, as amended and restated November 14, 2005 and as amended August 30, 2010 (the "Distribution Agreement") whereby the Distributor acts as principal underwriter for the Trust's shares. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, PA 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Fund, by a majority of the outstanding shares of the Fund, upon not more than 60 days' written notice by either
party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
DISTRIBUTION PLAN. The Trust has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or in any agreements related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the Trust. All material amendments of the Plan will require approval by a majority of the Board and of the Qualified Trustees.
The Plan provides that Class II shares of the Fund will pay the Distributor a fee not to exceed 0.10% of the Fund's average daily net assets attributable to Class II shares from which the Distributor may make payments pursuant to written agreements to financial institutions and intermediaries such as banks, savings and loan associations, insurance companies including, without limit, investment counselors, broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for services, reimbursement of expenses incurred in connection with distribution assistance or provision of shareholder services. The Fund's distributor has voluntarily agreed to limit this amount to 0.05% of the average daily net assets of the Fund, but may discontinue all or part of this limitation at any time. The Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution or shareholder service expenses incurred by the Distributor or the amount of payments made to other financial institutions and intermediaries. Investors should understand that some Agents may charge their clients fees in connection with purchases of shares or the provision of shareholder services with respect to shares. The Trust intends to operate the Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
12B-1 FEE PAYMENTS. For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the Distributor the following fees pursuant to the Plan:
2010 2011 2012 2010 2011 2012 -------------------------------------------------------------------------------- $13,815 $14,638 $13,860 $13,817 $14,639 $13,860 -------------------------------------------------------------------------------- |
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders of the Fund through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediary's
retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries' customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
State Street Bank & Trust Company, State Street Financial Center, One Lincoln Street, Boston, MA 02111 (the "Transfer Agent"), serves as transfer agent and Boston Financial Data Services, Inc. ("BFDS") serves as the servicing agent for the Fund under transfer agency agreements with the Trust. The structure of the fee agreement with the Transfer Agent is based upon the size, type and number of accounts and transactions made by shareholders. The Fund compensates BFDS for its services.
THE CUSTODIAN
PNC Bank, National Association, 1900 East 9th Street, 13th Floor, Cleveland, Ohio 44114 (the "Custodian"), serves as the Fund's custodian under a custody agreement with the Trust. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1700 Philadelphia, PA 19103, serves as independent registered public accounting firm for the Fund. The financial statements and notes thereto incorporated by reference have been audited by PricewaterhouseCoopers LLP as indicated in their report with respect thereto, and are incorporated by reference hereto in reliance upon the authority of said firm as experts in giving said reports.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Fund, described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or
material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving
as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of Trustees(1) present; currently Advisors' Inner Circle Fund II,
(since 1991) performs various Bishop Street Funds, SEI Daily
services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
--------------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Trust, SEI Asset Allocation Trust and
Administrator and the SEI Tax Exempt Trust, Adviser
Distributor. Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
--------------------------------------------------------------------------------------------------------------------
-S-24-
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POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------
Management (UK) Limited. Director
of the Distributor since 2003.
--------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------------------------------------------
Charles E. Trustee Self-Employed Current Directorships: Trustee of The
Carlbom (since 2005) Business Consultant, Advisors' Inner Circle Fund II and
(08/20/34) Business Projects Inc., Bishop Street Funds. Director of
since 1997. Oregon Transfer Co.
--------------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and
Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
--------------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Trustee Self Employed Current Directorships: Trustee of The
Jr. (since 2011) Consultant since Advisors' Inner Circle Fund II and
(05/28/52) January 2012. Director Bishop Street Funds. Director of The
of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
--------------------------------------------------------------------------------------------------------------------
Mitchell A. Trustee Retired. Private Current Directorships: Trustee of The
Johnson (since 2005) Investor since 1994. Advisors' Inner Circle Fund II,
(03/01/42) Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
--------------------------------------------------------------------------------------------------------------------
-S-25-
|
--------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------------
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
--------------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
--------------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
--------------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
--------------------------------------------------------------------------------------------------------------------
George J. Trustee Retired since January Current Directorships: Trustee/
Sullivan, Jr. (since 1999) 2012. Self-employed Director of State Street Navigator
(11/13/42) Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II,
1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
--------------------------------------------------------------------------------------------------------------------
-S-26-
|
--------------------------------------------------------------------------------------------------------------------
POSITION WITH
NAME AND DATE TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
--------------------------------------------------------------------------------------------------------------------
|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Fund as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and
investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending which
firm to engage as each fund's independent registered public accounting firm
and whether to terminate this relationship; (ii) reviewing the independent
registered public accounting firm's compensation, the proposed scope and
terms of its engagement, and the firm's independence; (iii) pre-approving
audit and non-audit services provided by each fund's independent registered
public accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the audit,
reports submitted to the Committee by the internal auditing department of
the Trust's Administrator that are material to the Trust as a whole, if
any, and management's responses to any such reports; (vi) reviewing each
fund's audited financial statements and
considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
------------------------------------------------------------------------------------
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF SHARES
NAME FUND SHARES (FUNDS)(1) (ALL FUNDS IN THE FUND COMPLEX)(1,2)
------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------
Doran None None
------------------------------------------------------------------------------------
Nesher None None
------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------
Carlbom None None
------------------------------------------------------------------------------------
Darr None None
------------------------------------------------------------------------------------
Grause None None
------------------------------------------------------------------------------------
Johnson None Over $100,000
------------------------------------------------------------------------------------
Krikorian None None
------------------------------------------------------------------------------------
Speca None None
------------------------------------------------------------------------------------
Storey None None
------------------------------------------------------------------------------------
Sullivan None None
------------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the "Fund Complex."
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
------------------------------------------------------------------------------------------------------
PENSION OR
RETIREMENT ESTIMATED
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS
COMPENSATION AS PART OF FUND UPON TOTAL COMPENSATION FROM THE
NAME FROM THE TRUST EXPENSES RETIREMENT TRUST AND FUND COMPLEX(1)
------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1)
board
------------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
---------------------------------------------------------------------------------------------------------------------------
NAME AND DATE POSITION WITH TRUST AND LENGTH OF PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
OF BIRTH TERM
---------------------------------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
---------------------------------------------------------------------------------------------------------------------------
Michael Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Lawson Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) (since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
---------------------------------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed Trust
and New Covenant Funds. Chief Compliance
Officer of SEI Opportunity Fund, L.P. until
2010. Director of Investment Product
Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February
2003.
---------------------------------------------------------------------------------------------------------------------------
Timothy D. Vice President and Assistant General Counsel and Secretary of SIMC and the
Barto Secretary Administrator since 2004. Vice President of
(03/28/68) (since 1999) SIMC and the Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
---------------------------------------------------------------------------------------------------------------------------
Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Sulzbach (since 2011) Associate at Morgan, Lewis & Bockius LLP
(07/18/77) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
---------------------------------------------------------------------------------------------------------------------------
John Munch Vice President and Assistant Attorney, SEI Investments Company, since
(05/07/71) Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
---------------------------------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
---------------------------------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the NYSE is open for business. Shares of the Fund are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m. Eastern Time if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Administrator, market prices for most securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders that is intended to supplement the discussion contained in the Fund's prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult with their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to qualify and elects to be treated as a RIC. By following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject. If the Fund qualifies as a RIC it will not be subject to federal income taxes on the net investment income and net realized capital gains that it timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC, the Fund must distribute annually to its shareholders at least 90% of its net investment income (generally net investment income plus the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and certain other related income, including, generally, certain gains from options, futures, and forward contracts derived with respect to its business of investing in such stock, securities or currencies, and net income derived from an interest in a qualified publicly traded partnership; (ii) at the end of each fiscal quarter of the Fund's taxable year, at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets or more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership and (iii) at the end of each fiscal quarter of the Fund's taxable year, not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or two or more issuers that the Fund controls and which are engaged in the same, or similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to maintain qualification as a RIC for a tax year, and the relief provisions are not available, the Fund will be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction (subject to certain limitations) and individuals may be able to benefit from the lower tax rates available to qualified dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC.
The Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. The Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. The Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described above, which only requires the Fund to distribute at least 90% of its annual investment company income and does not require any minimum distribution of net capital gain, the Fund will be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute, by the end of any calendar year, at least 98% of its ordinary income for that year and 98.2% of its capital gain net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending on October 31 of that year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Fund may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
SHAREHOLDER TREATMENT. The Fund receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to individuals of 20% (lower rates apply to individuals in lower tax brackets) to the extent that the Fund receives qualified dividend income on the securities it holds and the Fund designates the distributions as qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (e.g.,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, or
the stock of which is readily tradable on an established securities market in
the United States). A dividend will not be treated as qualified dividend income
to the extent that (i) the shareholder has not held the shares on which the
dividend was paid for more than 60 days during the 121-day period that begins
on the date that is 60 days before the date on which the shares become
"ex-dividend" (which is the day on which declared distributions (dividends or
capital gains) are deducted from the Fund's assets before it calculates the net
asset value) with respect to such dividend, (ii) the Fund has not satisfied
similar holding period requirements with respect to the securities it holds
that paid the dividends distributed to the shareholder), (iii) the shareholder
is under an obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to substantially similar or related property, or
(iv) the shareholder elects to treat such dividend as investment income under
section 163(d)(4)(B) of the Code. Distributions by the Fund of its net
short-term capital gains will be taxable as ordinary income. Capital gain
distributions consisting of the Fund's net capital gains will be taxable as
long-term capital gains. The Fund will report annually to its shareholders the
amount of the Fund's distributions that qualify for the reduced tax rates on
qualified dividend income.
The Fund's dividends that are paid to their corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible, in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements and debt financing limitations. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If the Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to the shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Any gain or loss recognized on a sale, exchange, or redemption of shares of the Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Fund (or its administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date. In addition to reporting the gross proceeds from the sale of Fund shares, the Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, the Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, the Fund will use the first-in, first-out method as the default cost basis method. The cost basis method elected by the Fund
shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of the Fund).
FOREIGN TAXES. Dividends and interests received by the Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors.
TAX TREATMENT OF COMPLEX SECURITIES. The Fund may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund's ability to recognize losses, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain of its foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Fund.
Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized by the Fund on the sale of debt securities are generally treated as ordinary losses by the Fund. These gains when distributed will be taxable to you as ordinary dividends, and any losses will reduce the Fund's ordinary income otherwise available for distribution to you. This treatment could increase or reduce the Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, the Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because the Fund distributes all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold at a rate of 28% and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure
requirements related to U.S. accounts or ownership are not satisfied. The Fund will not pay any additional amounts in respect to any amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by its tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
STATE TAXES. Depending upon state and local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. The Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by the Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Fund.
BROKERAGE ALLOCATION AND OTHER FUND BROKERAGE PRACTICES
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund paid the following aggregate brokerage commissions on portfolio transactions:
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AGGREGATE DOLLAR AMOUNT OF BROKERAGE COMMISSIONS PAID
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FUND 2010 2011 2012
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UA S&P 500 Index Fund $22,263 $47,672 $19,943
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BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser in connection with the account that paid commissions to the broker providing such services. Information so received by the Fund or any other specific client Adviser will be in addition to and not in lieu of the services required to be performed by the Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the adviser with research services. The FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
For the fiscal year ended October 31, 2012, the Fund did not pay any commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser.
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act, affiliated broker-dealers are permitted to receive and retain compensation for effecting portfolio transactions for the Fund on an exchange if a written contract is in effect between the affiliate and the Fund expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Fund did not pay brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any securities of its "regular brokers and dealers" (as such term is defined in the 1940 Act) that the Fund held during its most recent fiscal year. During the fiscal year ended October 31, 2012, the Fund held the following securities of its "regular brokers and dealers:"
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NAME OF BROKER/DEALER TYPE OF SECURITY HELD DOLLAR AMOUNT AT FISCAL YEAR
END
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Citigroup, Inc Equity $1,101,000
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Bank of New York Equity $291,000
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Goldman Sachs Equity $555,000
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JP Morgan Equity $1,554,000
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Morgan Stanley Equity $245,000
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PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under U.S. Securities and Exchange Commission ("SEC") rules as the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include futures contracts and option contracts in which the Fund may invest since such contracts generally have remaining maturities of less than one-year. For the Fund's two most recently completed fiscal years ended October 31, 2011 and 2012, the portfolio turnover rates for the Fund were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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UA S&P 500 Index Fund 22% 22%
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PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Fund's portfolio securities is in the best interests of Fund shareholders, on the one hand, and include procedures to address conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund, its Adviser, or its principal underwriter on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer ("Authorized Person") to authorize the release of the Fund's portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person, either directly or through reports by the Fund's Chief Compliance Officer, reports quarterly to the Board regarding the operation and administration of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31, and October 31). The Fund will disclose a complete or summary schedule of investments (which includes the Fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the Fund's net asset value ("Summary Schedule")) in its Semi-Annual and Annual Reports which are distributed to Fund shareholders. The Fund's complete schedule of investments following the first and third fiscal quarters is available in quarterly holdings reports filed with the SEC on Form N-Q, and the Fund's complete schedule of investments following the second and fourth fiscal quarters is available in Semi-Annual and Annual Reports filed with the SEC on Form N-CSR.
Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders but are available, free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV. Should the Fund include only a Summary Schedule rather than a complete schedule of investments in its Semi-Annual and Annual Reports, its Form N-CSR will be available without charge, upon request, by calling 1-866-766-8043. In addition, the Fund generally publishes a complete list of its portfolio holdings on a monthly basis, as of the end of the previous month, on the internet at http://aicfundholdings.com/allegiant. For example, the Fund's investments as of the end of January would ordinarily be published at the end of February. The Fund also publishes a list of its ten largest portfolio holdings, and the percentage of the Fund's assets that each of these holdings represents, on a monthly basis, ten (10) days after the end of the month, on the internet at http://aicfundholdings.com/allegiant or at http://uafund.com. This information will generally remain available until it is replaced by new portfolio holdings information as described above. The Adviser may exclude any portion of the Fund's portfolio holdings from publication when deemed to be in the best interest of the Fund.
In addition to information provided to shareholders and the general public, portfolio holdings information may be disclosed as frequently as daily to certain service providers, such as the Custodian, Administrator or Transfer Agent, in connection with their services to the Fund. From time to time rating and ranking organizations, such as Standard and Poor's, Lipper, Morningstar, Inc, Thomson Financial, Bloomberg and ICI (portfolio analysis) may request non-public portfolio holdings information in connection with rating the Fund. Similarly, institutional investors, financial planners, pension plan sponsors and/or their consultants or other third-parties may request portfolio holdings information in order to assess the risks of the Fund's portfolio along with related performance attribution statistics. The lag time for such disclosures will vary. The Fund believes that these third parties have legitimate objectives in requesting such portfolio holdings information.
The Fund's policies and procedures provide that the Authorized Person may authorize disclosure of non-public portfolio holdings information to such parties at differing times and/or with different lag times. Prior to making any disclosure to a third party, the Authorized Person must determine that such disclosure serves a reasonable business purpose, is in the best interests of the Fund's shareholders and that to the extent conflicts between the interests of the Fund's shareholders and those of the Fund's Adviser, principal underwriter, or any affiliated person of the Fund exist, such conflicts are addressed. Portfolio holdings information may be disclosed no more frequently than quarterly to ratings agencies, consultants and other qualified financial professionals or individuals. The disclosures will not be made sooner than five days after the date of the information. The Fund's Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
With the exception of disclosures to rating and ranking organizations as described above, the Fund requires any third party receiving non-public holdings information to enter into a confidentiality agreement with the Adviser. The confidentiality agreement provides, among other things, that non-public portfolio holdings information will be kept confidential and that the recipient has a duty not to trade on the non-public information and will use such information solely to analyze and rank the Fund, or to perform due diligence and asset allocation, depending on the recipient of the information.
The Fund's policies and procedures prohibit any compensation or other consideration from being paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Fund, Adviser and its affiliates or recipient of the Fund's portfolio holdings information.
ADDITIONAL INFORMATION ABOUT THE TRUST
DESCRIPTION OF SHARES. The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the portfolio. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or classes of shares. All consideration received by the Trust for shares of additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Trust has received a legal opinion to the effect that the Fund's shares are fully paid and non-assessable.
SHAREHOLDER LIABILITY. The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for
indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY. The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a trustee's individual liability in any manner inconsistent with the federal securities laws.
CODES OF ETHICS. The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Distributor and the Administrator have adopted Codes of Ethics (each a "Code of Ethics" and together the "Codes of Ethics") pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, including securities that may be purchased or held by the Fund, but are required to report their personal securities transactions for monitoring purposes. In addition, certain Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
PROXY VOTING
The Board has appointed ProxyVote Plus, LLC ("ProxyVote Plus"), a proxy consulting service, to act as the Fund's agent in exercising the proxy voting rights appurtenant to securities held by the Fund in a manner consistent with the policies adopted by ProxyVote Plus, and subject to the general oversight by the Board. ProxyVote Plus' proxy voting policies are designed to vote proxies in favor of shareholder interests following a case-by-case review of the merits of each proxy by ProxyVote Plus. In addition, ProxyVote Plus' proxy voting policies permit ProxyVote Plus to initiate shareholder proposals on the Fund's behalf in cases where ProxyVote Plus reasonably believes that such proposals are in the best interests of the Fund's shareholders. These policies and procedures are included in Appendix B to this SAI.
Because the Fund is distributed primarily to the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada (the "UA"), the Board has considered the recommendations of the UA in appointing ProxyVote Plus as the Fund's proxy voting agent.
The Trust is required to disclose annually the Fund's complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-888-766-8043; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Fund. Persons who owned of record or beneficially more than 25% of the Fund's outstanding shares may be deemed to control the Fund within the meaning of the 1940 Act. The Trust believes that most of the shares referred to below were held by the persons below in accounts for their fiduciary, agency or custodial customers. Shareholders controlling the Fund may have a significant impact on any shareholders vote of the Fund.
-------------------------------------------------------------------------------------------- UA S&P 500 INDEX FUND -- CLASS I -------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------------------- Heating Piping & Refrigeration 2,397,220.382 24.99% Pension Fund DTD 06/11/1973 9411 Philadelphia Road, Suite S Baltimore, MD 21237-4168 -------------------------------------------------------------------------------------------- Mercer Trust Company TTEE 1,086,808.221 11.33% FBO Steamfitters Supplemental Retirement Plan Attn: DC Plan Admin MS C4D 523661 1 Investors Way N7L Norwood, MA 02062-1599 -------------------------------------------------------------------------------------------- Trustees of the Northern Illinois Retirement Fund 776,685.423 8.10% State Street Bank & Trust 200 Clarendon Street Boston, MA 02116-5021 -------------------------------------------------------------------------------------------- Plumbers & Pipefitters Local 333 684,133.386 7.13% Pension FD DTD 07/01/2000 700 Tower Drive, Suite 300 Troy, MI 48098-2835 -------------------------------------------------------------------------------------------- Plumbers & Steamfitters Local 615,683.577 6.42% Union 486 911 Ridgebrook Road Sparks Glenco, MD 21152-9460 -------------------------------------------------------------------------------------------- Wilmington Trust RISC TTEE FBO 571,575.212 5.96% Western Washington UA Supplemental Pension Plan PO Box 52129 Phoenix, AZ 85072-2129 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- UA S&P 500 INDEX FUND -- CLASS II -------------------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------------------- New York Life Trust Company 1,970,614.715 75.58% 169 Lackawanna Avenue Parsippany, NJ 07054-1007 -------------------------------------------------------------------------------------------- |
INDEX INFORMATION
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to IMC (the "Licensee") is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the Licensee or the Fund. S&P has no obligation to take the needs of the Licensee or the owners of the Fund into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by the Fund how it is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSION, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
APPENDIX A -- DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
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following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and assured sources of alternate liquidity.
The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-l. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 or VMIG-2 are of high quality. Margins of protection are ample although not so large as in the MIG-I/VMIG-2 group.
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
o Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
o Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess a very strong capacity to pay a debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's sovereign rating. Such branch obligations are rated at the lower of the bank's rating or Moody's sovereign rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES
This statement sets forth the proxy voting policy of ProxyVote Plus, LLC. The Department of Labor has stated that the fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock and that trustees may delegate this duty to an investment manager. ERISA section 3(38) defines an investment manager as any fiduciary who is registered as an investment adviser under the Investment Advisers Act of 1940. ProxyVote Plus is a registered investment adviser under the Investment Advisers Act of 1940.
ProxyVote Plus shall vote the proxies of its clients solely in the best interests of their participants and beneficiaries and for the exclusive purpose of providing benefits to them. ProxyVote Plus shall not subordinate the interests of participants and beneficiaries to unrelated objectives. ProxyVote Plus shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. When proxies due ProxyVote Plus's clients have not been received, ProxyVote Plus will make reasonable efforts to obtain missing proxies. ProxyVote Plus is not responsible for voting proxies it does not receive.
ProxyVote Plus shall report annually to its clients on proxy votes cast on their behalf. These proxy voting reports will demonstrate ProxyVote Plus's compliance with its fiduciary duty and will facilitate clients' monitoring of ProxyVote Plus.
ProxyVote Plus shall consider these guidelines as it evaluates proposals appearing on proxy ballots it votes on behalf of its clients.
BOARD OF DIRECTOR PROPOSALS
ELECTION OF DIRECTORS
The election of directors generally occurs under one of two circumstances: when the director or slate is non-contested or when a director or slate is nominated by some other party and is contested by management.
UNCONTESTED ELECTIONS OF DIRECTORS
ProxyVote Plus will evaluate an uncontested slate of nominees to the board of directors by assessing the performance of the board of directors and the qualifications of individual nominees to the board. Specifically, the following factors will be considered:
o The company's financial performance as judged by total long-term returns to shareholders and other relevant financial indicators in comparison to a group of its peers or appropriate broader markets such as the S&P 500.
o Attendance records of incumbent directors. In general, support will be withheld from directors who have failed to attend at least 75 % of board and committee meetings without adequate justification. A company's failure to disclose this information may also be considered in determining whether to withhold support for nominees to the board.
o The independence of the board and nominees. ProxyVote Plus believes that a board independent from management is of vital importance to a company and its shareholders. Accordingly, ProxyVote Plus will cast votes in a manner that shall encourage the independence of boards. Independence will be evaluated based upon a number of factors, including: Whether the nominee has been employed by the company or an affiliate in an executive capacity within the last five years; whether the nominee has been or is currently employed by a firm that is one of the company's paid advisors or consultants; whether the nominee has any personal services contract with the company; whether the nominee is a relative of an executive or director of the company; whether the nominee is an officer of a company on which the company's chairman or chief executive officer is also a board member.
o The number of other boards of directors on which nominees serve. Service as a director represents a major commitment of time, energy, and talent. The National Association of Corporate Directors has estimated that directors spend as much as 190 hours per year preparing for and attending board and committee meetings. Service on a number of other boards, especially by one who also holds a full- time position, creates the risk that one's obligation as a director may not be fully met.
o The overall conduct of the company. As indicated, directors bear ultimate responsibility to shareholders for the success or failure of the company. Therefore, they should be held accountable for actions taken that may not be in shareholders' best interests, such as awarding excessive compensation to executives or themselves for performance that does not warrant it; for acting against shareholders' properly expressed wishes, such as failing to implement an appropriate proposal approved by a majority of shareholders; for adopting antitakeover provisions not in shareholders' best interests; for refusing to provide information to which shareholders are entitled; or for other actions taken by their company that may not be in shareholders' best interests.
o The performance of the Board's Audit Committee. PVP may withhold support from nominees that serve on an Audit Committee when it is determined that the nominees are not serving shareholders' long-term interests by allowing the company's external auditor to have potential conflicts of interest resulting from the auditor's receipt of non-audit fees from the company.
CONTESTED ELECTIONS OF DIRECTORS
Contested elections of directors frequently occur when a board candidate or slate runs for the purpose of seeking a significant change in corporate policy or control. Competing slates will be evaluated based upon the personal qualifications of the candidates, the policies that they advance, and their expressed and demonstrated commitment to the interests of all shareholders.
DIRECTOR ELECTION MAJORITY VOTE STANDARD
ProxyVote Plus will support shareholder proposals seeking to require that directors be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders. Most companies require that directors receive a plurality of the votes cast, which in practical terms means that a nominee can be elected even if 99.9% of shareholders withhold support from him or her. A majority vote standard serves to make shareholders' right to elect directors more meaningful.
MAJORITY OF INDEPENDENT DIRECTORS
In general, ProxyVote Plus will support shareholder proposals seeking to require that a majority of directors be independent. SEE definition of independence under UNCONTESTED ELECTION OF DIRECTORS. Board independence is critical so that directors may carry out their duties to select, monitor and compensate management.
SEPARATE OFFICES OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER
In general, ProxyVote Plus will support shareholder proposals seeking to require that different persons serve as the chairman and chief executive officer. The chairman's duty to oversee management is obviously compromised when he is required to monitor himself. However, in certain circumstances, such as a small-cap company with a limited group of leaders, it may be appropriate for these positions to be combined for some period of time.
INDEPENDENT NOMINATING, COMPENSATION, AND AUDIT COMMITTEES
ProxyVote Plus will support proposals that all, or a majority of directors on these committees, be independent directors. SEE definition of independence under UNCONTESTED ELECTION OF DIRECTORS. Such independence is necessary to the effective functioning of these committees.
CLASSIFIED BOARDS
ProxyVote Plus will evaluate proposals to establish a classified board or shareholder proposals to declassify the board by taking into consideration that classified boards reduce the ability of shareholders to influence corporate policy and hold directors accountable versus the potential benefit of discouraging transactions that may be detrimental to the long-term economic best interests of plan participants and beneficiaries.
TERM LIMITS
ProxyVote Plus will generally vote against proposals to limit terms of directors because they may result in prohibiting the service of directors who significantly contribute to the company's success and represent shareholders' interests very well. ProxyVote Plus believes that holding individual nominees to high standards when they seek election better advances shareholders' interests.
DIRECTOR LIABILITY
Management proposals typically seek shareholder approval to adopt an amendment to the company's charter to eliminate or limit the personal liability of directors to the company and its shareholders for monetary damages for any breach of fiduciary duty to the fullest extent permitted by state law. In contrast, shareholder proposals seek to provide for personal monetary liability for fiduciary breaches arising from gross negligence. While ProxyVote Plus recognizes that a company may have a more difficult time attracting and retaining directors if they are subject to personal monetary liability, ProxyVote Plus believes the great responsibility and authority of directors justifies holding them accountable for their actions. Each proposal addressing director liability will be evaluated consistent with this philosophy. ProxyVote Plus may support these proposals when the company persuasively argues that such action is necessary to attract and retain directors, but ProxyVote Plus may often oppose management proposals and support shareholder proposals in light of our philosophy of promoting director accountability.
Specifically, ProxyVote Plus will oppose management proposals that limit a director's liability for (i) a breach of the duty of loyalty, (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violations of the law, (iii) acts involving the unlawful purchases or redemptions of stock, (iv) the payment of unlawful dividends, or (v) the receipt of improper personal benefits. In addition, ProxyVote Plus will generally oppose proposals to reduce or eliminate directors' personal liability when litigation is pending against current board members.
INDEMNIFICATION
Indemnification is the payment by a company of the expenses of directors who become involved in litigation as a result of their service to a company. Proposals to indemnify a company's directors differ from those to eliminate or reduce their liability because with indemnification directors may still be liable for an act or omission, but the company will bear the expense. ProxyVote Plus may support these proposals when the company persuasively argues that such action is necessary to attract and retain directors, but will generally oppose indemnification when it is being proposed to insulate directors from actions they have already taken.
OUTSIDE DIRECTOR COMPENSATION AND BENEFITS
In consideration for the significant contributions and responsibilities expected of outside directors, ProxyVote Plus believes reasonable compensation should be awarded to them. Shareholder evaluation of director compensation is especially important since directors are responsible for compensating themselves. As the REPORT OF THE NATIONAL ASSOCIATION OF CORPORATE DIRECTORS BLUE RIBBON COMMISSION ON DIRECTOR COMPENSATION (1995) stated:
The challenge of devising director compensation plans is that both the inside and outside directors have a conflict of interests. Outside directors, of course, have a conflict of interests in being responsible for setting their own pay. Inside directors, who normally do not get additional pay for serving on the board, do not have the same direct conflict, but they do have an indirect conflict because of potential reciprocity with outside members of the board. The outside directors would be unlikely to increase their own compensation over the objections of the CEO and senior officers serving as inside directors. In turn, these same outside directors approve pay plans for these key insiders.
Thus, full disclosure in the proxy statement of the philosophy and process used in establishing director compensation and the total value of the compensation is critically important to shareholders.
ProxyVote Plus supports compensating directors in a fashion that rewards excellent service, not marginal performance, and enhances directors' links to shareholders. Further, director compensation should be accomplished in a manner that does not compromise the independence of directors. For example, a director who is scheduled to receive a large pension if he serves for a certain number of years is less likely to confront management if he believes this may reduce the likelihood that his pension rights will vest.
With these considerations in mind, ProxyVote Plus will support paying directors solely in the form of equity and cash and will support management and shareholder proposals to eliminate pension and benefit programs. ProxyVote Plus will support proposals that encourage a significant component of directors' total compensation be in the form of stock, but will also evaluate the appropriateness of the total value of the compensation package. For example, ProxyVote Plus may not support a proposal to reduce directors' cash compensation from $40,000 to $20,000 if it is replaced with stock awards of 10,000 shares worth $1,000,000. ProxyVote Plus also wishes to encourage significant stock holdings by directors without precluding board service by otherwise qualified individuals who do not possess significant wealth. Such ownership levels without excluding such people may be accomplished by offering compensation in the form of stock and cash, so long as the stock component is significant and the cash component is reasonable. Stock grants should be structured to avoid short-term holdings by directors.
BROADER PARTICIPATION ON THE BOARD
ProxyVote Plus will support proposals requesting companies to make efforts to seek more women and minority group members for service on boards. A more diverse board of qualified directors benefits the company and shareholders.
CHANGES IN CONTROL
ProxyVote Plus will evaluate proposals seeking shareholder approval for a merger, acquisition, restructuring, or spinoff by reviewing the proposed benefits and potential disadvantages to shareholders. In determining the appropriate vote, ProxyVote Plus will recognize that its duty is to advance the long-term economic best interests of our clients' participants and beneficiaries.
CORPORATE GOVERNANCE
AUDITORS
Independent auditors serve a critically important role in helping to protect the integrity and reliability of corporate financial reporting. A company's external auditor must be free of conflicts of interest that may impede its ability to confront management when the auditor has concerns about the company's financial reporting. When a company's external auditor is receiving significant non-audit fees from that company, it may create such conflicts of interest.
ProxyVote Plus will evaluate all fees paid by a company to its auditor and generally will not support management's request to ratify its auditors when it is determined that the auditors are receiving non-audit fees from the company -- in addition to audit fees -- that may compromise the auditor's independence. In addition, in those cases where there has been a change in auditors from the prior years and it is determined that the cause is strict enforcement of accounting principles and practices by the terminated firm, ProxyVote Plus will consider a vote against the new auditing firm. ProxyVote Plus will generally support shareholder proposals seeking to bar auditors from receiving non-audit fees from companies at which they perform audits for such fees increase the auditor's potential conflicts of interest.
INCREASE AUTHORIZED COMMON STOCK
ProxyVote Plus will evaluate management proposals requesting shareholder approval to increase authorized common stock by determining whether management has provided justification for the increase. For example, ProxyVote Plus may support increases in authorized common stock to fund stock splits that are in shareholders' interests. ProxyVote Plus will generally oppose proposals when the company intends to use the additional stock to implement a poison pill or other takeover defense. ProxyVote Plus will evaluate the amount of additional stock requested in comparison to the requests of the company's peers as well as the company's articulated reason for the increase.
BLANK CHECK PREFERRED STOCK
ProxyVote Plus will oppose requests to authorize blank check preferred stock. Blank check preferred stock is preferred stock authorized by shareholders that gives the board of directors broad powers to establish voting, dividend and other rights without any shareholder review. It can be used as an antitakeover device and for this reason ProxyVote Plus will vote against its authorization.
REINCORPORATION
ProxyVote Plus will generally oppose proposals by companies to reincorporate to jurisdictions that may result in a weakening of shareholder rights, management and director accountability or present other risks that outweigh potential benefits. ProxyVote Plus may support management requests to reincorporate when satisfactory business justification has been provided, and there is no overall and significant negative impact on matters of corporate governance or management or director accountability.
POISON PILLS
ProxyVote Plus's analysis will consider whether a poison pill proposal by management requires management to submit the pill periodically to a shareholder vote. In evaluating any poison pill proposal, ProxyVote Plus will consider the impact of acquisition attempts that may be detrimental to the long-term economic best interests of plan participants and beneficiaries.
INSIDER TRADING
ProxyVote Plus will support proposals that establish "zero tolerance" policies for illegal insider trading activity. Illegal insider trading has an extremely deleterious effect on share price and investor confidence.
BOARD SIZE AND COMPOSITION
ProxyVote Plus will generally support management proposals to change the number of directors provided a satisfactory explanation justifying the change is provided in the proxy statement.
SUPERMAJORITY VOTING REQUIREMENTS
ProxyVote Plus's analysis will weigh the consideration that supermajority voting requirements may be used to undermine voting rights against the potential benefit, in some circumstances, of protecting minority stockholder interests.
DUAL CLASS VOTING
ProxyVote Plus will take into consideration the principle of one share, one vote; the impact of any dilution in shareholder voting rights; and any decrease in share price likely to result from issuing a new class of stock with unequal voting rights.
CONFIDENTIAL VOTING AND INDEPENDENT TABULATION OF THE VOTE
ProxyVote Plus will consider the interest in assuring that proxy voting be protected from potential management coercion and management's use of corporate funds to lobby shareholders to change their votes.
CUMULATIVE VOTING
ProxyVote Plus will generally support shareholder proposals to implement cumulative voting and oppose management proposals to eliminate it. Cumulative voting is a method of obtaining minority shareholder representation on a board and of achieving a measure of board independence from management control.
SHAREHOLDERS' RIGHT TO CALL SPECIAL MEETINGS
In analyzing proposals to limit or eliminate the right of shareholders who have
held their shares for at least one year to call special meetings on issues of
importance, ProxyVote Plus will weigh the fact that this right enhances the
opportunity for shareholders to raise issues of concern with the board of
directors against their potential for facilitating changes in control.
APPROVE OTHER BUSINESS
ProxyVote Plus will generally oppose management requests to approve other business because this gives management broad authority to take action without shareholder consent even when shareholders have an interest in the issue.
EMPLOYEE-RELATED PROPOSALS
EMPLOYEE STOCK PURCHASE PLANS
ProxyVote Plus will generally support employee stock purchase plans. These plans cover a large number of a company's employees and allow them to purchase the company's stock at a slight discount. ProxyVote Plus supports employee ownership in companies for it serves to link the interests of employees of the company with shareholders of the company, which benefits shareholders in the long run.
HIGH-PERFORMANCE WORKPLACES
ProxyVote Plus will generally support proposals encouraging high-performance workplace practices at companies. Such practices may include employee training, direct involvement in decision making, compensation linked to performance, employment security and a supportive work environment ---or may include other measures of performance, such as the extent to which a company uses part-time or contract employees to the exclusion of full-time paid employees. High-performance workplace practices can contribute to both a company's productivity and long-term financial performance. However, ProxyVote Plus will review these proposals to ensure that they are in shareholders' best interests and do not unduly interfere with the company's operation.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION PLANS
ProxyVote Plus supports compensation plans that provide challenging performance objectives and serve to motivate executives to excellent performance. However, ProxyVote Plus does not support executive compensation plans that exceed the requirement necessary to attract and retain qualified and skilled managers, that adversely affect shareholders, that are excessively generous, that lack clear and challenging performance goals, or that adversely affect employee productivity and morale. ProxyVote Plus will consider the following factors in evaluating proposed compensation plans for shareholder approval:
o Whether a proposed stock-based compensation plan generally is available to other managers and employees in the company, or is targeted narrowly to the top executives of the company. Broad-based stock option plans may provide a significantly greater improvement in employee productivity and company performance than those narrowly targeted to top managers.
o The effect of a stock-based plan on the potential dilution of outstanding shares. Proposals with relatively high potential dilution levels (more than 10 percent) impose potentially large future liabilities that erode shareholder value. However, ProxyVote Plus will also consider whether the dilution is due to stock compensation targeted to top executives or is a broad- based plan generally available to all employees.
o Whether a compensation plan permits the replacement or repricing of "underwater" stock options; that is, those stock options whose exercise price is above the market price of the company stock. The repricing of stock options -- by lowering the exercise price of the stock --can serve to reward managers for the poor performance of the company' stock, undermining the performance-based nature of stock option awards.
o Whether the stock-based compensation plan provides for stock options that are "premium" priced, linked to a market or industry stock price index or other performance measure. Premium-priced stock options as well as options whose exercise is dependent on exceeding a market index ensure that management compensation is linked clearly to superior stock performance, rather than to stock increases due solely to a broad-based appreciation in the equity markets.
o Whether the compensation plan creates or exacerbates disparities in the workplace that may adversely affect employee productivity and morale. In addition, the voting fiduciary should examine whether the performance goals established in a compensation plan for executives include goals or targets related to employee compensation, benefit levels or other measures of a high-performance workplace.
o Whether a compensation plan permits additional stock option grants or other forms of stock compensation for executives who already hold considerable stock through the exercise of prior stock options or grants, or who have a large number of unexercised stock options or unvested stock grants. While ProxyVote Plus generally supports stock compensation as an appropriate incentive for managers, providing additional stock compensation to these managers may offer diminished incentives and needlessly dilute the company's shares.
o Whether a plan authorizes multiple types of compensation awards, provides for substantial discretion by the compensation committee (or similar entity) to issue a wide range of stock- based awards and/or provides directors with substantial discretion to set and/or amend the performance criteria of a plan. ProxyVote Plus will not support compensation plans that are needlessly complex, inconsistent and complicated, or plans that weaken performance criteria by providing directors with excessive discretionary power.
DISCLOSING OR RESTRICTING EXECUTIVE COMPENSATION
A variety of shareholder proposals seek to limit executive compensation, or to link executive compensation to the achievement of specific performance goals. For example, some shareholder proposals seek to tie executive compensation to the company's compliance with environmental laws, workplace health and safety regulations or nondiscrimination laws or to the company's enforcement of labor standards with foreign and domestic suppliers. In addition, some proposals may restrict the exercise of stock options during periods of substantial layoffs or downsizings, or of reductions in employee pay and benefits. ProxyVote Plus will support proposals requesting that a company reflect the expense of its stock options on its income statement for stock options represent a real and significant cost to the company and such cost should be disclosed to shareholders in the income statement rather than buried in a footnote to the annual report.
ProxyVote Plus will support proposals that link executive compensation to the company's achievement of goals that improve the long-term performance of the company. ProxyVote Plus will also support proposals seeking to expand the disclosure of executive compensation when the information is useful to shareholders. ProxyVote Plus generally believes that shareholders benefit from full disclosure of all forms of compensation received by the highest paid managers of the company.
GOLDEN PARACHUTES
ProxyVote Plus will generally oppose management proposals to award golden parachutes and support shareholder proposals to eliminate them. Golden parachutes are severance agreements given to executives in the event of a merger or takeover. In light of the significant compensation already awarded most executives they are rarely justified.
SHAREHOLDER PROPOSALS
A variety of shareholder proposals are sponsored each year concerning fundamental corporate governance topics and social issues, as well as many unique proposals that are presented for vote for the first time. ProxyVote Plus's position on many of these proposals has already been discussed. In general, ProxyVote Plus will evaluate shareholder proposals to determine whether they are in the best economic interests of the participants and beneficiaries ProxyVote Plus represents.
In general, ProxyVote Plus supports proposals that request the company to furnish information helpful to shareholders in evaluating the company's operations. In order to be able intelligently to monitor their investments shareholders often need information best provided by the company in which they have invested. Requests to report such information merit support. ProxyVote Plus will evaluate proposals seeking the company to cease taking certain actions that the proponent believes is harmful to society or some segment of society with special attention to the company's legal and ethical obligations, its ability to remain profitable, and the potential negative publicity if the company fails to honor the request.
ProxyVote Plus will generally support the following proposals so long as they are determined to protect or advance the long-term economic best interests of plan participants and beneficiaries:
SPECIAL POLICY REVIEW AND SHAREHOLDER ADVISORY COMMITTEES
These resolutions propose the establishment of special committees of the board to address broad corporate policy and provide forums for ongoing dialogue on issues including, but not limited to shareholder relations, the environment, occupational health and safety, and executive compensation.
CORPORATE CONDUCT AND HUMAN RIGHTS
These proposals call for the adoption and/or enforcement of principles or codes relating to a company's investment in countries in which there are patterns of ongoing and systematic violation of human rights, a government is illegitimate or there is a call by human rights advocates, pro-democracy organizations or legitimately elected representatives for economic sanctions.
ADOPTION OF "MACBRIDE PRINCIPLES"
These resolutions call for the adoption of the MacBride Principles on the grounds that U.S. companies operating abroad should support the equal employment opportunity policies that apply in facilities domestically.
ADOPTION OF "CERES PRINCIPLES"
These resolutions call for the adoption of principles that encourage the company to protect the environment and the safety and health of its employees. Many companies have voluntarily adopted these principles.
LEGAL AND REGULATORY COMPLIANCE
These resolutions call for compliance with governmental mandates and corporate policies regarding nondiscrimination, affirmative action, workplace safety and health and other basic labor protections.
SUPPLIER STANDARDS
These resolutions call for the corporation to take reasonable steps, or institute a review process, to ensure that it does not and will not do business with foreign suppliers that manufacture products for sale in the U.S. using forced labor, convict labor or child labor, or that fail to comply with all applicable laws and standards protecting their employees' wages, benefits, working conditions, freedom of association and other rights.
FAIR LENDING
These resolutions call for financial institutions to affirmatively comply with fair-lending regulations and statutes, institute or report on overall fair-lending policies or goals by the parent and financial subsidiaries of the corporation or disclose lending data to shareholders and the public.
OTHER ISSUES
EQUAL ACCESS TO THE PROXY
ProxyVote Plus's analysis will take into consideration the fact that such proposals give shareholders the same ability as management to state their views on contested proxy issues, including director nominations, thereby enhancing corporate accountability.
FAIR-PRICE PROVISIONS
ProxyVote Plus's analysis of the long-term costs and benefits of a fair-price provision will consider the fact that such provisions guard against the coercive pressures of two-tiered tender offers in which some shareholders, including plan participants in some situations, receive less value for their stock than other
shareholders from a bidder who seeks to take a controlling interest in the company. However, ProxyVote Plus will also consider the provision's potential for minimizing the company's debt and the resulting impact on the long-term value of holdings in the event the shareholders do not tender.
GREENMAIL PAYMENTS
ProxyVote Plus will consider the fact that greenmail discriminates against other shareholders and may result in decreased stock price. In the event ProxyVote Plus concludes that the greenmail payment lacks satisfactory long-term business justification (such as stopping an acquisition attempt that would be detrimental to the long-term economic best interests of plan participants and beneficiaries), ProxyVote Plus will oppose the proposal.
STATEMENT OF ADDITIONAL INFORMATION
WESTWOOD LARGECAP VALUE FUND
(A CLASS SHARES TICKER SYMBOL: WWLAX)
(INSTITUTIONAL SHARES TICKER SYMBOL: WHGLX)
WESTWOOD SMIDCAP FUND
(INSTITUTIONAL SHARES TICKER SYMBOL: WHGMX)
WESTWOOD SMALLCAP VALUE FUND
(INSTITUTIONAL SHARES TICKER SYMBOL: WHGSX)
WESTWOOD INCOME OPPORTUNITY FUND
(A CLASS SHARES TICKER SYMBOL: WWIAX)
(INSTITUTIONAL SHARES TICKER SYMBOL: WHGIX)
WESTWOOD DIVIDEND GROWTH FUND
(INSTITUTIONAL SHARES TICKER SYMBOL: WHGDX)
WESTWOOD SMIDCAP PLUS FUND
(INSTITUTIONAL SHARES TICKER SYMBOL: WHGPX)
WESTWOOD SHORT DURATION HIGH YIELD FUND
(A CLASS SHARES)
(INSTITUTIONAL SHARES TICKER SYMBOL: WHGHX)
WESTWOOD GLOBAL EQUITY FUND
(A CLASS SHARES)
(INSTITUTIONAL SHARES TICKER SYMBOL: WWGEX)
WESTWOOD GLOBAL DIVIDEND FUND
(A CLASS SHARES)
(INSTITUTIONAL SHARES TICKER SYMBOL: WWGDX)
WESTWOOD EMERGING MARKETS FUND
(A CLASS SHARES TICKER SYMBOL: WWEAX)
(INSTITUTIONAL SHARES TICKER SYMBOL: WWEMX)
WESTWOOD EMERGING MARKETS PLUS FUND
(A CLASS SHARES)
(INSTITUTIONAL SHARES)
EACH, A SERIES OF THE ADVISORS' INNER CIRCLE FUND
MARCH 1, 2013
INVESTMENT ADVISER:
WESTWOOD MANAGEMENT CORP.
This Statement of Additional Information ("SAI") is not a prospectus. This SAI is intended to provide additional information regarding the activities and operations of The Advisors' Inner Circle Fund (the "Trust") and the Westwood LargeCap Value Fund, the Westwood SMidCap Fund, the Westwood Income Opportunity Fund, the Westwood SmallCap Value Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund, the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund (each a "Fund" and together, the "Funds"). Shares of the Westwood SMidCap Fund are currently not available to new investors. Existing shareholders of the Fund may continue to make additional investments and reinvest dividends and capital gains distributions in the Fund. In addition, A Class Shares of the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund and the Westwood Emerging Markets Plus Fund and Institutional Class Shares of the Westwood Emerging Markets Plus Fund are currently not available for purchase. This SAI is incorporated by reference and should be read in conjunction with the Funds' prospectuses dated March 1, 2013. Capitalized terms not defined herein are defined in the prospectuses. The financial statements for the Funds including the notes thereto and the report of Ernst & Young LLP thereon, as contained in the 2012 Annual Report to Shareholders are herein incorporated by reference into and deemed to be part of this SAI. A copy of the 2012 Annual Report to Shareholders must accompany the delivery of this SAI. Shareholders may obtain copies of the Funds' prospectuses or Annual Report free of charge by writing to the Trust at P.O. Box 219009, Kansas City, MO 64121 or calling the Funds at 1-877-FUND-WHG (1-877-386-3944).
TABLE OF CONTENTS
THE TRUST ............................................................... S-1 ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES ......... S-2 DESCRIPTION OF PERMITTED INVESTMENTS .................................... S-8 INVESTMENT LIMITATIONS .................................................. S-20 THE ADVISER AND SUB-ADVISER ............................................. S-23 THE PORTFOLIO MANAGERS .................................................. S-27 THE ADMINISTRATOR ....................................................... S-30 THE DISTRIBUTOR ......................................................... S-32 SHAREHOLDER SERVICES .................................................... S-33 PAYMENTS TO FINANCIAL INTERMEDIARIES .................................... S-33 THE TRANSFER AGENT ...................................................... S-34 THE CUSTODIAN ........................................................... S-34 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................... S-34 LEGAL COUNSEL ........................................................... S-34 TRUSTEES AND OFFICERS OF THE TRUST ...................................... S-34 PURCHASING AND REDEEMING SHARES ......................................... S-45 DETERMINATION OF NET ASSET VALUE ........................................ S-45 TAXES ................................................................... S-46 FUND TRANSACTIONS ....................................................... S-51 PORTFOLIO HOLDINGS ...................................................... S-54 DESCRIPTION OF SHARES ................................................... S-55 SHAREHOLDER LIABILITY ................................................... S-56 LIMITATION OF TRUSTEES' LIABILITY ....................................... S-56 PROXY VOTING ............................................................ S-56 CODES OF ETHICS ......................................................... S-56 5% AND 25% SHAREHOLDERS ................................................. S-57 APPENDIX A -- DESCRIPTION OF RATINGS .................................... A-1 APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ...................... B-1 March 1, 2013 WHG-SX-001-0800 |
THE TRUST
GENERAL. Each Fund is a separate series of the Trust. The Trust is an open-end investment management company established under Massachusetts law as a Massachusetts voluntary association (commonly known as a business trust) under an Amended and Restated Declaration of Trust dated July 18, 1991, as amended and restated February 18, 1997 and amended May 15, 2012. The Declaration of Trust permits the Trust to offer separate series ("funds") of shares of beneficial interest ("shares"). The Trust reserves the right to create and issue shares of additional funds. Each fund is a separate mutual fund, and each share of each fund represents an equal proportionate interest in that fund. All consideration received by the Trust for shares of any fund and all assets of such fund belong solely to that fund and would be subject to liabilities related thereto. Each fund of the Trust pays its (i) operating expenses, including fees of its service providers, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering its shares under federal and state securities laws, pricing and insurance expenses, brokerage costs, interest charges, taxes and organization expenses, and (ii) pro rata share of the Fund's other expenses, including audit and legal expenses. Expenses attributable to a specific fund shall be payable solely out of the assets of that fund. Expenses not attributable to a specific fund are allocated across all of the funds on the basis of relative net assets. The other funds of the Trust are described in one or more separate Statements of Additional Information.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer shares of the Funds in some or all of the following classes: Institutional Shares and A Class Shares. The different classes provide for variations in sales charges, certain distribution and shareholder servicing expenses and in the minimum initial investment requirements. Minimum investment requirements and investor eligibility are described in the prospectuses. The Trust reserves the right to create and issue additional classes of shares. For more information on shareholder servicing and distribution expenses, see the "Distributor" and "Shareholder Services" sections in this SAI. The Funds are currently offered in the following classes of shares:
-------------------------------------------------------------------------------- FUND INSTITUTIONAL SHARES A CLASS SHARES -------------------------------------------------------------------------------- Westwood LargeCap Value Fund X X -------------------------------------------------------------------------------- Westwood SMidCap Fund X -------------------------------------------------------------------------------- Westwood Income Opportunity Fund X X -------------------------------------------------------------------------------- Westwood SmallCap Value Fund X -------------------------------------------------------------------------------- Westwood Dividend Growth Fund X -------------------------------------------------------------------------------- Westwood SMidCap Plus Fund X -------------------------------------------------------------------------------- Westwood Short Duration High Yield Fund X X(1) -------------------------------------------------------------------------------- Westwood Global Equity Fund X X(1) -------------------------------------------------------------------------------- Westwood Global Dividend Fund X X(1) -------------------------------------------------------------------------------- Westwood Emerging Markets Fund X X -------------------------------------------------------------------------------- Westwood Emerging Markets Plus Fund X(1) X(1) -------------------------------------------------------------------------------- |
(1) Not currently available for purchase.
HISTORY OF THE WESTWOOD DIVIDEND GROWTH FUND. The Westwood Dividend Growth Fund is the successor to the McCarthy Multi-Cap Stock Fund (the "Predecessor Fund"), a separate registered investment company. The Predecessor Fund was managed by McCarthy Group Advisors, L.L.C. ("McCarthy"). McCarthy was responsible for the day-to-day management of the Predecessor Fund, which had a substantially similar investment objective, investment strategies, policies and restrictions as those of the Fund. The Predecessor Fund's date of inception was August 6, 2001. The Predecessor Fund reorganized into the Fund on February 7, 2011. Substantially all of the assets of the Predecessor Fund were acquired by the Fund in connection with its commencement of operations on February 7, 2011 (the "Reorganization").
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each share held on the record date for the meeting. Each Fund will vote separately on matters relating solely to it. As a Massachusetts voluntary association, the Trust is not required, and does not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the operation of the Trust and for the election of trustees under certain circumstances. Under the Declaration of Trust, the trustees have the power to liquidate each Fund without shareholder approval. While the trustees have no present intention of exercising this power, they may do so if a Fund fails to reach a viable size within a reasonable amount of time or for such other reasons as may be determined by the Board of Trustees (each, a "Trustee" and collectively, the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Any series of the Trust created on or after November 11, 1996 may reorganize or merge with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law and the Declaration of Trust, without the approval of shareholders of any series.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objectives and principal investment strategies are described in the prospectuses. The following information supplements, and should be read in conjunction with, the prospectuses. For a description of certain permitted investments discussed below, see "Description of Permitted Investments" in this SAI.
WESTWOOD LARGECAP VALUE FUND. The investment objective of the Fund is to seek long-term capital appreciation. The investment objective of the Fund is fundamental and may not be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act").
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in common stocks and other equity securities of large capitalization companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers large capitalization companies to be companies that have market capitalizations of greater than $5 billion at the time of initial purchase. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in equity securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). In the event that the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investments in such securities would normally represent less than 25% of the Fund's assets.
The Fund invests in approximately 40-60 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target or a change to a company's fundamentals that negatively impacts the original investment thesis. The Adviser will not necessarily sell a security that has depreciated below the stated market capitalization defined above.
WESTWOOD SMIDCAP FUND. The investment objective of the Fund is to seek long term capital appreciation. The investment objective of the Fund is fundamental and may not be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the 1940 Act.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small- and mid-cap companies. This investment policy may be changed by the Fund upon 60 days'
prior notice to shareholders. The Fund considers small- and mid-cap companies to be those companies with market capitalizations between $500 million and $10 billion. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). In the event the Fund invests in foreign securities or ADRs, the Adviser expects that the Fund's investment in such securities would normally represent less than 15% of the Fund's assets.
The Fund invests in approximately 50-65 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund. The Adviser will not necessarily sell a security that has appreciated or depreciated outside the Fund's target capitalization range.
WESTWOOD SMALLCAP VALUE FUND. The investment objective of the Fund is to seek long-term capital appreciation. The investment objective of the Fund is fundamental and may not be changed without the consent of shareholders. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the 1940 Act.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small-cap companies. The Fund considers small-cap companies to be those companies with market capitalizations between $100 million and $2 billion at the time of initial purchase. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in securities of domestic companies, but may also invest in equity securities of foreign companies and American Depository Receipts ("ADRs"). In the event the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investment in such securities would normally represent less than 25% of the Fund's assets.
The Fund invests in approximately 50-70 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund. The Adviser will not necessarily sell a security that has appreciated or depreciated outside the Fund's target capitalization range.
WESTWOOD INCOME OPPORTUNITY FUND. The primary investment objective of the Fund is to provide current income. A secondary objective of the Fund is to provide the opportunity for long-term capital appreciation. The investment objectives of the Fund are non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objectives. The Fund is classified as a "diversified" investment company under the 1940 Act.
Under normal circumstances, the Fund seeks to meet its investment objective by investing generally more than 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying and/or interest-bearing securities. By utilizing income-producing securities from diverse asset classes, the Fund also seeks to maintain a lower volatility profile
than traditional equity-only products. The Fund aims to invest in securities of companies with strong and improving cash flow sufficient to support a sustainable or rising income stream for investors. In selecting securities for the Fund, the Adviser chooses among a diversified group of income-producing asset classes. Equity securities may include dividend-paying common stocks, preferred stocks, convertible securities and warrants. Fixed income securities may include bonds and other debt securities, and money market instruments. Other types of income-producing securities may include interests in royalty trusts and master limited partnerships ("MLPs"), securities of real estate investment trusts ("REITs"), and shares of exchange-traded funds ("ETFs"). The Fund generally invests in securities of domestic companies, but may also invest in securities of foreign companies and American Depositary Receipts ("ADRs"). In the event the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investments in such securities would normally represent less than 25% of the Fund's assets.
The Fund is permitted to invest in companies of any capitalization range. The Fund's fixed income investments are, in the aggregate, of investment grade (i.e., those rated in one of the three highest rating categories by a rating agency), but may at times include securities rated below investment grade (high yield or "junk" bonds). In addition, the Fund's fixed income securities may include unrated securities, if deemed by the Adviser to be of comparable quality to investment grade.
The Fund seeks to provide a higher level of current income than that offered by traditional fixed income products such as U.S. government bonds and money market securities. The Adviser's investment process incorporates relative value analysis among capital instruments, as well as among asset classes, to determine where downside potential can be limited to achieve the goal of generating an attractive level of current income along with capital appreciation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund.
WESTWOOD DIVIDEND GROWTH FUND. The primary investment objective of the Fund is to seek to provide a growing stream of income over time. A secondary objective of the Fund is to seek to provide long-term capital appreciation and current income. The investment objective of the Fund is non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objectives. The Fund is classified as a "diversified" investment company under the 1940 Act.
The Fund seeks to invest primarily in the stocks of companies of any size, from larger, well-established companies, which are preferred by the Adviser, to smaller companies. Under normal circumstances, the Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in dividend paying equity securities. For purposes of this policy, dividend paying equity securities include common stock, preferred stock, royalty trusts and trust preferred securities. The Fund may also invest in real estate investment trusts ("REITs"). The Fund will typically invest up to 5% of its net assets in REITs, but can invest a higher percentage in REITs if REIT valuations and fundamental prospects are compelling. The Fund will not invest more than 20% of its net assets in REITs. The Fund may invest up to 25% of its net assets in the securities of foreign issuers that are publicly traded in the United States or on foreign exchanges, including American Depositary Receipts ("ADRs").
The Adviser pursues the Fund's objective by investing primarily in the stocks of companies that exhibit the potential for significant long-term appreciation and dividend growth. In selecting investments, the portfolio managers seek to identify dividend-paying issuers with strong profitability, solid balance sheets and capital allocation policies that support sustained or increasing dividends. The Adviser generally makes use of fundamental analytical techniques that combine quantitative analysis screens with fundamental analysis by the Adviser's equity investment team to determine which particular stocks to purchase and sell. The Adviser will consider the sale of securities from the Fund's portfolio when the reasons for the original purchase no longer apply.
WESTWOOD SMIDCAP PLUS FUND. The investment objective of the Fund is to seek long-term capital appreciation. The investment objective of the Fund is non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objectives. The Fund is classified as a "diversified" investment company under the 1940 Act.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of small- and mid-cap companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers small- and mid-cap companies to be those companies with market capitalizations between $2 billion and $15 billion. The equity securities in which the Fund invests are primarily common stocks, but may also include shares of exchange-traded funds ("ETFs"), real estate investment trusts ("REITs"), royalty trusts, and master limited partnerships ("MLPs"). The Fund generally invests in securities of domestic companies, but may also invest in equity securities of foreign companies and American Depositary Receipts ("ADRs"). In the event the Fund invests in foreign securities and ADRs, the Adviser expects that the Fund's investment in such companies would normally represent less than 15% of the Fund's assets.
The Fund invests in approximately 45-65 securities that are well diversified among market sectors. The Adviser utilizes a value style of investing and selects securities for the Fund that it believes are currently undervalued in the market and offer an attractive opportunity for price appreciation coupled with downside risk limitation. Key metrics for evaluating the risk/return profile of an investment may include strong free cash flow, an improving return on equity, a strengthening balance sheet and, in the case of common equities, positive earnings surprises without a corresponding change in the stock price. The Adviser has disciplines in place that serve as sell signals, such as a security reaching a predetermined price target, a change to a company's fundamentals that make the risk/return profile unattractive, or a need to improve the overall risk/return profile of the Fund. The Adviser will not necessarily sell a security that has appreciated or depreciated outside the Fund's target capitalization range.
WESTWOOD SHORT DURATION HIGH YIELD FUND. The investment objective of the Fund is to generate a high level of current income while experiencing lower volatility than the broader high yield market. The investment objectives of the Fund are non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objectives. The Fund is classified as a "diversified" investment company under the 1940 Act.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in high yield securities. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. High yield securities, also referred to as "junk" bonds, are securities rated BB+, Ba1 or below by independent rating agencies at the time of purchase by the Fund, or securities that are unrated but judged to be of comparable quality by SKY Harbor Capital Management, LLC (the "Sub-Adviser"). The Fund may invest in securities of any rating, including securities that are in default.
In seeking to achieve the Fund's objective, the Sub-Adviser generally invests in a portfolio of high yield securities of U.S. companies, as described in further detail below. While the Sub-Adviser may purchase securities of any maturity, under normal market conditions, the Sub-Adviser generally expects to invest in high yield securities, including privately placed securities, that have an expected redemption through maturity, call or other corporate action within three years or less, although this may vary if, in the Sub-Adviser's opinion, it is warranted by current market conditions. While there is no maximum duration on individual securities, the average maximum "duration to worst" of the Fund is expected to be under three years. "Duration to worst" is the duration of a bond computed using the bond's nearest call date or maturity, whichever comes first. The Sub-Adviser believes such a portfolio serves to reduce volatility and preserve capital when compared to traditional high yield portfolios. In the Sub-Adviser's view, traditional high yield portfolios generally possess durations to worst of longer than three years. Portfolios with longer durations to worst are generally more sensitive to interest rate changes and other market risks. Accordingly, the Sub-Adviser seeks to achieve less volatility and better preservation of capital for the Fund relative to traditional high yield portfolios by maintaining a duration to worst for the Fund that is significantly shorter than that of traditional high yield portfolios. The Fund also invests in high yield securities of non-U.S. companies, and the Sub-Adviser expects that the Fund's investments in non-U.S. companies will normally represent less than 25% of the Fund's assets, and may include investments in emerging markets.
In selecting securities for the Fund's portfolio, the Sub-Adviser seeks issuers that exhibit attractive characteristics including, but not limited to: stable businesses with projectable cash flows; positive year-over-year cash flow comparisons supported by stable industry conditions; generation of cash in excess of corporate and financial obligations; and management intentions for use of cash flows favorable to bond holders. In making investment decisions, the Sub-Adviser utilizes an investment process that is based on fundamental analysis of issuers, markets, and general macro-economic conditions and supported by quantitative valuation and risk monitoring tools. The goal of the investment process is to identify high yield securities with attractively priced income streams and to achieve superior long term returns from investments. The Sub-Adviser employs an established selling discipline and may generally sell a security for one of three non-exclusive reasons: (i) there is a negative change in the Sub-Adviser's fundamental assessment of a security; (ii) the security becomes overvalued relative to other opportunities; or (iii) the Sub-Adviser is shifting the portfolio from one sector or risk segment to another.
WESTWOOD GLOBAL EQUITY FUND. The investment objective of the Fund is to seek long-term capital appreciation. The investment objective of the Fund is non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act").
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies organized or located throughout the world, including the United States. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $1 billion. The Fund invests at least 40% of its net assets, plus any borrowings for investment purposes, in companies organized or located or doing a substantial amount of business outside the United States in both developed and emerging market countries, and will generally have exposure to the United States, the United Kingdom and Japan.
The Fund invests in approximately 65-85 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
WESTWOOD GLOBAL DIVIDEND FUND. The investment objective of the Fund is to seek long-term capital appreciation and dividend income. The investment objective of the Fund is non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act").
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying equity securities of companies organized or located throughout the world, including the United States. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $500 million. The Fund invests at least 40% of its net assets,
plus any borrowings for investment purposes, in companies organized or located or doing a substantial amount of business outside the United States in both developed and emerging market countries, and will generally have exposure to the United States, the United Kingdom and Japan.
The Fund invests in approximately 65-90 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market, offer an attractive opportunity for price appreciation and dividend growth, and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation, consistency of earnings growth and the ability, or prospective ability, to pay dividends. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
WESTWOOD EMERGING MARKETS FUND. The investment objective of the Fund is to seek long-term capital appreciation. The investment objective of the Fund is non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act").
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers a company to be an emerging market company if (i) at least 50% of the company's assets are located in emerging markets; (ii) at least 50% of the company's revenues are generated in emerging markets; or (iii) the company is domiciled in an emerging market. "Emerging markets" include countries in the MSCI Emerging Markets Index, and other countries that the Fund considers to be equivalent to those in that index based on their level of economic development or the size and experience of their securities markets. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $500 million.
The Fund invests in approximately 70-90 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
WESTWOOD EMERGING MARKETS PLUS FUND. The investment objective of the Fund is to seek long-term capital appreciation. The investment objective of the Fund is non-fundamental and may be changed without shareholder approval. There can be no assurance that the Fund will be able to achieve its investment objective. The Fund is classified as a "diversified" investment company under the Investment Company Act of 1940, as amended (the "1940 Act").
Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies. This investment policy may be changed by the Fund upon 60 days' prior notice to shareholders. The Fund considers a company to be an emerging market company if (i) at least 50% of the company's assets are located in emerging markets; (ii) at least 50% of the company's revenues are generated in emerging markets; or (iii) the company is domiciled in an emerging market. "Emerging markets" include countries in the MSCI
Emerging Markets Index, and other countries that the Fund considers to be equivalent to those in that index based on their level of economic development or the size and experience of their securities markets. The equity securities in which the Fund invests are primarily common stocks, but may also include exchange-traded funds ("ETFs"), American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), preferred stock, warrants and real estate investment trusts ("REITs"). Equity securities also include participatory notes, which are derivative instruments with economic characteristics similar to equity securities designed to replicate equity market exposure in certain foreign markets where direct investment is either impossible or difficult due to local investment restrictions. The Fund typically invests in companies with market capitalizations exceeding $1.5 billion.
The Fund invests in approximately 50-70 securities to achieve its investment objective. The Adviser utilizes a fundamental, bottom-up investment process and seeks to invest in securities of sound businesses that it believes are currently undervalued in the market and can generate positive and sustainable earnings growth and, thus, economic profits over time. Key characteristics that the Adviser looks for in evaluating an investment may include management aligned with an Economic Value Added ("EVA") philosophy, strong core franchise value, above average cash flow generation and consistency of earnings growth. The Adviser has disciplines in place that serve as sell signals, such as a security reaching its estimated fair value, an adverse change in a company's fundamentals, or when more attractive alternatives exist.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments and investment practices discussed in the "Additional Information about Investment Objectives and Policies" section and the associated risk factors. A Fund may invest in any of the following instruments or engage in any of the following investment practices unless such investment or activity is inconsistent with or is not permitted by a Fund's stated investment policies, including those stated below.
AMERICAN DEPOSITARY RECEIPTS. ADRs, as well as other "hybrid" forms of ADRs, including European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign issuer. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository" and may be sponsored or unsponsored. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer's home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities.
For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. While the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts agree to distribute notices of shareholders meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequency is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities.
For purposes of a Fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depositary receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers.
Investments in the securities of foreign issuers may subject the Funds to investment risks that differ in some respects from those related to investments in securities of U.S. issuers. Such risks include future adverse political and economic developments, possible imposition of withholding taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source or greater fluctuation in value due to changes in exchange rates. Foreign issuers of securities often engage in business practices different from those of domestic issuers of similar securities, and there may be less information publicly available about foreign issuers. In addition, foreign issuers are, generally speaking, subject to less government supervision and regulation and different accounting treatment than are those in the United States.
EQUITY SECURITIES. Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants to acquire common stock, securities convertible into common stock, and investments in master limited partnerships. Investments in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the net asset value of a Fund to fluctuate. The Funds purchase equity securities traded in the United States on registered exchanges or the over-the-counter market. Equity securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
o PREFERRED STOCK. 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.
o ROYALTY TRUSTS. Royalty trusts are structured similarly to REITs. A royalty trust generally acquires an interest in natural resource companies or chemical companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields.
o EXCHANGE-TRADED FUNDS. An ETF is a fund whose shares are bought and sold on a securities exchange as if it were a single security. An ETF holds a portfolio of securities designed to track a particular market segment or index.
Some examples of ETFs are SPDRs((R)), DIAMONDS(SM), NASDAQ 100 Index Tracking Stock(SM) ("QQQs(SM)"), and iShares((R)). A Fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or foreign market while awaiting an opportunity to purchase securities directly. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities and ETFs have management fees that increase their costs versus the costs of owning the underlying securities directly. See also "Investment Company Shares" below.
o WARRANTS. Warrants are instruments that entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by a Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non- convertible securities. Because of this higher yield, convertible securities generally sell at a price above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
o MICRO, SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of micro, small and medium capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies. This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product lines and frequent lack of depth of management. The securities of micro and smaller companies are often traded in the over-the-counter market and even if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities of micro and smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general.
MASTER LIMITED PARTNERSHIPS. MLPs are limited partnerships or limited liability companies, whose partnership units or limited liability interests are listed and traded on a U.S. securities exchange, and are treated as publicly traded partnerships for federal income tax purposes. To qualify to be treated as a partnership for tax purposes, an MLP must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Internal Revenue Code of 1986, as amended (the "Code"). These qualifying sources include activities such as the exploration, development, mining,
production, processing, refining, transportation, storage and marketing of mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. MLPs that are formed as limited liability companies generally have two analogous classes of owners, the managing member and the members. For purposes of this section, references to general partners also apply to managing members and references to limited partners also apply to members. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an equity interest of as much as 2% in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the MLP through ownership of common units and have a limited role in the MLP's operations and management.
MLPs are typically structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount ("minimum quarterly distributions" or "MQD"). Common and general partner interests also accrue arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the partnership's cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such results benefit all security holders of the MLP.
General partner interests of MLPs are typically retained by an MLP's original sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and investors such as us. A holder of general partner interests can be liable under certain circumstances for amounts greater than the amount of the holder's investment in the general partner interest. General partner interests often confer direct board participation rights and in many cases, operating control, over the MLP. These interests themselves are not publicly traded, although they may be owned by publicly traded entities. General partner interests receive cash distributions, typically 2% of the MLP's aggregate cash distributions, which are contractually defined in the partnership agreement. In addition, holders of general partner interests typically hold incentive distribution rights ("IDRs"), which provide them with a larger share of the aggregate MLP cash distributions as the distributions to limited partner unit holders are increased to prescribed levels. General partner interests generally cannot be converted into common units. The general partner interest can be redeemed by the MLP if the MLP unitholders choose to remove the general partner, typically with a supermajority vote by limited partner unitholders.
FIXED INCOME SECURITIES. Fixed income securities include bonds, notes, debentures and other interest-bearing securities that represent indebtedness. The market value of the fixed income investments in which a Fund invests will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. Changes by recognized agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of these securities will not necessarily affect cash income derived from these securities but will affect a Fund's net asset value.
FOREIGN SECURITIES. Foreign securities include equity securities of foreign entities, obligations of foreign branches of U.S. banks and of foreign banks, including, without limitation, European Certificates of Deposit, European Time Deposits, European Bankers' Acceptances, Canadian Time Deposits, Europaper and Yankee Certificates of Deposit, and investments in Canadian Commercial Paper and foreign securities. These instruments have investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include future adverse
political and economic developments, the possible imposition of withholding taxes on interest or other income, possible seizure, nationalization, or expropriation of foreign deposits, the possible establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations. Such investments may also entail higher custodial fees and sales commissions than domestic investments. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks.
A Fund's investments in emerging markets can be considered speculative and may therefore offer higher potential for gains and losses than investments in developed markets. With respect to an emerging market country, there may be a greater potential for nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war), which could adversely affect the economies of such countries or investments in such countries. The economies of developing countries are generally heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange or currency controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade.
MONEY MARKET SECURITIES. Money market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating category by a nationally recognized statistical ratings organization ("NRSRO"), such as Standard & Poor's Rating Services ("S&P") or Moody's Investor Services, Inc. ("Moody's"), or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank obligations (certificates of deposit, time deposits and bankers' acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each of these money market securities are described below. For a description of ratings, see "Appendix A -- Description of Ratings" to this SAI.
REAL ESTATE INVESTMENT TRUSTS. A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Code. The Code permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on real property; and distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs in which a Fund invests may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Fund invests may concentrate investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of a Fund's investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore, REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through a Fund, a shareholder will bear not only his proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation ("Farmer Mac").
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each instrumentality (the "Senior Preferred Stock Purchase Agreement" or "Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury's funding commitment to increase as necessary to accommodate any cumulative reduction in net worth through the end of 2012. The unlimited support the U.S. Treasury extended to the two companies expired at the beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% annual dividend. Instead, the companies will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is believed that the new amendment puts Fannie Mae and Freddie Mac in a better position to service their debt because the companies no longer have to borrow from the U.S. Treasury to make fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac also will be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent, which puts each of them on track to cut their portfolios to a targeted $250 billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action lawsuits and investigations by federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious question as the U.S. Government reportedly is considering multiple options, ranging from nationalization, privatization, consolidation, or abolishment of the entities.
o U.S. TREASURY OBLIGATIONS. U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
o RECEIPTS. Interests in separately traded interest and principal component parts of U.S. government obligations that are issued by banks or brokerage firms and are created by depositing U.S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon securities.
o U.S. GOVERNMENT ZERO COUPON SECURITIES. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
o U.S. GOVERNMENT AGENCIES. Some obligations issued or guaranteed by agencies of the U.S. government are supported by the full faith and credit of the U.S. Treasury, others are supported by the right of the issuer to borrow from the U.S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U.S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of a Fund's shares.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a few to 270 days.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Funds may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest
limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by a Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations include the following:
o BANKERS' ACCEPTANCES. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Corporations use bankers' acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
o CERTIFICATES OF DEPOSIT. Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
o TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid securities.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with financial institutions. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The acquisition of a repurchase agreement may be deemed to be an acquisition of the underlying securities as long as the obligation of the seller to repurchase the securities is collateralized fully. The Funds follow certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with creditworthy financial institutions whose condition will be continually monitored by the Adviser. The repurchase agreements entered into by the Funds will provide that the underlying collateral at all times shall have a value at least equal to 102% of the resale price stated in the agreement and consist only of securities permissible under Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance with this requirement). Under all repurchase agreements entered into by the Funds, the custodian or its agent must take possession of the underlying collateral. In the event of a default or bankruptcy by a selling financial institution, the Funds will seek to liquidate such collateral. However, the exercising of the Funds' right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, a Fund could suffer a loss. It is the current policy of the Funds not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by that Fund, amounts to more than 15% of the Fund's total assets. The investments of the Funds in repurchase agreements, at times, may be substantial when, in the view of the Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions in which a Fund sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and price that is higher than the original sale price. Reverse repurchase agreements are similar to a fully collateralized borrowing by a Fund. At the time a Fund enters into a reverse repurchase agreement, it will earmark on the books of the Fund or place in a segregated account cash or liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a form of leverage, and the use of reverse repurchase agreements by a Fund may increase the Fund's volatility. Reverse repurchase agreements are also subject to the risk that the other party to the reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to a Fund. Reverse repurchase agreements also involve the risk that
the market value of the securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. In addition, when a Fund invests the proceeds it receives in a reverse repurchase transaction, there is a risk that those investments may decline in value. In this circumstance, the Fund could be required to sell other investments in order to meet its obligations to repurchase the securities.
SECURITIES LENDING. The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Trust's Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of a Fund (including the loan collateral). The Funds will not lend portfolio securities to their Adviser or their affiliates unless permissible under the 1940 Act and the rules and promulgations thereunder. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Funds.
The Funds may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting as the Funds' securities lending agent, but will bear all of any losses from the investment of collateral.
By lending its securities, a Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. The Funds will adhere to the following conditions whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Fund's administrator and the custodian); and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon a Fund's ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Funds may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Funds. A Fund's
purchase of such investment company securities results in the layering of
expenses, such that shareholders would indirectly bear a proportionate share of
the operating expenses of such investment companies, including advisory fees,
in addition to paying a Fund's expenses. Unless an exception is available,
Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i) acquiring more
than 3% of the voting shares of any one investment company, (ii) investing more
than 5% of its total assets in any one investment company, and (iii) investing
more than 10% of its total assets in all investment companies combined,
including its ETF investments.
For hedging or other purposes, the Funds may invest in investment companies that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as exchange-traded funds, are traded on a securities exchange. (See "Exchange Traded Funds" above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying portfolio securities of the investment company and also due to supply and demand of the investment company's shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition or performance of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved by the Board, the Funds may invest in the ETFs in excess of the 3% limit described above, provided that the Funds otherwise comply with the conditions of the SEC order, as it may be amended, and any other applicable investment limitations. Neither the ETFs nor their investment advisers make any representations regarding the advisability of investing in the ETFs.
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Funds will reduce the risk that they will be unable to close out a futures contract by only entering into futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission ("CFTC"). The Funds may use futures contracts and related options for: bona fide hedging; attempting to offset changes in the value of securities held or expected to be acquired or be disposed of; attempting to minimize fluctuations in foreign currencies; attempting to gain exposure to a particular market, index or instrument; or other risk management purposes. To the extent futures and/or options on futures are employed by the Funds, such use will be in accordance with Rule 4.5 of the Commodity Exchange Act ("CEA"). The Trust, on behalf of the Funds, has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" in accordance with Rule 4.5 and therefore, the Funds are not subject to registration or regulation as a commodity pool operator under the CEA.
An index futures contract is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract.
When a Fund purchases or sells a futures contract, or sells an option thereon, the Fund is required to "cover" its position in order to limit leveraging and related risks. To cover its position, the Fund may segregate (and marked-to-market on a daily basis) cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder. The segregated account functions as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund's outstanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the Fund arising from such investment activities.
A Fund may also cover its long position in a futures contract by purchasing a put option on the same futures contract with a strike price (i.e., an exercise price) as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price of the futures contract, the Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. A Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract. A Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments with prices which are expected to move relatively consistently with the futures contract.
A Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the call and the price of the futures contract. A Fund may also cover its sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently with the call option. A Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, a
Fund may segregate cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures contract. A Fund may also cover its sale of a put option by taking positions in instruments with prices which are expected to move relatively consistently with the put option.
There are significant risks associated with the Funds' use of futures contracts and related options, including the following: (1) the success of a hedging strategy may depend on the Adviser's ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by a Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and options on futures. In addition, some strategies reduce the Funds' exposure to price fluctuations, while others tend to increase its market exposure.
OPTIONS. The Funds may purchase and write put and call options on indices and enter into related closing transactions. A put option on a security gives the purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time during the option period. A call option on a security gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is the consideration for undertaking the obligations under the option contract.
A Fund may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage its exposure to exchange rates. Call options on foreign currency written by a Fund will be "covered," which means that the Fund will own an equal amount of the underlying foreign currency.
Put and call options on indices are similar to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than the price movements in individual securities.
All options written on indices or securities must be covered. When a Fund writes an option on a security, on an index or a foreign currency, it will establish a segregated account containing cash or liquid securities in an amount at least equal to the market value of the option and will maintain the account while the option is open or will otherwise cover the transaction.
A Fund may trade put and call options on securities, securities indices and currencies, as the investment adviser determines is appropriate in seeking the Fund's investment objectives, and except as restricted by the Fund's investment limitations. See "Investment Limitations."
The initial purchase (sale) of an option contract is an "opening transaction." In order to close out an option position, a Fund may enter into a "closing transaction," which is simply the sale (purchase) of an option contract on the same security with the same exercise price and expiration date as the option contract originally opened. If a Fund is unable to effect a closing purchase transaction with respect to an option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security upon exercise.
A Fund may purchase put and call options on securities to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that the Fund may seek to purchase in the future. The Fund purchasing put and call options pays a premium therefor. If price movements in the underlying securities are such that exercise of the options would not be profitable for the Fund, loss of the premium paid may be offset by an increase in the value of the Fund's securities or by a decrease in the cost of acquisition of securities by the Fund.
A Fund may write covered call options on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases in its market value. When a Fund writes an option, if the underlying securities do not increase or decrease to a price level that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised and the Fund will realize as profit the premium received for such option. When a call option of which a Fund is the writer is exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate in any increase in the price of such securities above the strike price. When a put option of which a Fund is the writer is exercised, the Fund will be required to purchase the underlying securities at a price in excess of the market value of such securities.
A Fund may purchase and write options on an exchange or over-the-counter. Over-the-counter options ("OTC options") differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available for exchange-traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information from a market maker. It is the SEC's position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand, interest rates, the pricing volatility of the underlying security and the time remaining until the expiration date.
Risks associated with options transactions include: (1) the success of a
hedging strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while a Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
PARTICIPATION NOTES AND PARTICIPATORY NOTES ("P-NOTES"). P-Notes are participation interest notes that are issued by banks or broker-dealers and are designed to offer a return linked to a particular underlying equity, debt, currency or market. When purchasing a P-Note, the posting of margin is not required because the full cost of the P-Note (plus commission) is paid at the time of purchase. When the P-Note matures, the issuer will pay to, or receive from, the purchaser the difference between the minimal value of the underlying instrument at the time of purchase and that instrument's value at maturity. Investments in P-Notes involve the same risks associated with a direct investment in the underlying foreign companies of foreign securities markets that they seek to replicate.
In addition, there can be no assurance that the trading price of P-Notes will equal the underlying value of the foreign companies or foreign securities markets that they seek to replicate. The holder of a participation note that is linked to a particular underlying security is entitled to receive any dividends paid in connection with an underlying security or instrument. However, the holder of a participation note does not receive voting rights as it would if it directly owned the underlying security or instrument. P-Notes are generally traded over-the-counter. P-Notes constitute general unsecured contractual obligations of the banks or broker-dealers that issue them and the counterparty. There is also counterparty risk associated with these investments because the Fund is relying on the creditworthiness of such counterparty and has no rights under a participation note against the issuer of the underlying security. In addition, a Fund will incur transaction costs as a result of investment in P-Notes.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "1933 Act"), but which can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust's Board. Despite such good faith efforts to determine fair value prices, a Fund's illiquid securities are subject to the risk that the security's fair value price may differ from the actual price which the Fund may ultimately realize upon their sale
or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. A Fund will not hold more than 15% of its net assets in illiquid securities. If the percentage of a Fund's net assets held in illiquid securities exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, commercial paper issued pursuant to Section 4(2) of the 1933 Act, and restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by the Fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the Board. Under the supervision of the Trust's Board, the Adviser determines the liquidity of the Funds' investments. In determining the liquidity of the Funds' investments, the Adviser may consider various factors, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security).
SHORT SALES. As consistent with each Fund's investment objectives, the Funds may engage in short sales that are either "uncovered" or "against the box." A short sale is "against the box" if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Funds with respect to the securities that are sold short.
Uncovered short sales are transactions under which a Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund may: (a) segregate cash or liquid securities at such a level that the amount segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short or (b) otherwise cover the Fund's short position.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following limitations are fundamental, which means that a Fund cannot change them without approval by the vote of a majority of the outstanding shares of the Fund. In addition, the investment objectives of the Westwood LargeCap Value Fund, the Westwood SMidCap Fund and the Westwood SmallCap Value Fund are fundamental policies that cannot be changed by a Fund without approval by the vote of a majority of the outstanding shares of the Fund. The phrase "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less.
Each Fund may not:
1. Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
3. Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
4. Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
5. Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
6. Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
The following limitations are non-fundamental and may be changed by the Trust's Board without shareholder approval. In addition, the investment objectives of the Westwood Income Opportunity Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund, the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund are non-fundamental policies that may be changed by the Trust's Board without shareholder approval. These non-fundamental policies are based upon the regulations currently set forth in the 1940 Act.
The Funds may not:
1. Purchase securities of any issuer (except securities of other investment companies, securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of a Fund would be invested in the securities of such issuer; or (ii) acquire more than 10% of the outstanding voting securities of any one issuer. This restriction applies to 75% of a Fund's total assets.
2. Purchase any securities which would cause 25% or more of the net assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry or group of industries, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements involving such securities. For purposes of this limitation, (i) utility companies will be classified according to their services, for example, gas distribution, gas transmission, electric and telephone will each be considered a separate industry; and (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry.
3. Borrow money from a bank in an amount exceeding 33 1/3% of the value of its total assets, provided that investment strategies that either obligate a Fund to purchase securities or require a Fund to cover a position by segregating assets or entering into an offsetting position shall not be subject to this limitation. Asset coverage of at least 300% is required for all borrowing, except where a Fund has borrowed money, from any source, for temporary purposes in an amount not exceeding 5% of its total assets.
4. Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that a Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) lend its securities.
5. Purchase or sell real estate, real estate limited partnership interests, physical commodities or commodities contracts except that a Fund may purchase (i) marketable securities issued by companies which own or invest in real estate (including real estate investment trusts), commodities or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
6. Hold illiquid securities in an amount exceeding, in the aggregate, 15% of a Fund's net assets.
7. Under normal circumstances, the Westwood SmallCap Value Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of small-cap companies.
8. Under normal circumstances, the Westwood SMidCap Fund and the Westwood SMidCap Plus Fund will each invest at least 80% of their individual net assets, plus the amount of any borrowings for investment purposes, in equity securities of small- and mid-cap companies.
9. Under normal circumstances, the Westwood LargeCap Value Fund shall invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of large-cap companies.
10. Under normal circumstances, the Westwood Dividend Growth Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in dividend paying equity securities.
11. Under normal circumstances, the Westwood Short Duration High Yield Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in high yield securities.
12. Under normal circumstances, the Westwood Global Equity Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies organized or located throughout the world, including the United States.
13. Under normal circumstances, the Westwood Global Dividend Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying equity securities of companies organized or located throughout the world, including the United States.
14. Under normal circumstances, the Westwood Emerging Markets Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies.
15. Under normal circumstances, the Westwood Emerging Markets Plus Fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies.
Except with respect to Fund policies concerning borrowing and illiquid securities, if a percentage restriction is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in values or assets will not constitute a violation of such restriction. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes a Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable. With respect to the limitation on borrowing, in the event that a subsequent change in net assets or other circumstances cause the Funds to exceed their limitation, the Funds will take steps to bring the aggregate amount of borrowing back within the limitation within three days thereafter (not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's outstanding voting securities would be held by the fund.
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an investment company's total assets in an industry or group of industries, with certain exceptions.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Funds' current investment policy on lending is as follows: a Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in securities lending as described in its SAI.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The 1940 Act does not directly restrict an investment company's ability to invest in real estate, but does require that every investment company have a fundamental investment policy governing such investments. The Funds will not purchase or sell real estate, except that the Funds may purchase: (i) marketable securities issued by companies which own or invest in real estate (including REITs).
COMMODITIES. The 1940 Act does not directly restrict an investment company's ability to invest in commodities, but does require that every investment company have a fundamental investment policy governing such investments. The Funds will not purchase or sell physical commodities or commodities contracts, except that the Funds may purchase: (i) marketable securities issued by companies which own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
THE ADVISER AND SUB-ADVISER
GENERAL. Westwood Management Corp., a New York corporation formed in 1983, located at 200 Crescent Court, Suite 1200, Dallas, Texas 75201, is a professional investment management firm registered with the SEC under the Investment Advisers Act of 1940. The Adviser is a wholly owned subsidiary of Westwood Holdings Group, Inc., an institutional asset management company. As of December 31, 2012, the Adviser had approximately $11.9 billion in assets under management.
The Adviser has delegated the authority to manage the Westwood Short Duration High Yield Fund to SKY Harbor Capital Management, LLC ("SKY Harbor" or the "Sub-Adviser"). The Adviser monitors the Sub-Adviser to ensure its compliance with the investment policies and guidelines of the Fund and monitors the Sub-Adviser's adherence to its investment style. The Adviser pays the Sub-Adviser out of the advisory fee it receives from the Fund. The Board of Trustees of The Advisors' Inner Circle Fund (the "Board") supervises the Adviser and the Sub-Adviser and establishes policies that the Adviser and Sub-Adviser must follow in their management activities.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into an investment advisory agreement dated December 16, 2005 (the "Advisory Agreement") with respect to the Funds. Under the Advisory Agreement, the Adviser serves as the investment adviser and makes investment decisions for the Funds and continuously reviews, supervises and administers the investment program of the Funds, subject to the supervision of, and policies established by, the Trustees of the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence generally in the performance of its duties hereunder or its reckless disregard of its obligation and duties under this Agreement.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Funds; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" or of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Funds, by a majority of the outstanding shares of the Funds, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. As used in the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning as such terms in the 1940 Act.
In rendering investment advisory services, the Adviser may use the portfolio management, research and other resources of Westwood International Advisors Inc. ("Westwood International"), an affiliate of the Adviser. Westwood International is not registered with the SEC as an investment adviser under the 1940 Act. Westwood International has entered into a Memorandum of Understanding ("MOU") with the Adviser pursuant to which Westwood International is considered a "participating affiliate" of the Adviser as that term is used in relief granted by the staff of the SEC allowing U.S. registered investment advisers to use portfolio management or research resources of advisory affiliates subject to the supervision of a registered adviser. Investment professionals from Westwood International may render portfolio management, research and other services to the Fund under the MOU and are subject to supervision by the Adviser. In addition, as a result of the Dodd-Frank Act the SEC staff's view and position regarding "participating affiliates" may change in the future.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.75% of the average daily net assets of the Westwood LargeCap Value Fund, the Westwood SMidCap Fund, the Westwood Income Opportunity Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund and the Westwood Short Duration High Yield Fund; 0.80% of the average daily net assets of the Westwood Global Equity Fund and the Westwood Global Dividend Fund; 0.85% of the average daily net assets of the Westwood SmallCap Value Fund; and 0.95% of the average daily net assets of the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund. The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses (collectively, "excluded expenses")) from exceeding the Funds' average daily net assets as follows:
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FUND SHARE CLASS EXPENSE CAP
--------------------------------------------------------------------------------
Westwood LargeCap Value Fund Institutional Shares 1.00%
------------------------------------------
A Class Shares 1.25%
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Westwood Income Opportunity Fund Institutional Shares 0.90%
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A Class Shares 1.15%
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Westwood SMidCap Fund Institutional Shares 1.25%
--------------------------------------------------------------------------------
Westwood SmallCap Value Fund Institutional Shares 1.10%
--------------------------------------------------------------------------------
Westwood Dividend Growth Fund Institutional Shares 1.00%
--------------------------------------------------------------------------------
Westwood SMidCap Plus Fund Institutional Shares 1.00%
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Westwood Short Duration High Yield Institutional Shares 0.90%
Fund ------------------------------------------
A Class Shares 1.15%
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Westwood Global Equity Fund Institutional Shares 1.00%
------------------------------------------
A Class Shares 1.25%
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Westwood Global Dividend Fund Institutional Shares 1.00%
------------------------------------------
A Class Shares 1.25%
--------------------------------------------------------------------------------
Westwood Emerging Markets Fund Institutional Shares 1.20%
------------------------------------------
A Class Shares 1.45%
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Westwood Emerging Markets Plus Institutional Shares 1.20%
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With the exception of the Westwood Dividend Growth Fund, the above contractual fee waivers will be honored by the Adviser through February 28, 2016 and the fee waivers may be renewed by the Adviser for subsequent periods thereafter. With respect to the Westwood Dividend Growth Fund, the contractual arrangement shall continue in effect until February 28, 2016 and shall thereafter continue in effect until its termination by shareholders of the Westwood Dividend Growth Fund. To maintain these expense limits, the Adviser may reduce a portion of its management fees and/or reimburse certain expenses of the Funds. In addition, if at any point total annual Fund operating expenses (not including excluded expenses) are below the expense cap, the Adviser may retain the difference between the total annual fund operating expenses (not including excluded expenses) and the expense cap to recover all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place.
Except otherwise noted, for the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following in management fees to the Adviser:
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CONTRACTUAL FEES PAID FEES WAIVED BY THE ADVISER TOTAL FEES PAID(1)
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FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
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Westwood
LargeCap
Value Fund $1,570,461 $1,705,764 $1,368,522 $0 $0 $0 $1,570,461 $1,920,321 $1,446,499
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Westwood
SMidCap
Fund $1,861,710 $3,181,677 $3,031,610 $0 $0 $0 $1,861,710 $3,181,677 $3,031,610
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Westwood
Income
Opportunity
Fund $1,203,288 $2,677,245 $5,179,309 $96,661 $0 $0 $1,106,627 $2,707,270 $5,368,847
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Westwood
SmallCap
Value Fund $236,601 $290,387 $266,962 $26,851 $9,024 $24,601 $209,750 $281,363 $242,361
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Westwood $465,870(2) $(6,321)(2) $459,549(2)
Dividend ---------- ----------- ----------
Growth Fund $340,216(2) $172,090(3) $598,382 $0(2) $7,487(3) $0 $355,938(2) $164,603(3) $612,189
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Westwood
SMidCap
Plus Fund N/A(4) $42,482(5) $132,910 N/A(4) $42,482(5) $81,144 N/A(4) $0(5) $51,766
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CONTRACTUAL FEES PAID FEES WAIVED BY THE ADVISER TOTAL FEES PAID(1)
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FUND 2010 2011 2012 2010 2011 2012 2010 2011 2012
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Westwood
Short
Duration
High Yield
Fund N/A(4) N/A(4) $174,875(6) N/A(4) N/A(4) $126,897(6) N/A(4) N/A(4) $47,978(6)
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Westwood
Global Equity
Fund N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4)
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Westwood
Global
Dividend
Fund N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4)
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Westwood
Emerging
Markets Fund N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4)
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Westwood
Emerging
Markets Plus
Fund N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4) N/A(4)
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(1) For the fiscal year ended October 31, 2011, the Adviser additionally reimbursed fees of $34,347 for the Westwood SMidCap Plus Fund to maintain the stated expense cap under its contractual expense limitation agreement with the Fund. During the fiscal years ended October 31, 2010, 2011 and 2012, the Adviser recovered previously waived and reimbursed fees of $63,437, $214,557 and $77,977 for the Westwood LargeCap Value Fund, $138,659, $0, and $0 for the Westwood SMidCap Fund, and $0, $30,025 and $189,538 for the Westwood Income Opportunity Fund. During the fiscal year ended October 31, 2012, the Adviser recovered previously waived or reimbursed fees of $13,807 for the Westwood Dividend Growth Fund. As of October 31, 2012, the amount of previously waived and reimbursed fees for the Westwood LargeCap Value Fund, Westwood SMidCap Fund, Westwood SmallCap Value Fund, Westwood Income Opportunity Fund, Westwood Dividend Growth Fund, Westwood SMidCap Plus Fund and Westwood Short Duration High Yield Fund for which the Adviser may seek reimbursement was $0, $0, $60,476, $4,809, $0, $157,973 and $126,897, respectively.
(2) For the fiscal year ended June 30. The Fund changed its fiscal year end from June 30 to October 31, effective with the four month period ended October 31, 2011.
(3) For the fiscal period July 1, 2011 to October 31, 2011.
(4) Not in operation during the period.
(5) Represents the period from March 28, 2011 (commencement of operations) to October 31, 2011.
(6) Represents the period from December 28, 2011 (commencement of operations) to October 31, 2012.
SUB-ADVISER
SKY Harbor, a Delaware limited liability company established in 2011, is located at 20 Horseneck Lane, Greenwich, CT 06830 and is registered with the SEC under the Advisers Act. SKY Harbor serves as the sub-adviser to the Westwood Short Duration High Yield Fund and is responsible for the day-to-day management of the Fund's investments. As of December 31, 2012, SKY Harbor had approximately $2.97 billion in assets under management.
SUB-ADVISORY AGREEMENT. The Sub-Adviser and the Adviser have entered into an investment sub-advisory agreement (the "Sub-Advisory Agreement"). Under the Sub-Advisory Agreement, the Sub-Adviser serves as the investment adviser for the Westwood Short Duration High Yield Fund, makes investment decisions for the Fund and administers the investment program of the Fund, subject to the supervision of, and policies established by, the Adviser and the Board. After the initial two-year term, the continuance of the Sub-Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not parties to the Sub-Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Sub-Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Board.
SUB-ADVISORY FEES. For the services provided pursuant to the Sub-Advisory Agreement, the Sub-Adviser receives an annual fee from the Adviser at an annual rate of 0.35% of the Westwood Short Duration High Yield Fund's average daily net assets.
THE PORTFOLIO MANAGERS
This section includes information about the Funds' portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own and how they are compensated.
COMPENSATION. The Adviser compensates the Funds' portfolio managers for their management of the Funds. Each of the Funds' portfolio managers' compensation consists of a base salary, a discretionary cash bonus, profit sharing, company stock incentive compensation and a full benefits package. Percentages for each component of compensation are variable. Base salary levels are maintained at levels that the compensation committee deems to be commensurate with similar companies in the asset management industry. In determining incentive compensation and annual merit-based salary increases, employees on the investment team are evaluated according to a combination of quantitative and qualitative factors. The discretionary cash bonus and restricted stock award are determined at year-end and they vary with the firm's success, which is directly linked to the performance of the products they manage, including the Funds and other accounts. Lastly, other benefits such as health insurance, life insurance and short and long-term disability insurance packages, as well as a 401(k) plan with employer matching, are provided.
The Sub-Adviser compensates the Westwood Short Duration High Yield Fund's portfolio manager for her management of the Fund and of the company as a co-founder of the Sub-Adviser. The portfolio manager's compensation consists of a base salary, proportionate share in the profit or loss of the Sub-Adviser as a co-founder, and a full benefits package. Percentages for each component of compensation are variable. Base salary levels are maintained at levels that the compensation committee deems to be commensurate with similar companies in the asset management industry. As a co-founder and equity owner, the portfolio manager's overall compensation varies with the ultimate value creation of the Sub-Adviser, which is linked to the performance of its products and services, including the Westwood Short Duration High Yield Fund and other accounts. Lastly, other benefits such as health insurance, life insurance and short and long-term disability insurance packages, as well as a 401(k) plan, are provided.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following tables show the dollar amount range of each portfolio manager's "beneficial ownership" of shares of the Funds as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act").
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NAME DOLLAR RANGE OF FUND SHARES(1)
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WESTWOOD
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$50,001 - $100,000 (Westwood LargeCap Value Fund, Institutional Shares)
Mark R. Freeman $100,001 - $500,000 (Westwood Income Opportunity Fund, Institutional Shares)
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Scott D. Lawson $1 - $10,000 (Westwood LargeCap Value Fund, Institutional Shares)
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Jay K. Singhania $100,001 - $500,000 (Westwood LargeCap Value Fund, Institutional Shares)
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$100,001 - $500,000 (Westwood LargeCap Value Fund, Institutional Shares)
Todd L. Williams $10,001 - $50,000 (Westwood Income Opportunity Fund, Institutional Shares)
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None (Westwood LargeCap Value Fund, Institutional Shares)
Lisa Dong None (Westwood SmallCap Value Fund, Institutional Shares)
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NAME DOLLAR RANGE OF FUND SHARES(1)
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$10,001 - $50,000 (Westwood SMidCap Fund, Institutional Shares)
Ragen R. Stienke $1 - $10,000 (Westwood SMidCap Plus Fund, Institutional Shares)
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William E. Costello $10,001 - $50,000 (Westwood SmallCap Value Fund, Institutional Shares)
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$50,001 - $100,000 (Westwood SMidCap Fund, Institutional Shares)
Graham Wong $10,001 - $50,000 (Westwood SMidCap Plus Fund, Institutional Shares)
$10,001 - $50,000 (Westwood SmallCap Value Fund, Institutional Shares)
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Grant L. Taber $10,001 - $50,000 (Westwood SMidCap Fund, Institutional Shares)
$50,001 - $100,000 (Westwood SMidCap Plus Fund, Institutional Shares)
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Thomas C. Lieu $10,001 - $50,000 (Westwood SMidCap Fund, Institutional Shares)
$10,001 - $50,000 (Westwood SMidCap Plus Fund, Institutional Shares)
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Matthew R. Lockridge $10,001 - $50,000 (Westwood SmallCap Value Fund, Institutional Shares)
$10,001-$50,000 (Westwood Dividend Growth Fund, Institutional Shares)
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Christopher J. MacDonald $100,001 - $500,000 (Westwood Dividend Growth Fund, Institutional Shares)
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Michael Wall $10,001-$50,000 (Westwood Dividend Growth Fund, Institutional Shares)
---------------------------------------------------------------------------------------------------------------
None (Westwood Global Equity Fund, Institutional Shares)
Patricia Perez-Coutts, CFA None (Westwood Emerging Markets Fund, Institutional Shares)
None (Westwood Emerging Markets Fund, A Class Shares)
---------------------------------------------------------------------------------------------------------------
Thomas Pinto Basto, CFA None (Westwood Global Equity Fund, Institutional Shares)
None (Westwood Global Dividend Fund, Institutional Shares)
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
SKY HARBOR
---------------------------------------------------------------------------------------------------------------
Anne Yobage, CFA $100,001 - $500,000 (Westwood Short Duration High Yield Fund, Institutional Shares)
---------------------------------------------------------------------------------------------------------------
|
(1) Valuation date is October 31, 2012.
OTHER ACCOUNTS. In addition to the Funds, certain portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of October 31, 2012.
The Adviser also manages institutional separate accounts and is the sub-adviser to other mutual funds. The investment process is the same for similar accounts, including the Funds, and is driven by proprietary team-oriented, in-depth, fundamental research. The investment research team is organized by industry coverage and supports all of the accounts managed in each of the Adviser's investment strategies. Each of the Adviser's investment strategies is managed by a portfolio team. Weekly research meetings provide a forum where the Adviser's investment professionals discuss current investment ideas within their assigned industries. Generally, the entire portfolio team, or a sub-set of the team, then debates the merits of recommendations, taking into account the prevailing market environment, the portfolio's current composition, and the relative value of alternative investments. Investment decisions are made by majority agreement of the portfolio team.
---------------------------------------------------------------------------------------------------------------
REGISTERED OTHER POOLED
INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
--------------------------------------------------------------------------------------------
NUMBER
OF TOTAL ASSETS(1) NUMBER OF TOTAL ASSETS(1) NUMBER OF TOTAL ASSETS(1)
NAME ACCOUNTS ($ MILLIONS) ACCOUNTS ($ MILLIONS) ACCOUNTS ($ MILLIONS)
---------------------------------------------------------------------------------------------------------------
WESTWOOD
---------------------------------------------------------------------------------------------------------------
Mark R. Freeman 10 $1,431.6 17 $1,284.3 68 $3,692.2(2)
---------------------------------------------------------------------------------------------------------------
Scott Lawson 8 $1,407.6 7 $751.4 67 $3,161.4(2)
---------------------------------------------------------------------------------------------------------------
Jay K. Singhania 9 $1,407.6 9 $774.8 61 $3,401.6(2,3)
---------------------------------------------------------------------------------------------------------------
Todd L. Williams 9 $1,407.6 10 $1,019.6 73 $3,909.6(2,3)
---------------------------------------------------------------------------------------------------------------
Lisa Dong 10 $1,459.7 16 $997.7 73 $3,502.3(2)
---------------------------------------------------------------------------------------------------------------
Ragen R. Stienke 1 $115.2 7 $570.5 47 $2,158.1
---------------------------------------------------------------------------------------------------------------
William E. Costello 1 $52.1 3 $41.5 16 $332.9(3)
---------------------------------------------------------------------------------------------------------------
Graham Wong 2 $167.3 15 $783.7 64 $2,500.2
---------------------------------------------------------------------------------------------------------------
Grant L. Taber 1 $115.2 11 $726.2 55 $2,407.4
---------------------------------------------------------------------------------------------------------------
Thomas C. Lieu 1 $115.2 12 $742.2 55 $2407.7
---------------------------------------------------------------------------------------------------------------
Matthew R. Lockridge 1 $52.1 8 $239.4 28 428.3
---------------------------------------------------------------------------------------------------------------
Christopher J.
MacDonald 0 $0 3 $174.5 26 $338.3
---------------------------------------------------------------------------------------------------------------
Mike Wall 0 $0 1 $42.2 12 $86.5
---------------------------------------------------------------------------------------------------------------
Patricia Perez-Coutts,
CFA 2 $214.7 6 $358.1 4 $199.5
---------------------------------------------------------------------------------------------------------------
Thomas Pinto Basto,
CFA 2 $23.9 5 $282.7 3 $0.76
---------------------------------------------------------------------------------------------------------------
SKY HARBOR
---------------------------------------------------------------------------------------------------------------
Anne Yobage, CFA 1 $54.3 1 $1,314.0 8 $828.5
---------------------------------------------------------------------------------------------------------------
|
(1) Represents the portion of assets for which the portfolio manager has primary responsibility in the accounts indicated. The accounts indicated may contain additional assets under the primary responsibility of other portfolio managers and therefore may be duplicated.
(2) Includes one account in a large cap strategy with assets under management of $262.3 million that is subject to performance-based advisory fees. Westwood manages performance-based fee accounts for three accounts with aggregated assets under management of $498.5 million as of October 31, 2012.
(3) Includes two accounts in an MLP strategy with assets under management of $236.2 million that are subject to performance-based advisory fees. Westwood manages performance-based fee accounts for three accounts with aggregated assets under management of $498.5 million as of October 31, 2012.
CONFLICTS OF INTERESTS. The portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of the Funds' investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Funds. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio manager could favor one account over another. Another potential conflict could include the portfolio managers' knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Funds. However, both the Adviser and the Sub-Adviser have established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated. Both the Adviser's and Sub-Adviser's trade allocation policy is to aggregate client transactions, including the Funds', where possible when it is believed that such aggregation may facilitate the Adviser's and/or Sub-Adviser's duty of best execution. Client accounts for which orders are aggregated receive the average price of such transaction. Any transaction costs incurred in the transaction are shared pro rata based on each client's participation
in the transaction. Both the Adviser and Sub-Adviser generally allocate securities among client accounts according to each account's pre-determined participation in the transaction. Both the Adviser's and Sub-Adviser's policy prohibits any allocation of trades that would favor any proprietary accounts, affiliated accounts, or any particular client(s) or group of clients more over any other account(s). Both the Adviser and Sub-Adviser prohibit late trading, frequent trading and/or market timing in the funds and monitors trades daily to ensure this policy is not violated.
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a Delaware statutory trust, has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub-administrator to other mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have entered into an administration agreement dated November 14, 1991, as amended and restated November 12, 2002 and amended September 7, 2006 and August 6, 2012 (the "Administration Agreement"). Under the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the Administrator also serves as the shareholder servicing agent for the Funds whereby the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the Administration Agreement, the Administrator is entitled to a fee, which is detailed below in the following schedules.
WESTWOOD LARGECAP VALUE, WESTWOOD SMIDCAP, WESTWOOD SMALLCAP VALUE, WESTWOOD INCOME OPPORTUNITY, WESTWOOD DIVIDEND GROWTH, WESTWOOD SMIDCAP PLUS AND WESTWOOD SHORT DURATION HIGH YIELD FUNDS
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.12% First $100 million
--------------------------------------------------------------------------------
0.08% $100 - $300 million
--------------------------------------------------------------------------------
0.06% $300 - $850 million
--------------------------------------------------------------------------------
0.04% $850 million - $3 billion
--------------------------------------------------------------------------------
0.035% Over $3 billion
--------------------------------------------------------------------------------
|
The foregoing fees are subject to a minimum annual fee of $100,000 per Fund.
o For each additional class of shares of a Fund established after the initial (1) class of shares per fund, the minimum annual fee will be increased by $15,000.
WESTWOOD GLOBAL EQUITY, WESTWOOD GLOBAL DIVIDEND, WESTWOOD EMERGING MARKETS AND WESTWOOD EMERGING MARKETS PLUS FUNDS
--------------------------------------------------------------------------------
FEE (AS A PERCENTAGE OF AGGREGATE
AVERAGE ANNUAL ASSETS) FUND'S AVERAGE DAILY NET ASSETS
--------------------------------------------------------------------------------
0.10% First $100 million
--------------------------------------------------------------------------------
0.08% $100 - $300 million
--------------------------------------------------------------------------------
0.06% $300 - $850 million
--------------------------------------------------------------------------------
0.05% Over $850 million
--------------------------------------------------------------------------------
|
The foregoing fees are subject to a minimum annual fee of $115,000 per Fund.
o For each additional class of shares of a Fund established after the initial one (1) class of shares per fund, the minimum annual fee will be increased by $15,000.
o The Administrator will waive $15,000 of each Fund's minimum annual fee for the first year from and after the date the Administrator begins each Fund's official net asset value.
Except otherwise noted, for the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following administration fees:
--------------------------------------------------------------------------
ADMINISTRATION FEES PAID
-----------------------------------------------
FUND 2010 2011 2012
--------------------------------------------------------------------------
Westwood LargeCap Value
Fund $166,112 $147,115 $108,040
--------------------------------------------------------------------------
Westwood SMidCap Fund $201,060 $273,667 $238,632
--------------------------------------------------------------------------
Westwood Income
Opportunity Fund $131,905 $228,354 $405,726
--------------------------------------------------------------------------
Westwood SmallCap Value
Fund $22,974 $22,087 $18,522
--------------------------------------------------------------------------
Westwood Dividend
Growth Fund(1) $62,043(2) $83,674(2) $14,431(3) $47,043
--------------------------------------------------------------------------
Westwood SMidCap Plus
Fund $N/A(4) $3,538(5) $10,427
--------------------------------------------------------------------------
Westwood Short Duration
High Yield Fund $N/A(4) $N/A(4) $13,569(6)
--------------------------------------------------------------------------
Westwood Global Equity
Fund $N/A(4) $N/A(4) $N/A(4)
--------------------------------------------------------------------------
Westwood Global Dividend
Fund $N/A(4) $N/A(4) $N/A(4)
--------------------------------------------------------------------------
Westwood Emerging
Markets Fund $N/A(4) $N/A(4) $N/A(4)
--------------------------------------------------------------------------
Westwood Emerging
Markets Plus Fund $N/A(4) $N/A(4) $N/A(4)
--------------------------------------------------------------------------
|
(1) Prior to the Reorganization, the Predecessor Fund paid administration fees under a different administration agreement.
(2) For the fiscal year ended June 30. The Fund changed its fiscal year end from June 30 to October 31, effective with the four month period ended October 31, 2011.
(3) For the fiscal period July 1, 2011 to October 31, 2011.
(4) Not in operation during the period.
(5) Represents the period from March 28, 2011 (commencement of operations) to October 31, 2011.
(6) Represents the period from December 28, 2011 (commencement of operations) to October 31, 2012.
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary of SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement dated May 31, 2000 ("Distribution Agreement"), whereby the Distributor acts as principal underwriter for the Trust's shares, and which applies to both Institutional Shares and A Class Shares of the Funds. The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Funds and (ii) by the vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement will terminate automatically in the event of its assignment (as such term is defined in the 1940 Act), and is terminable at any time without penalty by the Board or, with respect to the Funds, by a majority of the outstanding shares of the Funds, upon not more than 60 days' written notice by either party. The Distribution Agreement provides that the Distributor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
DISTRIBUTION PLAN. The Trust has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or in any agreements related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of the Trust. All material amendments of the Plan will require approval by a majority of the Trustees of the Trust and of the Qualified Trustees.
o A CLASS SHARES. Under the Plan, the Distributor, or third parties that enter into agreements with the Distributor ("Service Providers"), may receive up to 0.25% of the assets of the Westwood LargeCap Value Fund, Westwood Income Opportunity Fund, Westwood Short Duration High Yield Fund, Westwood Global Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund and Westwood Emerging Markets Plus Fund attributable to A Class Shares as compensation for distribution and shareholder services pursuant to Rule 12b-1 of the 1940 Act. The Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution or shareholder service expenses incurred by the Distributor or the amount of payments made to other financial institutions and intermediaries. Investors should understand that some Service Providers may charge their clients fees in connection with purchases of shares or the provision of shareholder services with respect to shares. The Trust intends to operate the Plan in accordance with its terms and with the Financial Industry Regulatory Authority ("FINRA") rules concerning sales charges.
o DESCRIPTION OF DISTRIBUTION SERVICES. Distribution services may include:
(i) services in connection with distribution assistance; or (ii) payments
to financial institutions and other financial intermediaries, such as
banks, savings and loan associations, insurance companies, investment
counselors, broker-dealers, mutual fund "supermarkets" and the
Distributor's affiliates and subsidiaries, as compensation for services,
reimbursement of expenses incurred in connection with distribution
assistance or provision of shareholder services. The Distributor may, at
its discretion, retain a portion of such payments to compensate itself for
distribution services and distribution related expenses such as the costs
of preparation, printing, mailing or otherwise disseminating sales
literature, advertising, and prospectuses (other than those furnished to
current shareholders of the Westwood LargeCap Value Fund, Westwood Income
Opportunity Fund, Westwood Short Duration High Yield Fund, Westwood Global
Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund
and Westwood Emerging Markets Plus Fund), promotional and incentive
programs, and such other marketing expenses that the Distributor may incur.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the Distributor the following fees pursuant to the Plan. A Class Shares of the Westwood Short Duration High Yield Fund, the Westwood Global Equity Fund, the Westwood Global Dividend Fund, the Westwood Emerging Markets Fund and the Westwood Emerging Markets Plus Fund were not in operation during the fiscal years ended October 31, 2010, 2011 and 2012.
-------------------------------------------------------------------------------------
12B-1 FEES RETAINED BY THE
12B-1 FEES PAID DISTRIBUTOR
-------------------------------------------------------------------------------------
FUND 2010 2011 2012 2010 2011 2012
-------------------------------------------------------------------------------------
Westwood LargeCap
Value Fund $19,403 $12,463 $11,128 $1,458 $2,601 $2,099
-------------------------------------------------------------------------------------
Westwood Income
Opportunity Fund $3,221 $40,289 $127,524 $1,427 $1,410 $1,192
-------------------------------------------------------------------------------------
|
SHAREHOLDER SERVICES
SHAREHOLDER SERVICING PLAN. The Westwood SMidCap Fund, Westwood SmallCap Value Fund and Westwood SMidCap Plus Fund have adopted a shareholder servicing plan (the "Service Plan") under which a shareholder servicing fee of up to 0.20% of average daily net assets of either Fund will be paid to other service providers. Under the Service Plan, other service providers may perform, or may compensate other service providers for performing certain shareholder and administrative services as discussed below.
DESCRIPTION OF SHAREHOLDER SERVICES. Shareholder services may include: (i) maintaining accounts relating to clients that invest in shares; (ii) arranging for bank wires; (iii) responding to client inquiries relating to the services performed by the services provider; (iv) responding to inquiries from clients concerning their investment in shares; (v) assisting clients in changing dividend options, account designations and addresses; (vi) providing information periodically to clients showing their position in shares; (vii) forwarding shareholder communications from the Fund such as proxies, shareholder reports, annual reports, and dividend distribution and tax notices to clients; and (viii) processing dividend payments from the Fund on behalf of clients.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers, dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar arrangement with the Funds, its service providers or their respective affiliates, as incentives to help market and promote the Funds and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Funds, the Distributor or shareholders of the Funds through the financial intermediary's retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank trust, or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Funds in a financial intermediary's retail distribution channel or on a preferred or recommended fund list; providing business or shareholder financial planning assistance; educating financial intermediary personnel about the Funds; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Funds by financial intermediaries customers, a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Funds shares, which in turn may benefit the Adviser through increased fees as Fund assets grow.
THE TRANSFER AGENT
DST Systems, Inc., 333 W. 11th Street, Kansas City, MO 64105 (the "Transfer Agent"), serves as the Funds' transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
THE CUSTODIAN
U.S. Bank National Association, 800 Nicollett Mall, Minneapolis, Minnesota 55402-4302 (the "Custodian"), serves as the custodian of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, One Commerce Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania 19103, serves as independent registered public accounting firm for the Funds. The financial statements and notes thereto incorporated by reference for the Westwood LargeCap Value Fund, the Westwood SMidCap Fund, the Westwood SmallCap Value Fund, the Westwood Income Opportunity Fund, the Westwood Dividend Growth Fund, the Westwood SMidCap Plus Fund and the Westwood Short Duration High Yield Fund have been audited by Ernst & Young LLP, as indicated in their report with respect thereto, and are incorporated by reference in reliance on the authority of their report as experts in accounting and auditing.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103-2921, serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series, including the Funds described in this SAI, are overseen by the Trustees. The Board has approved contracts, as described above, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The Trustees are responsible for overseeing the Trust's service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the funds. The funds and their service providers employ a variety of processes, procedures and controls to identify various possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible for the day-to-day management of each Fund's portfolio investments) and, consequently, for managing the risks associated with that business. The Board has emphasized to the funds' service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at which time certain of the fund's service providers present the Board with information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for the fund. Additionally, the fund's adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including the Trust's Chief Compliance Officer, as well as personnel of the adviser and other service providers, such as the fund's independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the funds by the adviser and receives information about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the advisory agreement with the adviser, the Board meets with the adviser to review such services. Among other things, the Board regularly considers the adviser's adherence to the funds' investment restrictions and compliance with various fund policies and procedures and with applicable securities regulations. The Board also reviews information about the funds' investments, including, for example, portfolio holdings schedules and reports on the adviser's use of derivatives in managing the funds, if any, as well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues and fund and adviser risk assessments. At least annually, the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's policies and procedures and those of its service providers, including the adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Trust's Fair Value Pricing Committee makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the funds' financial statements, focusing on major areas of risk encountered by the funds and noting any significant deficiencies or material weaknesses in the funds' internal controls. Additionally, in connection with its oversight function, the Board oversees fund management's implementation of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and discussions with the adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the funds, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds' goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the funds' investment management and business affairs are carried out by or through the funds' adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the funds' and each other's in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's ability to monitor and manage risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are ten members of the Board of Trustees, eight of whom are not interested persons of the Trust, as that term is defined in the 1940 Act ("independent Trustees"). Robert Nesher, an interested person of the Trust, serves as Chairman of the Board. George Sullivan, an independent Trustee, serves as the lead independent Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the independent Trustees constitute a super-majority (80%) of the Board, the fact that the chairperson of each Committee of the Board is an independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Governance Committee and Fair Value Pricing Committee. The Audit Committee and Governance Committee are chaired by an independent Trustee and composed of all of the independent Trustees. In addition, the Board of Trustees has a lead independent Trustee.
In his role as lead independent Trustee, Mr. Sullivan, among other things: (i) presides over Board meetings in the absence of the Chairman of the Board; (ii) presides over executive sessions of the independent Trustees; (iii) along with the Chairman of the Board, oversees the development of agendas for Board meetings; (iv) facilitates communication between the independent Trustees and management, and among the independent Trustees; (v) serves as a key point person for dealings between the independent Trustees and management; and (vi) has such other responsibilities as the Board or independent Trustees determine from time to time.
Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust. Unless otherwise noted, the business address of each Trustee is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
--------------------------------------------------------------------------------------------------------------
POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------------------------------------
Robert Nesher Chairman of the SEI employee 1974 to Current Directorships: Trustee of The
(08/17/46) Board of present; currently Advisors' Inner Circle Fund II,
Trustees(1) performs various Bishop Street Funds, SEI Daily
(since 1991) services on behalf of Income Trust, SEI Institutional
SEI Investments for International Trust, SEI Institutional
which Mr. Nesher is Investments Trust, SEI Institutional
compensated. Managed Trust, SEI Liquid Asset
President and Director Trust, SEI Asset Allocation Trust,
of SEI Structured SEI Tax Exempt Trust, Adviser
Credit Fund, LP. Managed Trust and New Covenant
President and Chief Funds. Director of SEI Global Master
Executive Officer of Fund plc, SEI Global Assets Fund
SEI Alpha Strategy plc, SEI Global Investments Fund plc,
Portfolios, LP, June SEI Investments--Global Funds
2007 to present. Services, Limited, SEI Investments
President and Director Global, Limited, SEI Investments
of SEI Opportunity (Europe) Ltd., SEI Investments--Unit
Fund, L.P. to 2010. Trust Management (UK) Limited, SEI
Multi-Strategy Funds PLC, SEI
Global Nominee Ltd and SEI Alpha
Strategy Portfolios, LP.
Former Directorships: Director of SEI
Opportunity Fund, L.P. to 2010.
--------------------------------------------------------------------------------------------------------------
William M. Doran Trustee(1) Self-Employed Current Directorships: Trustee of The
(05/26/40) (since 1991) Consultant since 2003. Advisors' Inner Circle Fund II,
Partner at Morgan, Bishop Street Funds, SEI Daily
Lewis & Bockius LLP Income Trust, SEI Institutional
(law firm) from 1976 to International Trust, SEI Institutional
2003. Counsel to the Investments Trust, SEI Institutional
Trust, SEI Investments, Managed Trust, SEI Liquid Asset
SIMC, the Administrator Trust, SEI Asset Allocation Trust,
and the Distributor. SEI Tax Exempt Trust, Adviser
Managed Trust and New Covenant
Funds. Director of SEI Alpha
Strategy Portfolios, LP. Director of
SEI Investments (Europe), Limited,
SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Asset Korea Co.,
Ltd., SEI Global Nominee Ltd. and
SEI Investments -- Unit Trust
Management (UK) Limited. Director
of the Distributor since 2003.
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--------------------------------------------------------------------------------------------------------------
POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------------------------------------
Charles E. Carlbom Trustee Self-Employed Current Directorships: Trustee of The
(08/20/34) (since 2005) Business Consultant, Advisors' Inner Circle Fund II and
Business Projects Inc., Bishop Street Funds. Director of
since 1997. Oregon Transfer Co.
--------------------------------------------------------------------------------------------------------------
John K. Darr Trustee Retired. Chief Current Directorships: Trustee of The
(08/17/44) (since 2008) Executive Officer, Advisors' Inner Circle Fund II and
Office of Finance, Bishop Street Funds. Director of
Federal Home Loan Federal Home Loan Bank of
Banks, from 1992 to Pittsburgh, Manna, Inc. (non-profit
2007. developer of affordable housing for
ownership) and Meals on Wheels,
Lewes/Rehoboth Beach.
--------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr. Trustee Self Employed Current Directorships: Trustee of The
(05/28/52) (since 2011) Consultant since Advisors' Inner Circle Fund II and
January 2012. Director Bishop Street Funds. Director of The
of Endowments and Korea Fund, Inc.
Foundations,
Morningstar Investment
Management,
Morningstar, Inc.,
February 2010 to May
2011. Director of
International
Consulting and Chief
Executive Officer of
Morningstar Associates
Europe Limited,
Morningstar, Inc., May
2007 to February 2010.
Country Manager --
Morningstar UK
Limited, Morningstar,
Inc., June 2005 to May
2007.
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|
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POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------
Mitchell A. Johnson Trustee Retired. Private Current Directorships: Trustee of The
(03/01/42) (since 2005) Investor since 1994. Advisors' Inner Circle Fund II,
Bishop Street Funds, SEI Asset
Allocation Trust, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Managed
Trust, SEI Institutional Investments
Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, Adviser Managed
Trust and New Covenant Funds.
Director of SEI Alpha Strategy
Portfolios, LP. Director of Federal
Agricultural Mortgage Corporation
(Farmer Mac) since 1997.
--------------------------------------------------------------------------------------------------------------
Betty L. Krikorian Trustee Vice President, Current Directorships: Trustee of The
(01/23/43) (since 2005) Compliance, AARP Advisors' Inner Circle Fund II and
Financial Inc., from Bishop Street Funds.
2008 to 2010. Self-
Employed Legal and
Financial Services
Consultant since 2003.
Counsel (in-house) for
State Street Bank from
1995 to 2003.
--------------------------------------------------------------------------------------------------------------
Bruce Speca Trustee Global Head of Asset Current Directorships: Trustee of The
(02/12/56) (since 2011) Allocation, Manulife Advisors' Inner Circle Fund II and
Asset Management Bishop Street Funds.
(subsidiary of Manulife
Financial), June 2010 to
May 2011. Executive
Vice President --
Investment
Management Services,
John Hancock Financial
Services (subsidiary of
Manulife Financial),
June 2003 to June
2010.
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|
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POSITION WITH
TRUST AND LENGTH PRINCIPAL OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
NAME AND DATE OF BIRTH OF TERM IN THE PAST 5 YEARS PAST 5 YEARS
--------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Attorney, Solo Current Directorships:
(04/12/31) (since 1994) Practitioner since 1994. Trustee/Director of The Advisors'
Inner Circle Fund II, Bishop Street
Funds and U.S. Charitable Gift Trust.
Trustee of SEI Daily Income Trust,
SEI Institutional International Trust,
SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI
Liquid Asset Trust, SEI Asset
Allocation Trust, SEI Tax Exempt
Trust and SEI Alpha Strategy
Portfolios, L.P. until December 2010.
--------------------------------------------------------------------------------------------------------------
George J. Sullivan, Jr. Trustee Retired since January Current Directorships: Trustee/
(11/13/42) (since 1999) 2012. Self-employed Director of State Street Navigator
Lead Independent Consultant, Newfound Securities Lending Trust, The
Trustee Consultants Inc., April Advisors' Inner Circle Fund II,
1997 to December Bishop Street Funds, SEI Structured
2011. Credit Fund, LP, SEI Daily Income
Trust, SEI Institutional International
Trust, SEI Institutional Investments
Trust, SEI Institutional Managed
Trust, SEI Liquid Asset Trust, SEI
Asset Allocation Trust, SEI Tax
Exempt Trust, SEI Alpha Strategy
Portfolios, LP, Adviser Managed
Trust and New Covenant Funds.
Member of the independent review
committee for SEI's Canadian-
registered mutual funds.
Former Directorships: Director of
SEI Opportunity Fund, L.P. to 2010.
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|
(1) Denotes Trustees who may be deemed to be "interested" persons of the Funds as that term is defined in the 1940 Act by virtue of their affiliation with the Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Funds provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Funds, and to exercise their business judgment in a manner that serves the best interests of the Funds' shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Nesher should serve as Trustee because of the experience he has gained in his various roles with SEI Investments Company, which he joined in 1974, his knowledge of and experience in the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Doran should serve as Trustee because of the experience he gained serving as a Partner in the Investment Management and Securities Industry Practice of a large law firm, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1991.
The Trust has concluded that Mr. Carlbom should serve as Trustee because of the business experience he gained as President and CEO of a large distribution cooperative and Chairman of a consulting company, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Darr should serve as Trustee because of his background in economics, the business experience he gained in a variety of roles with different financial and banking institutions and as a founder of a money management firm, his knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 2008.
The Trust has concluded that Mr. Grause should serve as Trustee because of the knowledge and experience he gained in a variety of leadership roles with different financial institutions, his knowledge of the mutual fund and investment management industries, and his past experience as an interested trustee and chair of the investment committee for a multi-managed investment company.
The Trust has concluded that Mr. Johnson should serve as Trustee because of the experience he gained as a senior vice president, corporate finance, of a Fortune 500 company, his experience in and knowledge of the financial services and banking industries, the experience he gained serving as a director of other mutual funds, and the experience he has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Ms. Krikorian should serve as Trustee because of the experience she gained serving as a legal and financial services consultant, in-house counsel to a large custodian bank and Vice President of Compliance of an investment adviser, her background in fiduciary and banking law, her experience in and knowledge of the financial services industry, and the experience she has gained serving as a trustee of the Trust since 2005.
The Trust has concluded that Mr. Speca should serve as Trustee because of the knowledge and experience he gained serving as president of a mutual fund company and portfolio manager for a $95 billion complex of asset allocation funds, and his over 25 years of experience working in a management capacity with mutual fund boards.
The Trust has concluded that Mr. Storey should serve as Trustee because of the mutual fund governance experience he gained as an Investment Management attorney, both in private practice and with the SEC, his background serving as counsel to numerous mutual fund boards of trustees, his knowledge of the 1940 Act, his experience in and knowledge of the financial services industry, and the experience he has gained serving as a trustee of the Trust since 1994.
The Trust has concluded that Mr. Sullivan should serve as Trustee because of the experience he gained as a certified public accountant and financial consultant, his experience in and knowledge of public company accounting and auditing and the financial services industry, the experience he gained as an officer of a large financial services firm in its operations department, and his experience from serving as a trustee of the Trust since 1999.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board's overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of each of the independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which firm to engage as each fund's
independent registered public accounting firm and whether to terminate this relationship; (ii) reviewing the independent registered public accounting firm's compensation, the proposed scope and terms of its engagement, and the firm's independence; (iii) pre-approving audit and non-audit services provided by each fund's independent registered public accounting firm to the Trust and certain other affiliated entities; (iv) serving as a channel of communication between the independent registered public accounting firm and the Trustees; (v) reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust's Administrator that are material to the Trust as a whole, if any, and management's responses to any such reports; (vi) reviewing each fund's audited financial statements and considering any significant disputes between the Trust's management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; (vii) considering, in consultation with the independent registered public accounting firm and the Trust's senior internal accounting executive, if any, the independent registered public accounting firms' reports on the adequacy of the Trust's internal financial controls; (viii) reviewing, in consultation with each fund's independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each fund's financial statements; and (ix) other audit related matters. Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan and Ms. Krikorian currently serve as members of the Audit Committee. Mr. Sullivan serves as the Chairman of the Audit Committee. The Audit Committee meets periodically, as necessary, and met four (4) times during the most recently completed fiscal year.
o FAIR VALUE PRICING COMMITTEE. The Board has a standing Fair Value Pricing Committee that is composed of at least one Trustee and various representatives of the Trust's service providers, as appointed by the Board. The Fair Value Pricing Committee operates under procedures approved by the Board. The principal responsibility of the Fair Value Pricing Committee is to determine the fair value of securities for which current market quotations are not readily available. The Fair Value Pricing Committee's determinations are reviewed by the Board. Mr. Nesher, interested trustee, currently serves as the Board's delegate on the Fair Value Pricing Committee. The Fair Value Pricing Committee meets periodically, as necessary, and met twenty-one (21) times during the most recently completed fiscal year.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee (formerly the Nominating Committee) that is composed of each of the independent Trustees of the Trust. The Governance Committee operates under a written charter approved by the Board. The principal responsibilities of the Governance Committee include: (i) considering and reviewing Board governance and compensation issues; (ii) conducting a self-assessment of the Board's operations; (iii) selecting and nominating all persons to serve as independent Trustees and evaluating the qualifications of "interested" Trustee candidates; and (iv) reviewing shareholder recommendations for nominations to fill vacancies on the Board if such recommendations are submitted in writing and addressed to the Committee at the Trust's office. Ms. Krikorian and Messrs. Carlbom, Darr, Grause, Johnson, Speca, Storey and Sullivan currently serve as members of the Governance Committee. Ms. Krikorian serves as the Chairman of the Governance Committee. The Governance Committee meets periodically, as necessary, and met twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount range of each Trustee's "beneficial ownership" of shares of each of the Funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust.
-------------------------------------------------------------------------------------
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF SHARES
NAME SHARES (FUND)(1) (ALL FUNDS IN THE FUND COMPLEX)(1,2)
-------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-------------------------------------------------------------------------------------
Doran None None
-------------------------------------------------------------------------------------
Nesher None None
-------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------
Carlbom None None
-------------------------------------------------------------------------------------
Darr None None
-------------------------------------------------------------------------------------
Grause None None
-------------------------------------------------------------------------------------
Johnson None Over $100,000
-------------------------------------------------------------------------------------
Krikorian None None
-------------------------------------------------------------------------------------
Speca None None
-------------------------------------------------------------------------------------
Storey None None
-------------------------------------------------------------------------------------
Sullivan None None
-------------------------------------------------------------------------------------
|
(1) Valuation date is December 31, 2012.
(2) The Trust is the only investment company in the Fund Complex.
BOARD COMPENSATION. The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
-----------------------------------------------------------------------------------------------------------------------
PENSION OR
RETIREMENT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL
COMPENSATION FROM AS PART OF FUND BENEFITS UPON TOTAL COMPENSATION FROM THE
NAME THE TRUST EXPENSES RETIREMENT TRUST AND FUND COMPLEX(1)
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-----------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------------------------------------
Carlbom $52,654 N/A N/A $52,654 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Darr $52,654 N/A N/A $52,654 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Grause(2) $40,570 N/A N/A $40,570 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Johnson $52,654 N/A N/A $52,654 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Krikorian $52,654 N/A N/A $52,654 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Speca(2) $40,570 N/A N/A $40,570 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Storey $52,654 N/A N/A $52,654 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
Sullivan $52,654 N/A N/A $52,654 for service on one (1) board
-----------------------------------------------------------------------------------------------------------------------
|
(1) The Trust is the only investment company in the Fund Complex.
(2) Joined the Board of Trustees on November 17, 2011.
TRUST OFFICERS. Set forth below are the names, dates of birth, position with the Trust, length of term of office, and the principal occupations for the last five years of each of the persons currently serving as executive officers of the Trust. Unless otherwise noted, the business address of each officer is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual funds for which SEI Investments Company or its affiliates act as investment manager, administrator or distributor.
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NAME AND DATE POSITION WITH TRUST AND
OF BIRTH LENGTH OF TERM PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
---------------------------------------------------------------------------------------------------
Michael Beattie President Director of Client Service, SEI Investments
(03/13/65) (since 2011) Company, since 2004.
---------------------------------------------------------------------------------------------------
Michael Treasurer, Controller and Director, SEI Investments, Fund Accounting
Lawson Chief Financial Officer since July 2005. Manager, SEI Investments,
(10/08/60) (since 2005) Fund Accounting at SEI Investments AVP from
April 1995 to February 1998 and November
1998 to July 2005.
---------------------------------------------------------------------------------------------------
Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(12/18/62) (since 2006) Credit Fund, LP and SEI Alpha Strategy
Portfolios, LP since June 2007. Chief
Compliance Officer of The Advisors' Inner
Circle Fund II, Bishop Street Funds, SEI
Institutional Managed Trust, SEI Asset
Allocation Trust, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI
Daily Income Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust, Adviser Managed Trust
and New Covenant Funds. Chief Compliance
Officer of SEI Opportunity Fund, L.P. until
2010. Director of Investment Product
Management and Development, SEI
Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI
Investments, from March 2000 to February
2003.
---------------------------------------------------------------------------------------------------
Timothy D. Vice President and General Counsel and Secretary of SIMC and the
Barto Assistant Secretary Administrator since 2004. Vice President of
(03/28/68) (since 1999) SIMC and the Administrator since 1999. Vice
President and Assistant Secretary of SEI
Investments since 2001. Assistant Secretary of
SIMC, the Administrator and the Distributor,
and Vice President of the Distributor, from 1999
to 2003.
---------------------------------------------------------------------------------------------------
Dianne M. Vice President and Counsel at SEI Investments since 2010.
Sulzbach Secretary Associate at Morgan, Lewis & Bockius LLP
(07/18/77) (since 2011) from 2006 to 2010. Associate at Morrison &
Foerster LLP from 2003 to 2006. Associate at
Stradley Ronon Stevens & Young LLP from
2002 to 2003.
---------------------------------------------------------------------------------------------------
John Munch Vice President and Attorney, SEI Investments Company, since
(05/07/71) Assistant Secretary 2001. General Counsel, SEI Investments
(since 2012) Distribution Co., since 2004.
---------------------------------------------------------------------------------------------------
Keri Rohn Privacy Officer Compliance Officer at SEI Investments since
(8/24/80) (since 2009) 2003.
AML Officer
(since 2011)
---------------------------------------------------------------------------------------------------
|
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the New York Stock Exchange ("NYSE") is open for business. Shares of the Funds are offered and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole or in part by a distribution in-kind of securities held by the Funds in lieu of cash. Shareholders may incur brokerage charges on the sale of any such securities so received in payment of redemptions. A shareholder will at all times be entitled to aggregate cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation of the Funds' securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The Trust also reserves the right to suspend sales of shares of the Funds for any period during which the NYSE, the Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Funds adhere to Section 2(a)(41), and Rule 2a-4 thereunder, of the 1940 Act with respect to the valuation of portfolio securities. In general, securities for which market quotations are readily available are valued at current market value, and all other securities are valued at fair value as determined in good faith by the Board. In complying with the 1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff in various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on valuation date (or at approximately 4:00 p.m., Eastern Time, if a security's primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not available or determined to not represent the fair value of the security as of the Funds' pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market securities and other debt securities are priced based upon valuations provided by recognized independent, third-party pricing agents. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value for such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Money market securities and other debt securities with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. If such prices are not available or determined to not represent the fair value of the security as of the Fund's pricing time, the security will be valued at fair value as determined in good faith using methods approved by the Trust's Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the Trust's Administrator, market prices for most securities held by the Funds are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax considerations generally affecting the Funds and their shareholders that is intended to supplement the discussion contained in the Funds' prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussion here and in the Funds' prospectus is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
This general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
QUALIFICATIONS AS A REGULATED INVESTMENT COMPANY ("RIC"). The Funds each intend to qualify and elect to be treated as a RIC. By following such a policy, each Fund expects to eliminate or reduce to a nominal amount the federal taxes to which they may be subject. A Fund that qualifies as a RIC will not be subject to federal income taxes on the net investment income and net realized capital gains that the Fund timely distributes to its shareholders. The Board reserves the right not to maintain the qualification of the Funds as a RIC if it determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the code, each Fund must distribute at least 90% of its net investment income (which, includes dividends, taxable interest, and the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any, to its shareholders and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of each Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of stock, securities, or foreign currencies, or certain other income derived with respect to its business of investing in such stocks, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership; (ii) at the close of each quarter of the Funds' taxable year, at least 50% of the value of each Fund's total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount that does not exceed 5% of the value of each Fund's assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the close of each quarter of the Funds' taxable year, not more than 25% of the value of each Fund's assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer or the securities (other than the securities of another RIC) of two or more issuers that the Funds control and that are engaged in the same, similar or related trades or business, or the securities of one or more qualified publicly traded partnerships. Although the Funds intend to distribute substantially all of their net investment income and may distribute their capital gains for any taxable year, the Funds will be subject to federal income taxation to the extent any such income or gains are not distributed.
If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain DE MINIMIS failures of the diversification requirements where the Fund corrects the failure within a specified period. If the Fund fails to qualify for any taxable year as a RIC and these relief provisions are not available, all of its taxable income will be subject to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and such distributions generally will be taxable to shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits. In this event, distributions generally will be eligible for the dividend-received deduction for corporate shareholders (subject to certain limitations) and for the lower capital gains rates on qualified dividend income for individual shareholders to the extent they would qualify if the Fund was a regular corporation. In addition, the Funds could be required to recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before requalifying as a RIC. The Board reserves the right not to maintain the qualification of a Fund as a RIC if it determines such course of action to be beneficial to shareholders.
A Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such "qualified late year loss" as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar year. A "qualified late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as "post-October losses") and certain other late-year losses.
The treatment of capital loss carryovers for RICs is similar to the rules that apply to capital loss carryovers of individuals which provide that such losses are carried over by a Fund indefinitely. If a Fund has a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year beginning after December 22, 2010 (a "Post-2010 Loss"), the excess of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. A Fund's unused capital loss carryforwards that arose in taxable years that began on or before December 22, 2010 ("Pre-2011 Losses") are available to be applied against future capital gains, if any, realized by the Fund prior to the expiration of those carryforwards, generally eight years after the year in which they arose. A Fund's Post-2010 Losses must be fully utilized before the Fund will be permitted to utilize carryforwards of Pre-2011 Losses.
FEDERAL EXCISE TAX. If a Fund fails to distribute in a calendar year at least 98% of its ordinary income for the year and 98.2% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses) for the one-year period ending October 31 of such year (and any retained amount from the prior calendar year on which a Fund paid no federal income tax), the Fund will be subject to a nondeductible 4% Federal excise tax on the undistributed amounts. The Funds intend to make sufficient distributions to avoid imposition of this tax, or to retain, at most their net capital gains and pay tax thereon. The Funds intend to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Funds may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Funds to satisfy the requirement for qualification as a RIC.
DISTRIBUTIONS TO SHAREHOLDERS. The Funds receives income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any, less expenses incurred in the operation of the Funds, constitutes the Funds' net investment income from which dividends may be paid to you. Any distributions by the Funds from such income will be taxable to you as ordinary income or at the lower capital gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Distributions by the Funds will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Funds receive qualified dividend income on the securities
it holds and the Funds designate the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from each Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) each Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder), (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions by the Funds of their net short-term
capital
gains will be taxable as ordinary income. Capital gain distributions consisting of the Funds' net capital gains will be taxable as long-term capital gains at a maximum rate of 20%, regardless of how long the shareholder has owned the shares.
The Funds will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions, if any, at the time they are paid and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for a full year, the Funds may designate and distribute to you, as ordinary income, qualified dividend income or capital gain, a percentage of income that is not equal to the actual amount of such income earned during the period of your investment in the Funds.
If a Fund's distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in the same taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder's cost basis in a Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends or distributions representing gains realized on sales of securities, such dividends or distributions would be a return of investment though taxable to the shareholder in the same manner as other dividends or distributions.
Dividends declared to shareholders of record in October, November or December and actually paid in January of the following year will be treated as having been received by shareholders on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
In the case of corporate shareholders, Fund distributions (other than capital gains distributions) generally qualify for the dividend-received deduction to the extent such distributions are so designated and do not exceed the gross amount of qualifying dividends received by the Funds for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized on the sale or exchange of shares of a Fund). "Net investment income" does not include distributions of exempt-interest.
SALES, EXCHANGES, OR REDEMPTIONS. Any gain or loss recognized on a sale, exchange, or redemption of shares of a Fund by a shareholder who is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than twelve months and otherwise will be treated as a short-term capital gain or loss. However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less, any loss recognized will be treated as a long-term capital loss to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract to or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
The Funds (or their administrative agent) must report to the Internal Revenue Service ("IRS") and furnish to Fund shareholders cost basis information for Fund shares purchased on or after January 1, 2012, and sold on or after that date.
In addition to reporting the gross proceeds from the sale of Fund shares, a Fund will also be required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. For each sale of Fund shares, a Fund will permit shareholders to elect from among several IRS-accepted cost basis methods, including the average basis method. In the absence of an election, a Fund will use the average basis method as the default cost basis method. The cost basis method elected by the Fund shareholder (or the cost basis method applied by default) for each sale of Fund shares may not be changed after the settlement date of each such sale of Fund shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
TAX TREATMENT OF COMPLEX SECURITIES. The Funds may invest in complex securities. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and losses recognized by the Funds are treated as ordinary income or capital gain, accelerate the recognition of income to the Funds and/or defer the Funds' ability to recognize losses, and, in limited cases, subject the Funds to U.S. federal income tax on income from certain of their foreign securities. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Funds.
With respect to investments in STRIPS, TRs, and other zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
Certain Funds intend to invest in certain MLPs which may be treated as qualified publicly traded partnerships. Income from qualified publicly traded partnerships is qualifying income for purposes of the income qualification requirements, but a Fund's investment in one or more of such qualified publicly traded partnerships is limited under the asset diversification requirements of the Code to no more than 25% of the value of the Fund's assets. The Funds will monitor its investment in such qualified publicly traded partnerships in order to ensure compliance with this requirement.
Certain Funds intend to invest in royalty trusts. Depending on the U.S. federal income tax classification of these royalty trusts in which a Fund invests, securities issued by certain royalty trusts (such as royalty trusts which are grantor trusts for U.S. federal income tax purposes) may not produce qualifying income for purposes of the qualifying income requirements of the Code. Additionally, a Fund may be deemed to directly own the assets of each royalty trust, and would need to look to such assets when determining its compliance with the diversification requirements under the Code. Certain Canadian royalty trusts may be treated as a corporation for U.S. federal income tax purposes and distributions from such may be qualifying income when received by a Fund. Each Fund will monitor its investments in royalty trusts with the objective of maintaining its continued qualification as a RIC under the Code
If a Fund owns shares in certain foreign investment entities, referred to as "passive foreign investment companies" or "PFICs," the Fund will generally be subject to one of the following special tax regimes: (i) the Fund may be liable for U.S. federal income tax, and an additional interest charge, on a portion of any "excess distribution" from such foreign entity or any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund were able and elected to treat a PFIC as a "qualifying electing fund" or "QEF," the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Fund's pro rata share of the ordinary earnings and net capital gains of the passive foreign investment company, whether or not such earnings or gains are distributed to the Fund; or (iii) the Fund may be entitled to mark-to-market annually shares of the PFIC, whether or not any distributions are made to the Fund, and in such event would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
FOREIGN TAXES. Dividends and interests received by a Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors. If more than 50% of the value of a Fund's total assets at the close of their taxable year consists of stocks or securities of foreign corporations, the Fund will be eligible to, and will, file an election with the IRS that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to the election, the Fund will treat those taxes as dividends paid to their shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders' federal income tax. If a Fund makes the election, the Fund will report annually to their shareholders the respective amounts per share of the Fund's income from sources within, and taxes paid to, foreign countries and U.S. possessions.
Foreign tax credits, if any, received by a Fund as a result of an investment in another RIC (including an ETF which is taxable as a RIC) will not be passed through to you unless the Fund qualifies as a "qualified fund of funds" under the Code. If a Fund is a "qualified fund of funds" it will be eligible to file an election with the IRS that will enable the Fund to pass along these foreign tax credits to its shareholders. A Fund will be treated as a "qualified fund of funds" under the Code if at least 50% of the value of the Fund's total assets (at the close of each quarter of the Fund's taxable year) is represented by interests in other RICs.
BACKUP WITHHOLDING. A Fund will be required in certain cases to withhold, at applicable withholding rates, and remit to the United States Treasury the amount withheld on amounts payable to any shareholder who: (i) has provided the Fund either an incorrect tax identification number or no number at all; (ii) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends; (iii) has failed to certify to the Fund that such shareholder is not subject to backup withholding; or (iv) has failed to certify to the Fund that the shareholder is a U.S. person (including a resident alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Funds may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior to investing in the Funds.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning after December 31, 2013 (and proceeds of sales in respect of Fund shares received by Fund shareholders beginning after December 31, 2016) for shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. A Fund will not pay any additional amounts in respect to any amounts withheld.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Funds generally serve to block UBTI from being
realized by their tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Fund
invests in a REIT that is a taxable mortgage pool (TMP) or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are
encouraged to consult with their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as a Fund are not excepted.
Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by a Fund to its shareholders and the ownership of such shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from rules for federal income taxation described above. A Fund is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes.
Many states grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment requirements that must be met by a Fund. Investment in GNMA or FNMA securities, banker's acceptances, commercial paper, and repurchase agreements collateralized by U.S. government securities do not generally qualify for such tax-free treatment. The rules on exclusion of this income are different for corporate shareholders.
Shareholders are urged to consult their tax advisors regarding state and local taxes applicable to an investment in the Funds.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and over-the-counter, are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark-up or reflect a dealer's mark-down. Money market securities and other debt securities are usually bought and sold directly from the issuer or an underwriter or market maker for the securities. Generally, the Funds will not pay brokerage commissions for such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer's mark up or reflect a dealer's mark down. When the Funds execute transactions in the over-the-counter market, they will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Funds, engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Funds may obtain, it is the opinion of the Adviser that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Funds to participate in higher volume transactions will generally be beneficial to the Funds.
Except otherwise noted, for the fiscal years ended October 31, 2010, 2011 and 2012, the Funds paid the following aggregate brokerage commissions on portfolio transactions:
------------------------------------------------------------------------------------- FUND 2010 2011 2012 ------------------------------------------------------------------------------------- Westwood LargeCap Value Fund $158,911 $118,249 $161,402 ------------------------------------------------------------------------------------- Westwood SMidCap Fund $225,514 $316,355 $311,136 ------------------------------------------------------------------------------------- Westwood Income Opportunity Fund $77,149 $192,345 $344,404 ------------------------------------------------------------------------------------- Westwood SmallCap Value Fund $39,238 $74,657 $63,367 ------------------------------------------------------------------------------------- Westwood Dividend Growth Fund $54,952(1) $59,184(1) $1,032(2) $78,345 ------------------------------------------------------------------------------------- Westwood SMidCap Plus Fund $N/A(3) $7,888(4) $15,345 ------------------------------------------------------------------------------------- Westwood Short Duration High $N/A(3) $N/A(3) $0(5) Yield Fund ------------------------------------------------------------------------------------- Westwood Global Equity Fund $N/A(3) $N/A(3) $N/A(3) ------------------------------------------------------------------------------------- Westwood Global Dividend Fund $N/A(3) $N/A(3) $N/A(3) ------------------------------------------------------------------------------------- Westwood Emerging Markets Fund $N/A(3) $N/A(3) $N/A(3) ------------------------------------------------------------------------------------- Westwood Emerging Markets $N/A(3) $N/A(3) $N/A(3) Plus Fund ------------------------------------------------------------------------------------- |
(1) For the fiscal year ended June 30. The Fund changed its fiscal year end from June 30 to October 31, effective with the four month period ended October 31, 2011
(2) For the fiscal period July 1, 2011 to October 31, 2011.
(3) Not in operation during the period.
(4) Represents the period from March 28, 2011 (commencement of operations) to October 31, 2011.
(5) Represents the period from December 28, 2011 (commencement of operations) to October 31, 2012.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed capable of providing the best combination of price and execution, the Funds' Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances, to cause the Funds to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to the Funds.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used by the Adviser in connection with the Funds or any other specific client account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Funds' Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
From time to time, the Funds may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the adviser with research services. The Financial Industry Regulatory Authority ("FINRA") has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
Except otherwise noted, for the Trust's fiscal year ended October 31, 2012, the Funds paid the following commissions on brokerage transactions directed to brokers pursuant to an agreement or understanding whereby the broker provides research or other brokerage services to the Adviser:
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TOTAL DOLLAR AMOUNT OF BROKERAGE TOTAL DOLLAR AMOUNT OF
COMMISSIONS FOR RESEARCH TRANSACTIONS INVOLVING BROKERAGE
FUND SERVICES COMMISSIONS FOR RESEARCH SERVICES
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Westwood LargeCap Value Fund $161,402 $226,620,856
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Westwood SMidCap Fund $311,136 $343,652,215
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Westwood Income Opportunity Fund $344,404 $383,938,785
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Westwood SmallCap Value Fund $63,367 $44,538,422
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Westwood Dividend Growth Fund $78,345 $154,564,437
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Westwood SMidCap Plus Fund $15,375 $19,497,532
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Westwood Short Duration High Yield $0(1) $0(1)
Fund
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Westwood Global Equity Fund N/A(2) N/A(2)
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Westwood Global Dividend Fund N/A(2) N/A(2)
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Westwood Emerging Markets Fund N/A(2) N/A(2)
------------------------------------------------------------------------------------------------------------
Westwood Emerging Markets Plus Fund N/A(2) N/A(2)
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(1) Represents the period from December 28, 2011 (commencement of operations) to October 31, 2012.
(2) Not in operation during the period.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency transactions through registered broker-dealer affiliates of either the Funds, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules require that commissions paid to the affiliate by the Funds for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." The Trustees, including those who are not "interested persons" of the Funds, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
For the fiscal years ended October 31, 2010, 2011 and 2012, the Funds (except the Westwood Dividend Growth Fund) did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers. For the fiscal years ended June 30, 2010 and 2011, the fiscal period July 1, 2011 to October 31, 2011 and the fiscal year ended October 31, 2012, the Westwood Dividend Growth Fund did not pay any brokerage commissions on portfolio transactions effected by affiliated brokers.
SECURITIES OF "REGULAR BROKER-DEALERS." The Funds are required to identify any securities of their "regular brokers and dealers" (as such term is defined in the 1940 Act) that each Fund held during its most recent fiscal year. As of the fiscal year ended October 31, 2012, the Westwood Income Opportunity Fund held debt securities of Barclays Bank PLC valued at $4,895,000, debt securities of JP Morgan Chase valued at $4,316,000, equity securities of JP Morgan Chase
valued at $10,627,000, equity securities of Citigroup valued at $11,220,000 and debt securities of Citigroup valued at $2,452,000. As of the fiscal year ended October 31, 2012, the Westwood LargeCap Value Fund held equity securities of JP Morgan Chase valued at $3,514,000. During the fiscal year ended October 31, 2012, the Westwood SmallCap Value Fund, Westwood SMidCap Fund, Westwood SMidCap Plus Fund, Westwood Dividend Growth Fund and Westwood Short Duration High Yield Fund did not hold any securities of "regular brokers or dealers." The Westwood Global Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund and Westwood Emerging Markets Plus Fund were not in operation as of October 31, 2012.
PORTFOLIO TURNOVER RATES. Portfolio turnover rate is defined under SEC rules as the greater of the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one-year are excluded from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts in which the Funds may invest since such contracts generally have remaining maturities of less than one-year. The Funds may at times hold investments in other short-term instruments, such as repurchase agreements, which are excluded for purposes of computing portfolio turnover. For the fiscal years ended October 31, 2011 and 2012, the Funds' portfolio turnover rates were as follows:
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PORTFOLIO TURNOVER RATES
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FUND 2011 2012
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Westwood LargeCap Value Fund 42% 40%
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Westwood SMidCap Fund 62% 37%
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Westwood Income Opportunity Fund 26% 24%
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Westwood SmallCap Value Fund 103% 68%
--------------------------------------------------------------------------------
Westwood Dividend Growth Fund 66%(1) 24%(2) 95%
--------------------------------------------------------------------------------
Westwood SMidCap Plus Fund 31%(3) 34%
--------------------------------------------------------------------------------
Westwood Short Duration High Yield N/A(4) 52%(5)
Fund
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Westwood Global Equity Fund N/A(4) N/A(4)
--------------------------------------------------------------------------------
Westwood Global Dividend Fund N/A(4) N/A(4)
--------------------------------------------------------------------------------
Westwood Emerging Markets Fund N/A(4) N/A(4)
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Westwood Emerging Markets Plus Fund N/A(4) N/A(4)
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(1) For the fiscal year ended June 30. The Fund changed its fiscal year end from June 30 to October 31, effective with the four month period ended October 31, 2011. Includes portfolio turnover of the Predecessor Fund for the period prior to February 7, 2011.
(2) For the fiscal period July 1, 2011 to October 31, 2011 (the "Fiscal Period"). The portfolio turnover rate for the fiscal year ended June 30, 2011 is higher than the rate for the Fiscal Period because the portfolio turnover rate for the Fiscal Period was calculated for a shortened period and was not annualized.
(3) Represents the period from March 28, 2011 (commencement of operations) to October 31, 2011.
(4) Not in operation during the period.
(5) Represents the period from December 28, 2011 (commencement of operations) to October 31, 2012.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the Funds' portfolio securities is in the best interests of Fund shareholders, and include procedures to address conflicts between the interests of the Funds' shareholders, on the one hand, and those of the Funds' Adviser, principal underwriter or any affiliated person of the Funds, their Adviser, or their principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the Adviser's Chief Compliance Officer (the "Authorized Person") to authorize the release of the Funds' portfolio holdings, as necessary, in conformity with the foregoing principles. The Authorized Person reports at least quarterly to the Board regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Funds are required to disclose their complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each January 31, April 30, July 31 and October 31). The Funds disclose a complete schedule of investments in each Semi-Annual Report and Annual Report to Fund shareholders or, following the first and third fiscal quarters, in quarterly holdings reports filed with the SEC on Form N-Q. Semi-Annual and Annual Reports are distributed to Fund shareholders. Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders, but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. Within 10 days of the end of each calendar quarter, each Fund, except for the Short Duration High Yield Fund, will post its complete portfolio holdings on the internet at http://www.westwoodfunds.com. The Short Duration High Yield Fund will post its top 10 holdings within 10 days of the end of each calendar quarter on the internet at http://www.westwoodfunds.com.
The Funds' policies and procedures provide that the Authorized Persons, may authorize disclosure of portfolio holdings information to third parties at differing times and/or with different lag times then the information posted to the internet; provided that the recipient is, either by contractual agreement or otherwise by law, (i) required to maintain the confidentiality of the information and (ii) prohibited from using the information to facilitate or assist in any securities transactions or investment program. No compensation or other consideration is paid to or received by any party in connection with the disclosure of portfolio holdings information, including the Funds, Adviser and its affiliates or recipient of the Funds' portfolio holdings information. The Funds will review a third party's request for portfolio holdings information to determine whether the third party has legitimate business objectives in requesting such information.
The Adviser currently has two arrangements to provide Fund portfolio holdings information (including security name, ticker symbol, CUSIP, number of shares, current market value and percentage of portfolio, as well as percentage weightings for the Fund's top ten holdings) to third parties prior to the date on which portfolio holdings information is posted on the Funds' web site. In one arrangement, the Adviser provides portfolio holdings information with respect to the Westwood Income Opportunity Fund as of the end of each month, with at least a 14 day lag, to Retirement Advisors of America (a PH&H Investments Company). In the final arrangement, the Adviser provides portfolio holdings information with respect to the Westwood LargeCap Value Fund as of the end of each month, with at least a 14 day lag, to The Concord Advisory Group, Ltd. and Bayshore Community Hospital. The information provided to these third parties, until made publicly available, is considered confidential and will not be distributed to the public nor traded upon. The Funds believe these disclosures serve a legitimate business purpose. No compensation is received by any Fund or the Adviser in connection with the disclosure of portfolio holdings information. The Funds' Chief Compliance Officer will regularly review these arrangements and will make periodic reports to the Board regarding disclosure pursuant to such arrangements.
In addition, the Funds' service providers, such as the Custodian, Administrator and Transfer Agent, may receive portfolio holdings information as frequently as daily in connection with their services to the Funds. In addition to any contractual provisions relating to confidentiality of information that may be included in the service providers contract with the Trust, these arrangements impose obligations on the Funds' service providers that would prohibit them from disclosing or trading on the Funds' non-public information. Financial printers and pricing information vendors may receive portfolio holdings information, as necessary, in connection with their services to the Funds.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each fund, each of which represents an equal proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series or class of shares. All consideration received by the Trust for shares of any additional funds and all assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. The Funds' shares, when issued, are fully paid and non-assessable.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the Trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustee's individual liability in any manner inconsistent with the federal securities laws.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for securities held by the Funds to the Adviser. The Adviser will vote such proxies in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI.
For assets that are managed directly by the Sub-Adviser, SKY Harbor, the Adviser has delegated responsibility for decisions regarding proxy voting to SKY Harbor. SKY Harbor invests only in debt securities issued primarily by U.S. corporations and does not invest in equity securities that would require SKY Harbor to vote by proxy. Accordingly, SKY Harbor does not expect to receive proxy proposals with respect to any of its portfolio securities in the Westwood Short Duration High Yield Fund. On rare occasions, it is possible that the firm may receive a proxy for a corporate restructuring of a debt issuer or some other highly unusual situation in which holders of debt securities are permitted to vote. SKY Harbor will vote any proxies received in a timely manner that is in the best interest of the Westwood Short Duration High Yield Fund, as determined by the firm. Should the firm become aware of a conflict of interest that may affect its ability to vote any proxy, the firm will disclose the conflict to shareholders of the Westwood Short Duration High Yield Fund and advise the Adviser or, if required, obtain the consent of the Adviser before voting the proxy. In the event the firm determines that a conflict of interest exists that cannot be adequately remediated, the firm will delegate the voting authority to an independent third party in consultation with the Adviser.
The Board will periodically review the Funds' proxy voting record.
The Trust is required to disclose annually the Funds' complete proxy voting record during the most recent 12-month period ended June 30 on Form N-PX. This voting record is available: (i) without charge, upon request, by calling 1-877-FUND-WHG (1-877-386-3944) and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
CODE OF ETHICS
The Board on behalf of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Administrator and the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes are designed to prevent unlawful practices in connection
with the purchase or sale of securities by Access Persons. Under each Code of Ethics, Access Persons are permitted to invest in securities, including securities that may be purchased or held by the Funds, but are required to report their personal securities transactions for monitoring purposes. Certain Access Persons are prohibited from engaging in personal securities transactions in securities that are held by the Funds. In addition, all Access Persons are required to obtain approval before investing in initial public offerings or private placements or are prohibited from making such investments. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
5% AND 25% SHAREHOLDERS
As of February 4, 2013, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25% or more of any class of the shares of a Fund.
The Trust believes that most of the shares referred to below were held by the persons below in accounts for their fiduciary, agency or custodial customers. Persons owing of record or beneficially more than 25% of a Fund's outstanding shares may be deemed to "control" the Fund within the meaning of the 1940 Act.
-------------------------------------------------------------------------------- WESTWOOD LARGE CAP VALUE FUND -- A CLASS SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 326,893.3840 72.50% SPECIAL CUSTODY A/C FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- WELLS FARGO BANK, NA FBO 83,163.1100 18.44% GL WILSON MUT FD PO BOX 1533 MINNEAPOLIS, MN 55480-1533 -------------------------------------------------------------------------------- PERSHING LLC 38,272.4520 8.49% 1 PERSHING PLZ JERSEY CITY, NJ 07399-0002 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD LARGE CAP VALUE FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 3,436,695.1150 26.22% SPECIAL CUSTODY ACCT FOR THE BENEFIT OF CUST ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 2,078,156.6970 15.86% FOR THE EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4TH FL 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 1,134,981.5020 8.66% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------- WESTWOOD DIVIDEND GROWTH FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- TD AMERITRADE INC 4,505,010.3010 65.67% FBO OUR CUSTOMERS PO BOX 2226 OMAHA, NE 68103-2226 -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 528,596.8980 7.71% 200 CRESCENT CT STE 1200 DALLAS TX 75201-1807 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD SMIDCAP PLUS FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- PERSHING LLC 464,096.7570 19.28% 1 PERSHING PLZ JERSEY CITY, NJ 07399-0002 -------------------------------------------------------------------------------- TD AMERITRADE INC 416,611.3750 17.31% FBO OUR CUSTOMERS PO BOX 2226 OMAHA, NE 68103-2226 -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 407,690.1420 16.94% SPECIAL CUSTODY ACCT FOR THE BENEFIT OF CUST ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 272,855.3020 11.34% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- CHEMBACO 212,437.7580 8.83% C/O CHEMICAL BANK & TRUST ATTN TRUST DEPT 333 E MAIN ST MIDLAND, MI 48640-6511 -------------------------------------------------------------------------------- WELLS FARGO BANK NA FBO 178,205.8110 7.40% TIMMERMAN & SONS FEEDING P/S PLAN PO BOX 1533 MINNEAPOLIS, MN 55480-1533 -------------------------------------------------------------------------------- MAC & CO 176,853.7490 7.35% MUTUAL FUND OPERATIONS PO BOX 3198 525 WILLIAM PENN PLACE PITTSBURGH, PA 15230-3198 -------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------- WESTWOOD SMIDCAP FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 8,447,017.1480 31.38% FOR THE EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4TH FL 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 4,914,915.9460 18.26% SPECIAL CUSTODY ACCT FOR THE BENEFIT OF CUST ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- MERRILL LYNCH PIERCE FENNER & 3,259,676.2050 12.11% SMITH INC FOR THE SOLE BENEFIT OF ITS CUSTOMERS 4800 DEER LAKE DRIVE EAST JACKSONVILLE, FL 32246-6484 -------------------------------------------------------------------------------- GREAT WEST TRUST CO LLC 2,800,745.2190 10.41% FBO RECORDKEEPING FOR VARIOUS BENEFIT PLANS 8515 E ORCHARD RD 2T2 GREENWOOD VLG, CO 80111-5002 -------------------------------------------------------------------------------- STATE STREET BANK & TRUST COMPANY 2,359,365.1900 8.77% FBO BAE SYSTEMS 401K SAVINGS PLAN PO BOX 5501 BOSTON, MA 02206-5501 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD SMALLCAP VALUE FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF FUND -------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 1,166,839.2810 32.46% FOR THE EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4TH FL 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 886,210.6490 24.65% SPECIAL CUSTODY ACCT FOR THE BENEFIT OF CUST ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- T ROWE PRICE RETIREMENT PLAN 345,389.9530 9.61% SERVICES INC FBO RETIREMENT PLAN CLIENTS 4515 PAINTERS MILL RD OWINGS MILLS, MD 21117-4903 -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 306,027.1660 8.51% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------- WESTWOOD INCOME OPPORTUNITY FUND -- A CLASS SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 2,885,363.9290 51.61% SPECIAL CUSTODY A/C FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- PERSHING LLC 664,177.2300 11.88% 1 PERSHING PLZ JERSEY CITY, NJ 07399-0002 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD INCOME OPPORTUNITY FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- CHARLES SCHWAB & CO INC 20,904,993.8670 30.65% SPECIAL CUSTODY ACCT FOR THE BENEFIT OF CUST ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- NATIONAL FINANCIAL SERVICES LLC 20,685,842.5530 30.33% FOR THE EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4TH FL 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 4,556,228.9360 6.68% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD SHORT DURATION HIGH YIELD BOND FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 2,550,732.3800 39.30% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- SAXON & CO 1,300,989.1200 20.04% FBO P.O. BOX 7780-1888 PHILADELPHIA, PA 19182-0001 -------------------------------------------------------------------------------- CHARLES SCHWAB & CO 1,181,819.0650 18.21% SPECIAL CUSTODY ACCT FOR THE BENEFIT OF CUST ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD GLOBAL EQUITY FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD 616,055.4560 67.09% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------- WELLS FARGO BANK NA FBO 150,000.0000 16.33% TIMMERMAN & SONS FEEDING P/S PLAN PO BOX 1533 MINNEAPOLIS, MN 55480-1533 -------------------------------------------------------------------------------- TD AMERITRADE INC 110,693.7850 12.05% FBO OUR CUSTOMERS PO BOX 2226 OMAHA, NE 68103-2226 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD GLOBAL DIVIDEND FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 342,079.8050 92.53% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD EMERGING MARKETS FUND -- A CLASS SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 40,000.0000 99.95% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WESTWOOD EMERGING MARKETS FUND -- INSTITUTIONAL SHARES -------------------------------------------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES % OF CLASS -------------------------------------------------------------------------------- MAC & CO 2,662,350.5980 75.72% MUTUAL FUND OPERATIONS PO BOX 3198 525 WILLIAM PENN PLACE PITTSBURGH, PA 15230-3198 -------------------------------------------------------------------------------- ATTN MF ADMIN 335,657.3710 9.55% C/O MELLON BANK ID 225 SEI PRIVATE TRUST COMPANY 1 FREEDOM VALLEY DR OAKS, PA 19456-9989 -------------------------------------------------------------------------------- TCTCO C/O WESTWOOD TRUST 332,525.9200 9.46% 200 CRESCENT CT STE 1200 DALLAS, TX 75201-1807 -------------------------------------------------------------------------------- |
APPENDIX A -- DESCRIPTION OF RATINGS
RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category by Standard and Poor's (S&P) and
indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) by Moody's have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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The rating F1 (Highest Credit Quality) is the highest commercial rating assigned by Fitch Inc. Paper rated F1 is regarded as having the strongest capacity for timely payment of financial commitments. The rating F2 (Good Credit Quality) is the second highest commercial paper rating assigned by Fitch Inc., which reflects a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
The rating TBW-1 by Thomson BankWatch ("Thomson") indicates a very high likelihood that principal and interest will be paid on a timely basis.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S SHORT-TERM MIG/VMIG RATINGS - US TAX-EXEMPT MUNICIPALS. There are four rating categories for short-term obligations that define an investment grade situation. These are designated Moody's Investment Grade as MIG 1 (best quality) through MIG 4 (adequate quality). Short-term obligations of speculative quality are designated SG.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents an evaluation of the degree of risk associated with scheduled principal and interest payments, and the other represents an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
Issues that are subject to a periodic reoffer and resale in the secondary market in a "dutch auction" are assigned a long-term rating based only on Moody's assessment of the ability and willingness of the issuer to make timely principal and interest payments. Moody's expresses no opinion as to the ability of the holder to sell the security in a secondary market "dutch auction." Such issues are identified by the insertion of the words "dutch auction" into the name of the issue.
Issues or the features associated with MIG or VMIG ratings are identified by date of issue, date of maturity or maturities or rating expiration date and description to distinguish each rating from other ratings. Each rating designation is unique with no implication as to any other similar issue of the same obligor. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad- based access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
SG This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
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An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
- Amortization Schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note, and
- Source of Payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
S&P note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Those issues
determined to possess a very strong capacity to pay a debt service is
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the votes.
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DESCRIPTION OF CORPORATE BOND RATINGS
S&P
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rate B has greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
MOODY'S
BAA Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Bonds that are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Moody's bond ratings, where specified, are applied to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one-year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located. Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for Bank Deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by actions of the government controlling the currency of denomination. In addition, risks associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer's branch is located are not incorporated into Moody's short-term debt ratings.
Moody's makes no representation that rated bank or insurance company obligations are exempt from the registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent that any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within the parenthesis beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.
FITCH INC. ("FITCH")
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type market.
Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
THOMSON
Bonds rated AAA by Thomson BankWatch indicate that the ability to repay principal and interest on a timely basis is extremely high. Bonds rated AA indicate a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Bonds rated A indicate the ability to repay principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
Bonds rated BBB (the lowest investment-grade category) indicate an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
While not investment grade, the BB rating suggests that the likelihood of default is considerably less than for lower-rated issues. However, there are significant uncertainties that could affect the ability to adequately service debt obligations. Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
APPENDIX B --PROXY VOTING POLICIES AND PROCEDURES
WESTWOOD MANAGEMENT CORP.
POLICIES AND PROCEDURES FOR PROXY VOTING
POLICY
WESTWOOD HAS ENGAGED BROADRIDGE FOR ASSISTANCE WITH THE PROXY VOTING PROCESS FOR
OUR CLIENTS. BROADRIDGE IS A LEADING PROVIDER OF FULL SERVICE PROXY VOTING
SERVICES TO THE GLOBAL FINANCIAL INDUSTRY. WESTWOOD HAS ALSO ENGAGED GLASS LEWIS
FOR ASSISTANCE WITH PROXY RESEARCH AND ANALYSIS. GLASS LEWIS PROVIDES COMPLETE
ANALYSIS AND VOTING RECOMMENDATIONS ON ALL PROPOSALS AND IS DESIGNED TO ASSIST
INVESTORS IN MITIGATING RISK AND IMPROVING LONG-TERM VALUE. IN MOST CASES, WE AGREE WITH GLASS LEWIS'S RECOMMENDATIONS, HOWEVER, BALLOTS ARE REVIEWED BI-MONTHLY BY OUR ANALYSTS AND WE MAY CHOOSE TO VOTE DIFFERENTLY THAN GLASS LEWIS IF WE BELIEVE IT IN THE BEST INTEREST OF OUR CLIENTS.
RESPONSIBILITY
Westwood's Vice President, Senior Performance Analyst has the responsibility for the implementation and monitoring of our proxy voting policy, practices, disclosures and record keeping, including outlining our voting guidelines in our procedures.
PROCEDURES
WITH RESPECT TO PROXY RECORD KEEPING, WESTWOOD MAINTAINS COMPLETE FILES FOR ALL CLIENTS. THESE FILES INCLUDE A LISTING OF ALL PROXY MATERIAL SENT ON BEHALF OF OUR CLIENTS ALONG WITH INDIVIDUAL COPIES OF EACH RESPONSE. CLIENT ACCESS TO THESE FILES CAN BE ARRANGED UPON REQUEST. A SUMMARY OF VOTING IS SENT TO EACH
CLIENT ON AN ANNUAL BASIS.
Proxy Voting Records. WITH RESPECT TO PROXY RECORD KEEPING, WESTWOOD MAINTAINS COMPLETE FILES FOR ALL CLIENTS. THESE FILES INCLUDE A LISTING OF ALL PROXY MATERIAL SENT ON BEHALF OF OUR CLIENTS ALONG WITH INDIVIDUAL COPIES OF EACH RESPONSE. CLIENT ACCESS TO THESE FILES CAN BE ARRANGED UPON REQUEST. A SUMMARY OF VOTING IS SENT TO EACH CLIENT ON AN ANNUAL BASIS.
Voting Procedures
o WESTWOOD HAS ENGAGED BROADRIDGE AND GLASS LEWIS FOR ASSISTANCE WITH THE PROXY VOTING PROCESS FOR OUR CLIENTS.
o ALL PROXY MATERIALS THAT WESTWOOD IS RESPONSIBLE FOR VOTING ON BEHALF OF CLIENTS SHALL BE FORWARDED TO BROADRIDGE;
o WESTWOOD'S ANALYSTS REVIEW THE GLASS LEWIS PROXY VOTING RECOMMENDATIONS ON A BI-MONTHLY BASIS. THE ANALYST MAY CHOOSE TO VOTE DIFFERENTLY THAN GLASS LEWIS IF THE ANALYST BELIEVES IT IS IN THE BEST INTEREST OF THE CLIENT;
o IF WESTWOOD CHOOSES TO VOTE DIFFERENTLY THAN GLASS LEWIS, THEN WESTWOOD WILL OVERWRITE THE GLASS LEWIS RECOMMENDATION ON THE PROXYEDGE PLATFORM. IF WESTWOOD AGREES WITH THE GLASS LEWIS RECOMMENDATIONS, NO ACTION IS NECESSARY;
o BROADRIDGE WILL COMPLETE THE PROXY AND MAIL THE PROXY IN A TIMELY AND APPROPRIATE MANNER.
Disclosure
o WESTWOOD WILL PROVIDE CONSPICUOUSLY DISPLAYED INFORMATION IN ITS DISCLOSURE DOCUMENT SUMMARIZING THIS PROXY VOTING POLICY AND PROCEDURES, INCLUDING A STATEMENT THAT CLIENTS MAY REQUEST A PROXY VOTING SUMMARY INFORMATION REGARDING HOW WESTWOOD VOTED A CLIENT'S PROXIES, AND THAT CLIENTS MAY REQUEST A COPY OF THESE POLICIES AND PROCEDURES.
o THE ASSISTANT VICE PRESIDENT, SENIOR PERFORMANCE ANALYST WILL ALSO SEND A COPY OF THIS SUMMARY TO ALL EXISTING CLIENTS WHO HAVE PREVIOUSLY RECEIVED WESTWOOD'S DISCLOSURE DOCUMENT; OR THE ASSISTANT VICE PRESIDENT, SENIOR PERFORMANCE ANALYST MAY SEND EACH CLIENT THE AMENDED DISCLOSURE DOCUMENT. EITHER MAILING SHALL HIGHLIGHT THE INCLUSION OF INFORMATION REGARDING PROXY VOTING.
Client Requests for Information
o ALL CLIENT REQUESTS FOR INFORMATION REGARDING PROXY VOTES, OR POLICIES AND PROCEDURES, RECEIVED BY ANY EMPLOYEE SHOULD BE FORWARDED TO THE SENIOR PERFORMANCE ANALYST.
o IN RESPONSE TO ANY REQUEST THE SENIOR PERFORMANCE ANALYST WILL PREPARE A WRITTEN RESPONSE TO THE CLIENT WITH THE INFORMATION REQUESTED, AND AS APPLICABLE WILL INCLUDE THE NAME OF THE ISSUER, THE PROPOSAL VOTED UPON, AND HOW WESTWOOD VOTED THE CLIENT'S PROXY WITH RESPECT TO EACH PROPOSAL ABOUT WHICH CLIENT INQUIRED.
Voting Guidelines
o WESTWOOD HAS ENGAGED BROADRIDGE AND GLASS LEWIS FOR ASSISTANCE WITH THE PROXY VOTING PROCESS FOR OUR CLIENTS. THE GLASS LEWIS PROXY VOTING GUIDELINES ARE ATTACHED AS EXHIBIT H.
o WESTWOOD ANALYSTS WILL REVIEW THE GLASS LEWIS PROXY VOTING RECOMMENDATIONS BI-MONTHLY USING THE FOLLOWING GUIDELINES:
o WESTWOOD WILL VOTE PROXIES IN THE BEST INTERESTS OF EACH PARTICULAR CLIENT.
o WESTWOOD'S POLICY IS TO VOTE ALL PROXIES FROM A SPECIFIC ISSUER THE SAME WAY FOR EACH CLIENT ABSENT QUALIFYING RESTRICTIONS FROM A CLIENT.
o CLIENTS ARE PERMITTED TO PLACE REASONABLE RESTRICTIONS ON WESTWOOD'S VOTING AUTHORITY IN THE SAME MANNER THAT THEY MAY PLACE SUCH RESTRICTIONS ON THE ACTUAL SELECTION OF ACCOUNT SECURITIES.
Conflicts of Interest
o WESTWOOD WILL IDENTIFY ANY CONFLICTS THAT EXIST BETWEEN THE INTERESTS OF THE ADVISER AND THE CLIENT BY REVIEWING THE RELATIONSHIP OF WESTWOOD WITH THE ISSUER OF EACH SECURITY TO DETERMINE IF WESTWOOD OR ANY OF ITS EMPLOYEES HAS ANY FINANCIAL, BUSINESS OR PERSONAL RELATIONSHIP WITH THE ISSUER.
o IF A MATERIAL CONFLICT OF INTEREST EXISTS, THE ASSISTANT VICE PRESIDENT, SENIOR PERFORMANCE ANALYST WILL DETERMINE WHETHER IT IS APPROPRIATE TO DISCLOSE THE CONFLICT TO THE AFFECTED CLIENTS, TO GIVE THE CLIENTS AN OPPORTUNITY TO VOTE THE PROXIES THEMSELVES, OR TO ADDRESS THE VOTING ISSUE THROUGH THE OBJECTIVE MEANS OF VOTING CONSISTENT WITH THE INDEPENDENT THIRD PARTY GLASS LEWIS VOTING RECOMMENDATIONS.
o WESTWOOD WILL MAINTAIN A RECORD OF THE VOTING RESOLUTION OF ANY CONFLICT OF INTEREST.
Recordkeeping. THE SENIOR PERFORMANCE ANALYST SHALL RETAIN THE FOLLOWING PROXY RECORDS IN ACCORDANCE WITH THE SEC'S FIVE-YEAR RETENTION REQUIREMENT:
o THESE POLICIES AND PROCEDURES AND ANY AMENDMENTS;
o A PROXY VOTING SUMMARY FROM BROADRIDGE;
o ANY DOCUMENT WESTWOOD CREATED THAT WAS MATERIAL TO MAKING A DECISION TO VOTE IN OPPOSITION TO GLASS LEWIS' RECOMMENDATION, OR THAT MEMORIALIZES ANY SUCH DECISION; AND
o A COPY OF EACH WRITTEN REQUEST FROM A CLIENT FOR A PROXY VOTING SUMMARY, AND A COPY OF ANY WRITTEN RESPONSE.
PART C: OTHER INFORMATION
ITEM 28. EXHIBITS:
(a)(1) Amended and Restated Agreement and Declaration of Trust of The Advisors'
Inner Circle Fund (the "Registrant") dated July 18, 1991, as amended and
restated February 18, 1997, is incorporated herein by reference to exhibit
(1)(b) of Post-Effective Amendment No. 28 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the U.S. Securities and
Exchange Commission (the "SEC") via EDGAR Accession No. 0000950109-97-001691 on
February 27, 1997.
(a)(2) Amendment No. 1, dated May 15, 2012, to the Registrant's Amended and
Restated Agreement and Declaration of Trust dated July 18, 1991, as amended and
restated February 18, 1997, is incorporated herein by reference to exhibit
(a)(2) of Post-Effective Amendment No. 190 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-12-000262 on May 23, 2012.
(b) Registrant's Second Amended and Restated By-Laws are incorporated herein by reference to exhibit (b) of Post-Effective Amendment No. 179 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000087 on February 28, 2012.
(c) Not Applicable.
(d)(1) Investment Advisory Agreement dated August 15, 1994 between the Registrant and HGK Asset Management, Inc. is incorporated herein by reference to exhibit (5)(e) of Post- Effective Amendment No. 24 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0000950109-96- 001199 on February 28, 1996.
(d)(2) Expense Limitation Agreement dated March 1, 2008 between the Registrant
and HGK Asset Management, Inc. is incorporated herein by reference to exhibit
(d)(2) of Post- Effective Amendment No. 111 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-09-000276 on July 2, 2009.
(d)(3) Revised Schedule A dated March 1, 2010 to the Expense Limitation Agreement dated March 1, 2008 between the Registrant and HGK Asset Management, Inc. is incorporated herein by reference to exhibit (d)(3) of Post-Effective Amendment No. 124 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-10-000245 on June 30, 2010.
(d)(4) Investment Advisory Agreement dated November 21, 1994 between the
Registrant and AIG Global Investment Corp. (now, AIG Asset Management (U.S.),
LLC) is incorporated herein by reference to exhibit (5)(f) of Post-Effective
Amendment No. 28 to the Registrant's Registration Statement on Form N-1A (File
No. 33-42484), filed with the SEC via EDGAR Accession No. 0000950109-97-001691
on February 27, 1997.
(d)(5) Assignment and Assumption Agreement dated December 31, 2003 between AIG Capital Management Corp. and AIG Global Investment Corp. (now, AIG Asset Management (U.S.), LLC) is incorporated herein by reference to exhibit (d)(31) of Post-Effective Amendment No. 69 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-04-000095 on March 1, 2004.
(d)(6) Investment Advisory Agreement dated May 3, 1995 between the Registrant and First Manhattan Co. is incorporated herein by reference to exhibit (5)(g) of Post-Effective Amendment No. 24 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0000950109-96-001199 on February 28, 1996.
(d)(7) Amended and Restated Schedule dated May 19, 1998 to the Investment Advisory Agreement dated May 3, 1995 between the Registrant and First Manhattan Co. is incorporated herein by reference to exhibit (d)(9) of Post-Effective Amendment No. 34 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001047469-98-021496 on May 21, 1998.
(d)(8) Investment Advisory Agreement dated March 15, 1999 between the Registrant and LSV Asset Management is incorporated herein by reference to exhibit (d)(8) of Post-Effective Amendment No. 46 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-01-500070 on June 22, 2001.
(d)(9) Revised Schedule to the Investment Advisory Agreement dated March 15, 1999 between the Registrant and LSV Asset Management is filed herewith.
(d)(10) Amended and Restated Expense Limitation Agreement dated February 13, 2013 between the Registrant and LSV Asset Management, relating to the LSV Family of Funds, is filed herewith.
(d)(11) Investment Advisory Agreement dated June 24, 2002 between the
Registrant and Acadian Asset Management, Inc. (now, Acadian Asset Management
LLC) is incorporated herein by reference to exhibit (d)(17) of Post-Effective
Amendment No. 55 to the Registrant's Registration Statement on Form N-1A (File
No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-02-000263
on August 30, 2002.
(d)(12) Amended Schedule A to the Investment Advisory Agreement dated June 24, 2002 between the Registrant and Acadian Asset Management, Inc. (now Acadian Asset Management, LLC) is incorporated herein by reference to exhibit (d)(12) of Post-Effective Amendment No. 127 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-10- 000392 on September 3, 2010.
(d)(13) Expense Limitation Agreement dated December 16, 2010, between the Registrant and Acadian Asset Management LLC, is incorporated herein by reference to exhibit (d)(13) of Post-Effective Amendment No. 183 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC on March 28, 2012.
(d)(14) Investment Advisory Agreement dated June 24, 2002 between the Registrant and Cambiar Investors LLC is incorporated herein by reference to exhibit (d)(19) of Post-Effective Amendment No. 55 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-02-000263 on August 30, 2002.
(d)(15) Amended Schedule A to the Investment Advisory Agreement dated June 24, 2002 between the Registrant and Cambiar Investors LLC is incorporated herein by reference to exhibit (d)(15) of Post-Effective Amendment No. 168 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000735 on November 30, 2011.
(d)(16) Form of Amended and Restated Expense Limitation Agreement, dated August 28, 2012, as effective on September 1, 2012, between the Registrant and Cambiar Investors LLC is incorporated
herein by reference to exhibit (d)(16) of Post-Effective Amendment No. 194 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000394 on August 28, 2012.
(d)(17) Investment Advisory Agreement dated June 24, 2002 between the Registrant and Investment Counselors of Maryland, LLC is incorporated herein by reference to exhibit (d)(23) of Post-Effective Amendment No. 55 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-02-000263 on August 30, 2002.
(d)(18) Investment Advisory Agreement dated June 24, 2002 between the
Registrant and C.S. McKee, L.P. is incorporated herein by reference to exhibit
(d)(24) of Post-Effective Amendment No. 55 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-02-000263 on August 30, 2002.
(d)(19) Investment Advisory Agreement dated August 8, 2008 between the Registrant and Rice, Hall James & Associates LLC is incorporated herein by reference to exhibit (d)(16) of Post-Effective Amendment No. 116 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-09-000641 on December 18, 2009.
(d)(20) Expense Limitation Agreement dated March 1, 2008, between the Registrant and Rice Hall James & Associates, LLC, relating to the Rice Hall James Family of Funds, is filed herewith.
(d)(21) Investment Advisory Agreement dated June 24, 2002 between the Registrant and Thompson, Siegel & Walmsley, Inc. (now, Thompson, Siegel & Walmsley LLC) is incorporated herein by reference to exhibit (d)(27) of Post-Effective Amendment No. 55 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-02-000263 on August 30, 2002.
(d)(22) Amendment and Revised Schedule A dated June 1, 2010 to the Investment Advisory Agreement dated June 24, 2002 between the Registrant and Thompson, Siegel & Walmsley, Inc. (now, Thompson, Siegel & Walmsley LLC) is incorporated herein by reference to exhibit (d)(21) of Post-Effective Amendment No. 126 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-10-000336 on August 30, 2010.
(d)(23) Investment Advisory Agreement dated January 29, 2010 between the Registrant and PNC Capital Advisors, LLC, relating to the UA S&P 500 Index Fund, is filed herewith.
(d)(24) Investment Advisory Agreement dated May 28, 2004 between the Registrant and Haverford Investment Management, Inc. is incorporated herein by reference to exhibit (d)(30) of Post-Effective Amendment No. 79 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-05-000093 on February 25, 2005.
(d)(25) Expense Limitation Agreement dated March 1, 2008, between the Registrant and Haverford Investment Management, Inc., relating to the Haverford Quality Growth Stock Fund, is filed herewith.
(d)(26) Investment Advisory Agreement dated December 16, 2005 between the Registrant and Westwood Management Corp. is incorporated herein by reference to exhibit (d)(28) of Post-Effective Amendment No. 88 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-06-000081 on February 28, 2006.
(d)(27) Schedule A, dated December 16, 2005, as last amended November 14, 2012, to the Investment Advisory Agreement dated December 16, 2005 between the Registrant and Westwood Management Corp. is incorporated herein by reference to exhibit (d)(27) of Post-Effective Amendment No. 202 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000594 on December 19, 2012.
(d)(28) Amended and Restated Expense Limitation Agreement dated February 26, 2013, between the Registrant and Westwood Management Corp., relating to the Westwood Family of Funds, is filed herewith.
(d)(29) Investment Sub-Advisory Agreement dated December 27, 2011, between Westwood Management Corp. and SKY Harbor Capital Management, LLC, relating to the Westwood Short Duration High Yield Fund, is filed herewith.
(d)(30) Investment Advisory Agreement dated February 27, 2006 between the Registrant and Edgewood Management LLC is incorporated herein by reference to exhibit (d)(33) of Post-Effective Amendment No. 95 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000007 on January 12, 2007.
(d)(31) Expense Limitation Agreement dated March 1, 2008 between the Registrant
and Edgewood Management LLC is incorporated herein by reference to exhibit
(d)(28) of Post-Effective Amendment No. 124 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-10-000245 on June 30, 2010.
(d)(32) Investment Advisory Agreement dated September 21, 2009 between the Registrant and Pennant Management, Inc. is incorporated herein by reference to exhibit (d)(30) of Post- Effective Amendment No. 115 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-09- 000594 on November 30, 2009.
(d)(33) Investment Advisory Agreement dated March 31, 2010 between the Registrant and Sands Capital Management, LLC is incorporated herein by reference to exhibit (d)(30) of Post-Effective Amendment No. 123 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-10-000173 on April 30, 2010.
(d)(34) Expense Limitation Agreement dated March 31, 2010, between the Registrant and Sands Capital Management, LLC, relating to the Sands Capital Global Growth Fund, is filed herewith.
(d)(35) Investment Advisory Agreement dated March 24, 2011, between the Registrant and AlphaOne Investment Services, LLC, relating to the AlphaOne Family of Funds, is filed herewith.
(d)(36) Expense Limitation Agreement, effective as of March 28, 2011, between the Registrant and AlphaOne Investment Services, LLC, relating to the AlphaOne Family of Funds, is incorporated herein by reference to exhibit (d)(43) of Post-Effective Amendment No. 154 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000353 on June 29, 2011.
(d)(37) Investment Advisory Agreement dated June 20, 2011, between the Registrant and Loomis, Sayles & Company, L.P., relating to the Loomis Sayles Full Discretion Institutional Securitized Fund, is filed herewith.
(d)(38) Expense Limitation Agreement dated December 15, 2011, between the Registrant and Loomis, Sayles & Company, L.P., relating to the Loomis Sayles Full Discretion Institutional Securitized Fund, is filed herewith.
(d)(39) Investment Advisory Agreement dated December 19, 2011, between the Registrant and CBRE Clarion Securities LLC, relating to the CBRE Clarion Long/Short Fund, is filed herewith.
(d)(40) Form of Expense Limitation Agreement between the Registrant and CBRE Clarion Securities LLC, relating to the CBRE Clarion Long/Short Fund, is incorporated herein by reference to exhibit (d)(45) of Post-Effective Amendment No. 171 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000783 on December 28, 2011.
(d)(41) Investment Advisory Agreement dated February 20, 2012, between the Registrant and Hamlin Capital Management, LLC, relating to the Hamlin High Dividend Equity Fund, is incorporated herein by reference to exhibit (d)(45) of Post-Effective Amendment No. 183 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000195 on March 28, 2012.
(d)(42) Expense Limitation Agreement dated February 20, 2012, between the Registrant and Hamlin Capital Management, LLC, relating to the Hamlin High Dividend Equity Fund, is incorporated herein by reference to exhibit (d)(46) of Post-Effective Amendment No. 183 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000195 on March 28, 2012.
(d)(43) Investment Advisory Agreement between the Trust and Citigroup First Investment Management Americas LLC, relating to the Citi Market Pilot 2020 Fund, Citi Market Pilot 2030 Fund and Citi Market Pilot 2040 Fund, is incorporated herein by reference to exhibit (d)(47) of Post-Effective Amendment No. 190 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000262 on May 23, 2012.
(d)(44) Expense Limitation Agreement between the Registrant and Citigroup First Investment Management Americas LLC, relating to the Citi Market Pilot 2020 Fund, Citi Market Pilot 2030 Fund and Citi Market Pilot 2040 Fund, is incorporated herein by reference to exhibit (d)(48) of Post-Effective Amendment No. 190 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000262 on May 23, 2012.
(d)(45) Investment Advisory Agreement dated February 3, 2012, between the Trust and Thomson Horstmann & Bryant, Inc., relating to the Thomson Horstmann & Bryant MicroCap Fund, is filed herewith.
(d)(46) Expense Limitation Agreement dated March 28, 2012, between the Registrant and Thomson Horstmann & Bryant, Inc., relating to the Thomson Horstmann & Bryant MicroCap Fund, is filed herewith.
(d)(47) Investment Advisory Agreement between the Trust and Cornerstone Advisors, Inc., relating to the Cornerstone Advisors Global Public Equity Fund, Cornerstone Advisors Income Opportunities Fund, Cornerstone Advisors Public Alternatives Fund and Cornerstone Advisors Real Assets Fund, is incorporated herein by reference to exhibit (d)(51) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(48) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc.
and Parametric Portfolio Associates LLC, relating to the Cornerstone Advisors
Global Public Equity Fund, is incorporated herein by reference to exhibit
(d)(52) of Post-Effective Amendment No. 193 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(49) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and LSV Asset Management, relating to the Cornerstone Advisors Global Public Equity Fund, is incorporated herein by reference to exhibit (d)(53) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(50) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and Harris Associates L.P., relating to the Cornerstone Advisors Global Public Equity Fund, is incorporated herein by reference to exhibit (d)(54) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(51) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc.
and Thornburg Investment Management Inc, relating to the Cornerstone Advisors
Global Public Equity Fund, is incorporated herein by reference to exhibit
(d)(55) of Post-Effective Amendment No. 193 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(52) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc.
and Marsico Capital Management, LLC, relating to the Cornerstone Advisors
Global Public Equity Fund, is incorporated herein by reference to exhibit
(d)(56) of Post-Effective Amendment No. 193 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(53) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and Turner Investments, L.P., relating to the Cornerstone Advisors Global Public Equity Fund and Cornerstone Advisors Public Alternatives Fund, is incorporated herein by reference to exhibit (d)(57) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(54) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and Cramer Rosenthal McGlynn LLC, relating to the Cornerstone Advisors Global Public Equity Fund, is incorporated herein by reference to exhibit (d)(58) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(55) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and Fairpointe Capital LLC, relating to the Cornerstone Advisors Global Public Equity Fund, is incorporated herein by reference to exhibit (d)(59) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(56) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and Phocas Financial Corporation, relating to the Cornerstone Advisors Global Public Equity Fund, is incorporated herein by
reference to exhibit (d)(60) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(57) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and TCW Investment Management Company, relating to the Cornerstone Advisors Global Public Equity Fund, to be filed by amendment.
(d)(58) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc.
and Allianz Global Investors Capital LLC, relating to the Cornerstone Advisors
Global Public Equity Fund, is incorporated herein by reference to exhibit
(d)(62) of Post-Effective Amendment No. 193 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(59) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and Acadian Asset Management LLC, relating to the Cornerstone Advisors Global Public Equity Fund, is incorporated herein by reference to exhibit (d)(63) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(60) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc.
and Driehaus Capital Management LLC, relating to the Cornerstone Advisors
Global Public Equity Fund, is incorporated herein by reference to exhibit
(d)(64) of Post-Effective Amendment No. 193 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(61) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and OFI SteelPath, Inc., relating to the Cornerstone Advisors Income Opportunities Fund, to be filed by amendment.
(d)(62) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and AlphaSimplex Group, LLC, relating to the Cornerstone Advisors Public Alternatives Fund, is incorporated herein by reference to exhibit (d)(66) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(63) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and AQR Capital Management, LLC, relating to the Cornerstone Advisors Public Alternatives Fund, is incorporated herein by reference to exhibit (d)(67) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(64) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and ClariVest Asset Management LLC, relating to the Cornerstone Advisors Public Alternatives Fund, to be filed by amendment.
(d)(65) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and Kayne Anderson Capital Advisors, L.P., relating to the Cornerstone Advisors Real Assets Fund, is incorporated herein by reference to exhibit (d)(69) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(66) Investment Sub-Advisory Agreement between Cornerstone Advisors, Inc. and BlackRock Investment Management, LLC, relating to the Cornerstone Advisors Real Assets Fund, is incorporated herein by reference to exhibit (d)(70) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(d)(67) Form of Investment Advisory Agreement between the Registrant and Harvest Global Investments Limited is incorporated herein by reference to exhibit (d)(71) of Post-Effective Amendment No. 200 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000571 on December 7, 2012.
(d)(68) Form of Expense Limitation Agreement between the Registrant and Harvest
Global Investments Limited is incorporated herein by reference to exhibit
(d)(72) of Post-Effective Amendment No. 200 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-12-000571 on December 7, 2012.
(e)(1) Distribution Agreement dated November 14, 1991, as amended and restated August 8, 1994, between the Registrant and SEI Financial Services Company (now, SEI Investments Distribution Co.) is incorporated herein by reference to exhibit (6) of Post-Effective Amendment No. 24 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0000950109-96-001199 on February 28, 1996.
(e)(2) Distribution Agreement dated November 14, 1991, as amended and restated November 12, 2002, between the Registrant and SEI Investments Distribution Co. (formerly, SEI Financial Services Company) is incorporated herein by reference to exhibit (e)(4) of Post- Effective Amendment No. 62 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-03- 000108 on February 28, 2003.
(e)(3) Amendment No. 1, effective as of August 30, 2010, to the Distribution
Agreement dated November 14, 1991, as amended and restated November 12, 2002,
between the Registrant and SEI Investments Distribution Co. (formerly, SEI
Financial Services Company), is incorporated herein by reference to exhibit
(e)(3) of Post-Effective Amendment No. 158 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-11-000517 on September 16, 2011.
(e)(4) Amended and Restated Sub-Distribution and Servicing Agreement dated November 10, 1997 between SEI Investments Company and AIG Equity Sales Corporation is incorporated herein by reference to exhibit (6)(c) of Post-Effective Amendment No. 32 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001047469-98-008087 on February 27, 1998.
(e)(5) Revised Form of Amended Sub-Distribution and Servicing Agreement for SEI
Investments Distribution Co. is incorporated herein by reference to exhibit
(e)(2) of Post-Effective Amendment No. 76 to the Registration Statement of The
Advisors' Inner Circle Fund II (File No. 33-50718), filed with the SEC via
EDGAR Accession No. 0001135428-08-000222 on May 30, 2008.
(f) Not applicable.
(g)(1) Custodian Agreement dated August 12, 1991 between the Registrant and CoreStates Bank N.A. (now, US Bank, National Association) is incorporated herein by reference to exhibit (6) of Post-Effective
Amendment No. 28 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0000950109-97-001691 on February 27, 1997.
(g)(2) Amendment dated May 21, 2001 to the Custodian Agreement dated August 12, 1991 between the Registrant and First Union National Bank (now, U.S. Bank, National Association) is incorporated herein by reference to exhibit (g)(4) of Post-Effective Amendment No. 51 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-02-000175 on June 14, 2002.
(g)(3) Amended Fee Schedule dated February 18, 2004 to the Custodian Agreement dated August 12, 1991 between the Registrant and Wachovia Bank, National Association (now U.S. Bank, National Association) is incorporated herein by reference to exhibit (g)(7) of Post-Effective Amendment No. 69 to the Registrant's Registration Statement on Form N- 1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-04- 000095 on March 1, 2004.
(g)(4) Amendment and Assignment dated August 8, 2006 to the Custodian Agreement dated August 12, 1991 between the Registrant and Wachovia Bank, N.A., (now U.S. Bank, National Association) assigning the Custodian Agreement to U.S. Bank, National Association is incorporated herein by reference to exhibit (g)(5) of Post-Effective Amendment No. 92 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-06-000367 on August 28, 2006.
(g)(5) Amendment dated March 14, 2007 to the Custodian Agreement dated August 12, 1991 between the Registrant and U.S. Bank, National Association is incorporated herein by reference to exhibit (g)(8) of Post-Effective Amendment No. 97 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000146 on April 30, 2007.
(g)(6) Custodian Agreement dated November 13, 2007 between the Registrant and Union Bank of California, N.A., to be filed by amendment.
(g)(7) Custody Agreement dated February 3, 2003 between the Registrant and National City Bank is incorporated herein by reference to exhibit (g)(5) of Post-Effective Amendment No. 66 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-03-000264 on April 30, 2003.
(g)(8) Amended Fee Schedule dated February 19, 2003 to the Custody Agreement dated February 3, 2003 between the Registrant and National City Bank is incorporated herein by reference to exhibit (g)(6) of Post-Effective Amendment No. 68 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-03-000630 on December 29, 2003.
(g)(9) Custody Agreement between the Registrant and The Northern Trust Company, to be filed by amendment.
(g)(10) Global Custodial Services Agreement between the Registrant and Citi Global Transaction Services, to be filed by amendment.
(g)(11) Amended Fee Schedule to the Global Custodial Services Agreement between the Registrant and Citi Global Transaction Services, to be filed by amendment.
(g)(12) Custodial Services Agreement between the Registrant and The Bank of New York Mellon, relating to the Cambiar Aggressive Value Fund and Cambiar Opportunity Fund, to be filed by amendment.
(h)(1) Administration Agreement dated November 14, 1991, as amended and restated November 12, 2002, between the Registrant and SEI Investments Global Funds Services is incorporated herein by reference to exhibit (h)(50) of Post-Effective Amendment No. 62 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-03-000108 on February 28, 2003.
(h)(2) Consent to Assignment and Assumption of Administration Agreement dated June 1, 1996 between the Registrant and SEI Financial Management Corporation (now, SEI Investments Global Funds Services) is incorporated herein by reference to exhibit (9)(f) of Post-Effective Amendment No. 28 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0000950109-97-001691 on February 27, 1997.
(h)(3) Administration Agreement dated November 14, 1991, as amended and restated November 12, 2002, between the Registrant and SEI Investments Global Funds Services, is filed herewith.
(h)(4) Transfer Agency and Services Agreement dated October 1, 2000, as amended and restated February 21, 2001, between the Registrant and Forum Shareholder Services, LLC (now, Citi Fund Services, LLC) is incorporated herein by reference to exhibit (h)(24) of Post-Effective Amendment No. 98 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000218 on June 15, 2007.
(h)(5) AML Delegation Amendment dated May 20, 2003 to the Transfer Agency and Services Agreement dated October 1, 2000, as amended and restated February 21, 2001, between the Registrant and Forum Shareholder Services, LLC (now, Citi Fund Services, LLC) is incorporated herein by reference to exhibit (h)(64) of Post-Effective Amendment No. 68 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-03-000630 on December 29, 2003.
(h)(6) Transfer Agency and Service Agreement dated January 15, 2003 between the Registrant and State Street Bank and Trust Company is incorporated herein by reference to exhibit (h)(62) of Post-Effective Amendment No. 67 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-03-000495 on August 28, 2003.
(h)(7) AML Delegation Amendment dated May 20, 2003 to the Transfer Agency and
Service Agreement dated January 15, 2003 between the Registrant and State
Street Bank and Trust Company is incorporated herein by reference to exhibit
(h)(65) of Post-Effective Amendment No. 68 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR
Accession No. 0001135428-03-000630 on December 29, 2003.
(h)(8) Agency Agreement dated April 1, 2006 between the Registrant and DST Systems, Inc., is incorporated herein by reference to exhibit (h)(7) of Post-Effective Amendment No. 190 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000262 on May 23, 2012.
(h)(9) Amendment dated April 1, 2009 to the Agency Agreement dated April 1, 2006 between the Registrant and DST Systems, Inc., to be filed by amendment.
(h)(10) Amended Fee Schedule, dated August 30, 2012, to the Agency Agreement dated April 1, 2006 between the Registrant and DST Systems, Inc. is incorporated herein by reference to exhibit (h)(10) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(h)(11) Transfer Agency Agreement dated May 31, 2007 between the Registrant and UMB Fund Services, Inc. is incorporated herein by reference to exhibit (h)(30) of Post-Effective Amendment No. 99 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000376 on August 28, 2007.
(h)(12) Transfer Agency Services Agreement between the Registrant and Atlantic Fund Services, to be filed by amendment.
(h)(13) Transfer Agency Agreement between the Registrant and Boston Financial Data Services, Inc., to be filed by amendment.
(h)(14) Amendment to the Transfer Agency Agreement between the Registrant and Boston Financial Data Services, Inc., to be filed by amendment.
(h)(15) Shareholder Services Plan, relating to the Investor Class Shares of the Cambiar Funds, is incorporated herein by reference to exhibit (m)(6) of Post-Effective Amendment No. 71 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-04-000154 on April 16, 2004.
(h)(16) Revised Exhibit A to the Shareholder Services Plan, relating to Investor Class Shares of the Cambiar Funds, is incorporated herein by reference to exhibit (h)(11) of Post- Effective Amendment No. 168 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11- 000735 on November 30, 2011.
(h)(17) Shareholder Services Plan, relating to the Retail Class Shares of the Edgewood Growth Fund, is incorporated herein by reference to exhibit (h)(42) of Post-Effective Amendment No. 89 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-06-000148 on April 14, 2006.
(h)(18) Shareholder Services Plan, relating to Institutional Shares of the Westwood Funds, is incorporated herein by reference to exhibit (h)(36) of Post-Effective Amendment No. 100 to the Registrants Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000518 on November 15, 2007.
(h)(19) Exhibit A to the Shareholder Services Plan, relating to the Institutional Shares of the Westwood Funds, is incorporated herein by reference to exhibit (h)(14) of Post-Effective Amendment No. 140 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000194 on March 28, 2011.
(h)(20) Shareholder Services Plan, relating to the Investor Class Shares of the Sands Capital Global Growth Fund, is incorporated herein by reference to exhibit (h)(30) of Post- Effective Amendment No. 120 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC on March 1, 2010.
(h)(21) Shareholder Services Plan, relating to R Class Shares of the AlphaOne Funds, is incorporated herein by reference to exhibit (h)(17) of Post-Effective Amendment No. 141 to the Registrant's
Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000199 on March 30, 2011.
(h)(22) Shareholder Services Plan, relating to Investor Class and Institutional Shares of the CBRE Clarion Long/Short Fund, is incorporated herein by reference to exhibit (h)(17) of Post-Effective Amendment No. 171 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000783 on December 28, 2011.
(h)(23) Shareholder Services Plan, relating to the A Shares of the Citi Market Pilot 2020 Fund, Citi Market Pilot 2030 Fund and Citi Market Pilot 2040 Fund, to be filed by amendment.
(h)(24) Shareholder Services Plan, relating to the Investor Class Shares of the Hamlin High Dividend Equity Fund, is incorporated herein by reference to exhibit (h)(22) of Post- Effective Amendment No. 183 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000195 on March 28, 2012.
(h)(25) Shareholder Services Plan, relating to the Investor Class Shares of the Thomson Horstmann & Bryant MicroCap Fund, is incorporated herein by reference to exhibit (h)(23) of Post-Effective Amendment No. 184 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000197 on March 28, 2012.
(h)(26) Shareholder Services Plan, relating to the Institutional Shares of the Cornerstone Advisors Global Public Equity Fund, Cornerstone Advisors Income Opportunities Fund, Cornerstone Advisors Public Alternatives Fund and Cornerstone Advisors Real Assets Fund, is incorporated herein by reference to exhibit (h)(26) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(i) Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP, relating to the Acadian Family of Funds, AIG Money Market Fund, AlphaOne Family of Funds, CBRE Clarion Long/Short Fund, Cornerstone Family of Funds, Edgewood Growth Fund, FMC Family of Funds, Haverford Quality Growth Stock Fund, ICM Small Company Portfolio, Loomis Sayles Full Discretion Institutional Securitized Fund, LSV Family of Funds, McKee International Equity Portfolio, Rice Hall James Family of Funds, Sands Capital Global Growth Fund, TS&W Family of Funds, Thomson Horstmann & Bryant MicroCap Fund, UA S&P 500 Index Fund and Westwood Family of Funds, is filed herewith.
(j)(1) Consent of independent registered public accounting firm, Ernst & Young LLP, is filed herewith.
(j)(2) Consent of independent registered public accounting firm, PricewaterhouseCoopers LLP, is filed herewith.
(j)(3) Consent of independent registered public accounting firm, Deloitte & Touche LLP, is filed herewith.
(k) Not Applicable.
(l) Not Applicable.
(m)(1) Distribution Plan dated August 8, 1994, as amended August 14, 2000, is incorporated herein by reference to exhibit (m) of Post-Effective Amendment No. 41 to the Registrant's Registration Statement
on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0000950109-00-004829 on December 13, 2000.
(m)(2) Schedule A, as last amended November 14, 2012, to the Distribution Plan dated August 8, 1994, as amended August 14, 2000, is incorporated herein by reference to exhibit (m)(2) of Post-Effective Amendment No. 202 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000594 on December 19, 2012.
(m)(3) Distribution Plan dated September 17, 2002, relating to Investor Shares of the Rice Hall James Mid Cap Portfolio, is incorporated herein by reference to exhibit (m)(6) of Post- Effective Amendment No. 74 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-04- 000242 on June 1, 2004.
(m)(4) Amended Schedule A dated November 13, 2007 to the Distribution Plan dated September 17, 2002, relating to Investor Shares of the Rice Hall James Mid Cap Portfolio, is incorporated herein by reference to exhibit (m)(4) of Post-Effective Amendment No. 111 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-09-000276 on July 2, 2009.
(n)(1) Registrant's Amended and Restated Rule 18f-3 Plan dated February 21, 2007 (including Schedules and Certificates of Class Designation thereto) is incorporated herein by reference to exhibit (n) of Post-Effective Amendment No. 127 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-10-000392 on September 3, 2010.
(n)(2) Revised Schedule F and Certificates of Class Designation to the Registrant's Amended and Restated Rule 18f-3 Plan dated February 21, 2007, relating to the Westwood Family of Funds, are incorporated herein by reference to exhibit (n)(2) of Post-Effective Amendment No. 202 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000594 on December 19, 2012.
(n)(3) Schedule I and Certificates of Class Designation to the Registrant's Amended and Restated Rule 18f-3 Multiple Class Plan dated February 21, 2007, relating to the AlphaOne Family of Funds, are incorporated herein by reference to exhibit (n)(4) of Post- Effective Amendment No. 141 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000199 on March 30, 2011.
(n)(4) Revised Schedule C to the Registrant's Amended and Restated Rule 18f-3 Plan dated February 21, 2007, relating to the Cambiar Funds, is incorporated herein by reference to exhibit (n)(5) of Post-Effective Amendment No. 168 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000735 on November 30, 2011.
(n)(5) Schedule J and Certificates of Class Designation to the Registrant's Amended and Restated Rule 18f-3 Plan dated February 21, 2007, relating to the CBRE Clarion Long/Short Fund, to be filed by amendment.
(n)(6) Schedule K and Certificates of Class Designation to the Registrant's Amended and Restated Rule 18f-3 Plan dated February 21, 2007, relating to the Citi Market Pilot 2020 Fund, Citi Market Pilot 2030 Fund and Citi Market Pilot 2040 Fund, is incorporated herein by reference to exhibit (n)(7) of Post-Effective Amendment No. 190 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000262 on May 23, 2012.
(n)(7) Schedule N and Certificate of Class Designation to the Registrant's Amended and Restated Rule 18f-3 Plan dated February 21, 2007, relating to the Harvest China All Assets Fund and the Harvest Intermediate Bond Fund , is incorporated herein by reference to exhibit (n)(8) of Post-Effective Amendment No. 200 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000571 on December 7, 2012.
(o) Not Applicable.
(p)(1) Registrant's Code of Ethics dated November 2007 is incorporated herein by reference to exhibit (h)(36) of Post-Effective Amendment No. 100 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000518 on November 15, 2007.
(p)(2) HGK Asset Management, Inc. Revised Code of Ethics dated October 23, 2009 is incorporated herein by reference to exhibit (h)(30) of Post-Effective Amendment No. 120 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC on March 1, 2010.
(p)(3) LSV Asset Management Revised Code of Ethics dated January 19, 2007 is incorporated herein by reference to exhibit (p)(3) of Post-Effective Amendment No. 97 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000146 on April 30, 2007.
(p)(4) Cambiar Investors LLC Revised Code of Ethics dated January 2012 is incorporated herein by reference to exhibit (p)(4) of Post-Effective Amendment No. 194 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000394 on August 28, 2012.
(p)(5) Investment Counselors of Maryland, LLC Revised Code of Ethics dated March 13, 2007 is incorporated herein by reference to exhibit (p)(8) of Post-Effective Amendment No. 97 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000146 on April 30, 2007.
(p)(6) C.S. McKee, LLP Revised Code of Ethics, to be filed by amendment.
(p)(7) Thompson, Siegel & Walmsley, LLC Revised Code of Ethics, is filed herewith.
(p)(8) First Manhattan Co. Revised Code of Ethics dated December 2006 is incorporated herein by reference to exhibit (p)(11) of Post-Effective Amendment No. 97 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000146 on April 30, 2007.
(p)(9) Haverford Investment Management, Inc. Revised Code of Ethics, is filed herewith.
(p)(10) AIG Asset Management (U.S.), LLC Revised Code of Ethics dated September 13, 2007 is incorporated herein by reference to exhibit (p)(12) of Post-Effective Amendment No. 100 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-07-000518 on November 15, 2007.
(p)(11) Rice Hall James & Associates, LLC Revised Code of Ethics, is filed herewith.
(p)(12) Acadian Asset Management, LLC Revised Code of Ethics is incorporated herein by reference to exhibit (p)(12) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(13) Westwood Management Corp. Revised Code of Ethics is filed herewith
(p)(14) Edgewood Management LLC Revised Code of Ethics, to be filed by amendment.
(p)(15) PNC Capital Advisors, LLC Code of Ethics dated October 8, 2009 is incorporated herein by reference to exhibit (h)(30) of Post-Effective Amendment No. 120 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC on March 1, 2010.
(p)(16) Pennant Management, Inc. Code of Ethics is incorporated herein by reference to exhibit (p)(19) of Post-Effective Amendment No. 112 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-09-000365 on August 21, 2009.
(p)(17) Sands Capital Management, LLC Code of Ethics is incorporated herein by reference to exhibit (p)(19) of Post-Effective Amendment No. 117 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-10-000009 on January 15, 2010.
(p)(18) AlphaOne Investment Services, LLC Code of Ethics dated May 1, 2011, is incorporated herein by reference to exhibit (p)(20) of Post-Effective Amendment No. 158 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-11-000517 on September 16, 2011.
(p)(19) Loomis, Sayles & Company L.P. Code of Ethics is filed herewith. (p)(20) CBRE Clarion Securities LLC Code of Ethics is filed herewith. (p)(21) SKY Harbor Capital Management, LLC Code of Ethics is filed herewith.
(p)(22) Hamlin Capital Management, LLC Code of Ethics, is incorporated herein by reference to exhibit (p)(23) of Post-Effective Amendment No. 184 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000197 on March 28, 2012.
(p)(23) Thomson Horstmann & Bryant, Inc. Code of Ethics, is incorporated herein by reference to exhibit (p)(24) of Post-Effective Amendment No. 184 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000197 on March 28, 2012.
(p)(24) SEI Investments Distribution Co. Code of Ethics as revised January 1, 2012 is incorporated herein by reference to exhibit (p)(25) of Post-Effective Amendment No. 200 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000571 on December 7, 2012.
(p)(25) Citigroup First Investment Management Americas LLC Code of Ethics is incorporated herein by reference to exhibit (p)(26) of Post-Effective Amendment No. 190 to the Registrant's Registration
Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000262 on May 23, 2012.
(p)(26) Cornerstone Advisors, Inc. Code of Ethics is incorporated herein by reference to exhibit (p)(27) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(27) Parametric Portfolio Associates LLC Code of Ethics is incorporated herein by reference to exhibit (p)(28) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(28) Harris Associates L.P. Code of Ethics is incorporated herein by reference to exhibit (p)(29) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(29) Thornburg Investment Management Inc Code of Ethics is incorporated herein by reference to exhibit (p)(30) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(30) Marsico Capital Management, LLC Revised Code of Ethics is filed herewith.
(p)(31) Turner Investments, L.P. Code of Ethics is incorporated herein by reference to exhibit (p)(32) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(32) Cramer Rosenthal McGlynn LLC Code of Ethics is incorporated herein by reference to exhibit (p)(33) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(33) Fairpointe Capital LLC Code of Ethics is incorporated herein by reference to exhibit (p)(34) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(34) Phocas Financial Corporation Code of Ethics is incorporated herein by reference to exhibit (p)(35) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(35) TCW Investment Management Company Code of Ethics, is to be filed by amendment.
(p)(36) Amendment to the TCW Investment Management Company Code of Ethics is incorporated herein by reference to exhibit (p)(37) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(37) Allianz Global Investors Capital LLC Code of Ethics is incorporated herein by reference to exhibit (p)(38) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(38) Driehaus Capital Management LLC Revised Code of Ethics is filed herewith.
(p)(39) OFI SteelPath, Inc. Code of Ethics is filed herewith.
(p)(40) AlphaSimplex Group, LLC Code of Ethics is incorporated herein by reference to exhibit (p)(41) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(41) AQR Capital Management, LLC Code of Ethics is incorporated herein by reference to exhibit (p)(42) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(42) ClariVest Asset Management LLC Revised Code of Ethics is filed herewith.
(p)(43) Kayne Anderson Capital Advisors, L.P. Code of Ethics is incorporated herein by reference to exhibit (p)(44) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(44) BlackRock Financial Management, LLC Code of Ethics is incorporated herein by reference to exhibit (p)(45) of Post-Effective Amendment No. 193 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000370 on August 22, 2012.
(p)(45) Harvest Global Investments Limited Code of Ethics is incorporated herein by reference to exhibit (p)(46) of Post-Effective Amendment No. 200 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000571 on December 7, 2012.
(q) Powers of Attorney for Ms. Betty L. Krikorian and Messrs. Robert A. Nesher, Michael Lawson, William M. Doran, John K. Darr, George J. Sullivan, Jr., Charles E. Carlbom, James M. Storey, Philip T. Masterson, Mitchell A. Johnson, Bruce Speca and Joseph T. Grause are incorporated herein by reference to exhibit (q) of Post-Effective Amendment No. 179 to the Registrant's Registration Statement on Form N-1A (File No. 33-42484), filed with the SEC via EDGAR Accession No. 0001135428-12-000087 on February 28, 2012.
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT:
Not Applicable.
ITEM 30. INDEMNIFICATION:
Article VIII of the Agreement and Declaration of Trust filed as Exhibit (a) to the Registrant's Registration Statement is incorporated herein by reference. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "1933 Act") may be permitted to trustees, directors, officers and controlling
persons of the Registrant by the Registrant pursuant to the Agreement and Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the SEC, such indemnification is against public policy as expressed in the 1933 Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by trustees, directors, officers or controlling persons of the Registrant in connection with the successful defense of any act, suit or proceeding) is asserted by such trustees, directors, officers or controlling persons in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issues.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS:
The following lists any other business, profession, vocation or employment of a substantial nature in which each investment adviser, and each director, officer or partner of that investment adviser, is or has been engaged within the last two fiscal years for his or her own account or in the capacity of director, officer, employee, partner, or trustee. Unless noted below, none of the investment advisers, and/or director, officer or partner of each investment adviser, is or has been engaged within the last two fiscal years in any other business, profession, vocation or employment of a substantial nature for his or her own account or in the capacity of director, officer, employee, partner or trustee.
ACADIAN ASSET MANAGEMENT LLC
Acadian Asset Management LLC ("Acadian") serves as the investment adviser to
the Acadian Emerging Markets Portfolio and Acadian Emerging Markets Debt Fund
and as an investment sub-adviser to the Cornerstone Advisors Global Public
Equity Fund. The principal address of Acadian is 260 Franklin Street, Boston,
Massachusetts 02110. Acadian is an investment adviser registered under the
Investment Advisers Act of 1940.
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NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
INVESTMENT ADVISER
--------------------------------------------------------------------------------------------------------
Laurent De Greef, Member of Acadian Asset Management Managing Director, asset
Board of Managers (UK) Ltd management
--------------------------------------------------------------------------------------------------------
John Chisholm, Executive Acadian Asset Management
Vice President, CIO, Member Director, asset management
of Board of Managers (UK) Ltd
Acadian Asset Management Director, asset management
--------------------------------------------------------------------------------------------------------
Churchill Franklin, Executive (UK) Ltd
Vice President, COO, Acadian Asset Management
Member of Board of (Australia) Ltd Director, asset management
Managers
Acadian Cayman Limited G.P. Director, asset management
--------------------------------------------------------------------------------------------------------
Ronald Frashure, Chairman, Acadian Asset Management Director, asset management
Member of Board of (Singapore) Pte Ltd
Managers Acadian Cayman Limited G.P. Director, asset management
Director, asset management
Acadian Asset Management
--------------------------------------------------------------------------------------------------------
Mark Minichiello, Executive (UK) Ltd
Vice President, COO,
Treasurer, Secretary, Member Acadian Asset Management
of Board of Managers (Singapore) Pte Ltd Director, asset management
--------------------------------------------------------------------------------------------------------
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NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
INVESTMENT ADVISER
--------------------------------------------------------------------------------------------------------
Ross Dowd, Executive Vice Acadian Asset Management Director, asset management
President, Head of Client (UK) Ltd
Service, Member of Board of Acadian Cayman Limited G.P. Director, asset management
Managers Acadian Asset Management Director, asset management
(Singapore) Pte Ltd
--------------------------------------------------------------------------------------------------------
Linda Gibson, Member of Director, Executive Vice
Board of Managers President and Head of Global
Distribution - Old Mutual (US)
Holdings Inc. (a holding
company);
Acadian Asset Management LLC
(an investment advisor);
Barrow, Hanley, Mewhinney &
Strauss, LLC (an investment
advisor);
The Campbell Group, Inc. (a
holding company for The
Campbell Group LLC)
Echo Point Investment
Management, LLC (an
investment advisor);
Old Mutual (HFL) Inc. (a
holding company for Heitman Affiliated Directorships
affiliated financial services
firms);
Investment Counselors of
Maryland, LLC (an investment
advisor);
Old Mutual Asset Management
International, Ltd. (an investment
advisor);
Copper Rock Capital Partners,
LLC (an investment advisor);
Old Mutual Investment Partners
(a registered broker-dealer);
Rogge Global Partners plc (an
investment advisor);
Thompson, Siegel & Walmsley
LLC (an investment advisor)
--------------------------------------------------------------------------------------------------------
Matthew Berger, Member of Senior Vice President, Finance
Board of Managers and Affiliate Management - Old
Mutual (US) Holdings Inc. (a
holding company); Affiliated Directorships
Acadian Asset Management LLC
(investment advisor)
--------------------------------------------------------------------------------------------------------
Christopher Hadley, Member Executive Vice President, Head
of Board of Managers of Human Resources - Old
Mutual (US) Holdings Inc. (a Affiliated Directorships
--------------------------------------------------------------------------------------------------------
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NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
INVESTMENT ADVISER
--------------------------------------------------------------------------------------------------------
holding company);
Acadian Asset Management LLC
(an investment advisor)
--------------------------------------------------------------------------------------------------------
Aidan Riordan, Member of Executive Vice President, Head
Board of Managers of Affiliate Management - Old
Mutual (US) Holdings Inc. (a
holding company);
Acadian Asset Management LLC Affiliated Directorships
(an investment advisor);
Copper Rock Capital Partners
LLC (an investment advisor);
Echo Point Investment
Management, LLC (an
investment advisor)
--------------------------------------------------------------------------------------------------------
Stephen Belgrad, Member of Director, Chief Financial Officer
Board of Managers and Executive Vice President-
Old Mutual (US) Holdings Inc.
(a holding company); Acadian
Asset Management LLC (an
investment advisor);
Old Mutual Asset Management Affiliated Directorships
International, Ltd. (an investment
advisor)
--------------------------------------------------------------------------------------------------------
AIG ASSET MANAGEMENT (U.S.), LLC
AIG Asset Management (U.S.), LLC ("AIG") serves as the investment adviser for
the AIG Money Market Fund. The principal address of AIG is 80 Pine Street, New
York, New York 10005. AIG is an investment adviser registered under the
Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of AIG has
engaged in any other business, profession, vocation or employment of a
substantial nature for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
ALLIANZ GLOBAL INVESTORS U.S. LLC
Allianz Global Investors U.S. LLC ("Allianz Global Investors U.S.") serves as
an investment sub-adviser for the Cornerstone Advisors Global Public Equity
Fund. The principal address of Allianz Global Investors U.S. is 1633 Broadway,
New York, NY 10019. Allianz Global Investors U.S. is an investment adviser
registered under the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of Allianz
Global Investors U.S. has engaged in any other business, profession, vocation
or employment of a substantial nature for his or her own account or in the
capacity of director, officer, employee, partner or trustee.
ALPHAONE INVESTMENT SERVICES, LLC
AlphaOne Investment Services, LLC ("AlphaOne") serves as the investment adviser
for the AlphaOne Small Cap Growth Fund, AlphaOne Micro Cap Equity Fund and
AlphaOne U.S. Equity Long Short Fund. The principal address of AlphaOne is One
Tower Bridge, 100 Front Street, Suite 1250, West
20
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Conshohocken, PA 19428. AlphaOne is an investment adviser registered under the
Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of AlphaOne
has engaged in any other business, profession, vocation or employment of a
substantial nature for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
ALPHASIMPLEX GROUP, LLC
AlphaSimplex Group, LLC ("AlphaSimplex") serves as an investment sub-adviser
for the Cornerstone Advisors Public Alternatives Fund. The principal address of
AlphaSimplex is One Cambridge Center, Cambridge, Massachusetts 02142.
AlphaSimplex is an investment adviser registered under the Investment Advisers
Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Andrew W. Lo Massachusetts Institute of
Chief Investment Technology (MIT) -- Sloan School of Charles E. and Susan T. Harris
Strategist, Chairman of the Management Professor
Board 100 Main Street
E62-618
Cambridge, MA 02142 Director of the Laboratory for
United States Financial Engineering
--------------------------------------------------------------------------------------------------------
AQR CAPITAL MANAGEMENT, LLC
AQR Capital Management, LLC ("AQR") serves as an investment sub-adviser for the
Cornerstone Advisors Public Alternatives Fund. The principal address of AQR is
Two Greenwich Plaza, 3rd Floor, Greenwich, Connecticut 06830. AQR is an
investment adviser registered under the Investment Advisers Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
Lasse Pedersen, NYU Stern School of Business John A. Paulson Professor of
Principal Henry Kaufman Management Center Finance and Alternative
44 West Fourth Street Investments, 2009 -- present (on
New York, NY 10012 leave)
--------------------------------------------------------------------------------
Copenhagen Business School Professor (2011-present)
Howitzvej 60,
2000 Frederiksberg, Denmark
3815 3815
---------------------------------------------------------------------------------
Financial Times Stock Exchange Advisory Board Member (2009-
(FTSE) present)
1270 Avenue of the Americas
New York, NY 10020
---------------------------------------------------------------------------------
NASDAQ OMX Economic Advisory Board
One Liberty Plaza Member (2008-2011)
New York, NY
--------------------------------------------------------------------------------------------------------
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NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
American Finance Association Director (2011-present)
Haas School of Business
University of California
Berkeley, CA 94729-1900
---------------------------------------------------------------------------------
Federal Reserve Bank of New York Member of Monetary Policy
33 Liberty Street Panel (2010-2011)
New York, NY 10045 Member of Liquidity Working
Group (2009-2011)
--------------------------------------------------------------------------------------------------------
John Howard, AllianceBernstein Chief Financial Officer, March
Principal and Chief 1345 Avenue of the Americas 2010 through February 2011
Operating Officer New York, New York 10105
--------------------------------------------------------------------------------------------------------
BLACKROCK FINANCIAL MANAGEMENT, LLC
BlackRock Financial Management, LLC ("BlackRock") serves as an investment
sub-adviser for the Cornerstone Advisors Real Assets Fund. The principal
address of BlackRock is 55 East 52(nd) Street New York, New York 10055.
BlackRock is an investment adviser registered under the Investment Advisers Act
of 1940.
The information required by this Item 31 with respect to each director, officer
or partner of BlackRock for the fiscal years ended October 31, 2011 and 2012 is
incorporated herein by reference to Form ADV filed by BlackRock with the SEC.
CAMBIAR INVESTORS LLC
Cambiar Investors LLC ("Cambiar") serves as the investment adviser to the
Cambiar Opportunity Fund, the Cambiar International Equity Fund, the Cambiar
Small Cap Fund, the Cambiar Aggressive Value Fund, the Cambiar SMID Fund
(formerly, the Cambiar Smid 30 Fund) and the Cambiar Global Select Fund. The
principal address of Cambiar is 2401 East Second Street, Suite 400, Denver,
Colorado 80206. Cambiar is an investment adviser registered under the
Investment Advisers Act of 1940.
For the fiscal years ended April 30, 2011 and 2012, none of the directors,
officers or partners of Cambiar is or has been engaged in any other business,
profession, vocation or employment of a substantial nature for his or her own
account or in the capacity of director, officer, employee, partner or trustee.
CBRE CLARION SECURITIES LLC
CBRE Clarion Securities LLC ("CBRE Clarion") serves as the investment adviser
for the CBRE Clarion Long/Short Fund. The principal address of CBRE Clarion is
201 King of Prussia Road, Suite 600, Radnor, PA 19087. CBRE Clarion is an
investment adviser registered under the Investment Advisers Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
T. Ritson Ferguson CBRE Clarion Global Real Estate Interested Trustee
Income Fund (IGR)
Chief Executive Officer
and Co-Chief Investment c/o 201 King of Prussia Road, Suite
Officer 600, Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
22
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NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
CBRE Clarion Global, Ltd. Director
c/o 201 King of Prussia Road, Suite
600, Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
Joseph P. Smith CBRE Clarion Global, Ltd. Director
Managing Director and c/o 201 King of Prussia Road, Suite
Co-Chief Investment 600, Radnor, PA 19087
Officer
--------------------------------------------------------------------------------------------------------
Jarrett B. Kling Hirtle Callaghan Trust Trustee
Managing Director -- Sales 300 Barr Harbor Dr, Suite 500
and Marketing West Conshohocken, PA 19428
-----------------------------------------------------------------------------
Old Mutual Funds I Trustee (resigned 2012)
4643 South Ulster Street
Suite 600
Denver, CO 80237-2853
-----------------------------------------------------------------------------
Old Mutual Funds II Trustee (resigned 2012)
4643 South Ulster Street
Suite 600
Denver, CO 80237-2853
-----------------------------------------------------------------------------
Boys and Girls Clubs of America National Trustee
1275 Peachtree Street NE
Atlanta, GA 30309-3506
--------------------------------------------------------------------------------------------------------
William Zitelli CBRE Clarion Global Real Estate Chief Compliance Officer
Income Fund (IGR)
General Counsel
c/o 201 King of Prussia Road, Suite
600, Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
Jonathan Blome CBRE Clarion Global Real Estate Chief Financial Officer
Income Fund (IGR)
Chief Financial Officer
c/o 201 King of Prussia Road, Suite
600, Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
23
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CITIGROUP FIRST INVESTMENT MANAGEMENT AMERICAS LLC
Citigroup First Investment Management Americas LLC ("Citi") serves as the
investment adviser for the Citi Market Pilot 2020 Fund, Citi Market Pilot 2030
Fund and Citi Market Pilot 2040 Fund. The principal address of Citi is 388
Greenwich Street, New York, New York 10013. Citi is an investment adviser
registered under the Investment Advisers Act of 1940. [To be completed by
amendment.]
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
CLARIVEST ASSET MANAGEMENT LLC
ClariVest Asset Management LLC ("ClariVest") serves as an investment
sub-adviser for the Cornerstone Advisors Public Alternatives Fund. The
principal address of ClariVest is 11452 El Camino Real, Suite 250, San Diego,
California 92130. ClariVest is an investment adviser registered under the
Investment Advisers Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Richard Rossi Eagle Asset Management Inc. Director, President, Co-Chief
Manager 880 Carillon Parkway Operating Officer
St Petersburg, FL 33716
ClariVest Asset Management LLC Manager
11452 El Camino Real
Suite 250
San Diego, CA 92130
--------------------------------------------------------------------------------------------------------
J. Cooper Abbott Eagle Asset Management Inc. Director, Executive Vice
Manager 880 Carillon Parkway President - Investments, Co-Chief
St Petersburg, FL 33716 Operating Officer
ClariVest Asset Management LLC Manager
11452 El Camino Real
Suite 250
San Diego, CA 92130
--------------------------------------------------------------------------------------------------------
Courtland James Eagle Asset Management Inc. Vice President, Business
Manager 880 Carillon Parkway Development
St Petersburg, FL 33716
ClariVest Asset Management LLC Manager
11452 El Camino Real
Suite 250
San Diego, CA 92130
--------------------------------------------------------------------------------------------------------
CORNERSTONE ADVISORS, INC.
Cornerstone Advisors, Inc. ("Cornerstone") serves as the investment adviser for
the Cornerstone Advisors Global Public Equity, Cornerstone Advisors Income
Opportunities, Cornerstone Advisors Public Alternatives and Cornerstone
Advisors Real Assets Funds. The principal address of Cornerstone is 225
24
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108th Avenue NE, Suite 400, Bellevue, Washington 98004-5782. Cornerstone is an
investment adviser registered under the Investment Advisers Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
William Savoy BSquare Director
Director / Shareholder 110 -- 110(th) Avenue NE, Suite 200
Bellevue, WA 98004
--------------------------------------------------------------------------------------------------------
William Cornelius Tum-a-Lum Lumber Interim CEO
Director 432 SE Dorion
Pendleton, OR 97801
--------------------------------------------------------------------------------------------------------
Anne Farrell Seattle Foundation President Emeritus
Director 1200 -- 5(th) Avenue, Suite 1300
Seattle, WA 98101
REI Director
6750 S 228(th)
Kent, WA 98032
--------------------------------------------------------------------------------------------------------
CRAMER ROSENTHAL MCGLYNN LLC
Cramer Rosenthal McGlynn LLC ("CRM") serves as an investment sub-adviser for
the Cornerstone Advisors Global Public Equity Fund. The principal address of
CRM is 520 Madison Avenue, 20th Floor, New York, NY 10022. CRM is an investment
adviser registered under the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of CRM has
engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
C. S. MCKEE, L.P.
C. S. McKee, L.P. ("C.S. McKee") serves as the investment adviser to the McKee
International Equity Portfolio. The principal address of C.S. McKee is One
Gateway Center, Pittsburgh, Pennsylvania 15222. C.S. McKee is an investment
adviser registered under the Investment Advisers Act of 1940. The information
listed below is for the fiscal years ended October 31, 2011 and 2012.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
Gregory M. Melvin Dartmouth Capital, Inc. President
Chief Investment Officer 750 Stonegate Drive
Wexford, PA 15090
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
DRIEHAUS CAPITAL MANAGEMENT LLC
Driehaus Capital Management LLC ("Driehaus") serves as an investment
sub-adviser for the Cornerstone Advisors Global Public Equity Fund. The
principal address of Driehaus is 25 East Erie Street, Chicago, IL 60611.
Driehaus is an investment adviser registered under the Investment Advisers Act
of 1940. The information listed below is as of December 31, 2012 and is true
for fiscal years 2011 and 2012 unless otherwise noted.
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NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER
INVESTMENT ADVISER COMPANY
--------------------------------------------------------------------------------------------------------
Richard H. Driehaus Driehaus Capital Holdings LLC* Chairman
Chairman and Chief
Investment Officer Driehaus Mutual Funds** Trustee
Driehaus Securities LLC*** Chairman
--------------------------------------------------------------------------------------------------------
Robert H. Gordon Driehaus Capital Holdings LLC* President and Chief Executive
President and Chief Officer
Executive Officer Driehaus Mutual Funds** President since 2011; Senior
Vice President from 2006 to
2011.
Driehaus Securities LLC*** President and Chief Executive
Officer
--------------------------------------------------------------------------------------------------------
Janet L. McWilliams Driehaus Capital Holdings LLC* Senior Vice President and
Managing Director, Secretary since 2012.
Secretary and General Driehaus Mutual Funds** Assistant Vice President since
Counsel since 2012; 2006; Chief Compliance Officer
Assistant Vice President and from 2006 to 2012.
Chief Compliance Officer Driehaus Securities LLC*** Managing Director, Secretary
from 2006 to 2012. and General Counsel since 2012;
Assistant Vice President and
Chief Compliance Officer from
2006 to 2012.
--------------------------------------------------------------------------------------------------------
Michelle L. Cahoon Driehaus Capital Holdings LLC* Vice President, Treasurer and
Managing Director, Chief Financial Officer
Treasurer and Chief Driehaus Mutual Funds** Vice President and Treasurer
Financial Officer
Driehaus Securities LLC*** Managing Director, Treasurer
and Chief Financial Officer
--------------------------------------------------------------------------------------------------------
Stephen T. Weber Driehaus Securities LLC*** Managing Director, Sales and
Managing Director, Sales Relationship Management
and Relationship
Management
--------------------------------------------------------------------------------------------------------
Kaaren Sagastume Driehaus Securities LLC*** Managing Director, IT,
Managing Director, IT, Operations and Trading
Operations and Trading
--------------------------------------------------------------------------------------------------------
Thomas M. Seftenberg Driehaus Securities LLC*** Managing Director, Relationship
Managing Director, Management and Marketing
Relationship Management
and Marketing
--------------------------------------------------------------------------------------------------------
Michael R. Shoemaker Driehaus Mutual Funds** Assistant Vice President and
Assistant Vice President and Chief Compliance Officer
Chief Compliance Officer Driehaus Securities LLC*** Assistant Vice President and
since 2012; Associate Chief Chief Compliance Officer
Compliance Officer from Pacific Investment Management Compliance Officer from 2010
2011 to 2012; Senior Company LLC to 2011.
Compliance Analyst from 860 Newport Center Drive
--------------------------------------------------------------------------------------------------------
26
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2007 to 2010. Newport Beach, CA 92660
Michael P. Kailus Driehaus Mutual Funds** Assistant Secretary and Anti-
Assistant Secretary since Money Laundering Compliance
2010. Officer since 2010.
Driehaus Securities LLC*** Assistant Secretary since 2010.
Superfund USA, LLC Associate General Counsel from
850 W Jackson Blvd, Ste. 600 2005 to 2010.
Chicago, IL 60607
--------------------------------------------------------------------------------------------------------
* Driehaus Capital Holdings LLC, located at 25 East Erie Street, Chicago, IL
60611, is a holding company and is the majority owner of Driehaus Capital
Management LLC and Driehaus Securities LLC.
** Driehaus Mutual Funds, located at 25 East Erie Street, Chicago, IL 60611, is
an open-end management investment company registered with the U.S. Securities
and Exchange Commission under the Investment Company Act of 1940.
*** Driehaus Securities LLC, located at 25 East Erie Street, Chicago, IL 60611,
is a limited-purpose broker-dealer registered with the Financial Industry
Regulatory Authority ("FINRA") and the U.S. Securities and Exchange
Commission.
EDGEWOOD MANAGEMENT LLC
Edgewood Management LLC ("Edgewood") serves as the investment adviser to the
Edgewood Growth Fund. The principal address of Edgewood is 350 Park Avenue,
18th Floor, New York, New York 10022-6057. Edgewood is an investment adviser
registered under the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of Edgewood
has engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
FAIRPOINTE CAPITAL LLC
Fairpointe Capital LLC ("Fairpointe") serves as an investment sub-adviser for
the Cornerstone Advisors Global Public Equity Fund. The principal address of
Fairpointe is One N. Franklin Street, Suite 3300, Chicago, IL 60606. Fairpointe
is an investment adviser registered under the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of Fairpointe
has engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
FIRST MANHATTAN CO.
First Manhattan Co. ("FMC") serves as the investment adviser for the FMC Select
Fund and FMC Strategic Value Fund. The principal address of FMC is 437 Madison
Avenue, New York, New York 10022. Effective March 25, 2013, the principal place
of business will be 399 Park Avenue, New York, NY 10022-7001. FMC is an
investment adviser registered under the Investment Advisers Act of 1940. The
information listed below is for the fiscal years ended October 31, 2010 and
2011.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER
INVESTMENT ADVISER
COMPANY
--------------------------------------------------------------------------------------------------------
David Sanford Gottesman, Berkshire Hathaway, Inc. Member, Board of Directors
--------------------------------------------------------------------------------------------------------
27
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NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER
INVESTMENT ADVISER
COMPANY
--------------------------------------------------------------------------------------------------------
Senior Managing Director American Museum of Natural Trustee
History
Mount Sinai Center Trustee
Yeshiva University Trustee
--------------------------------------------------------------------------------------------------------
Daniel Rosenbloom, Senior NYU Medical Center Associate Trustee
Managing Director
National Foundation for Facial Trustee
Reconstruction
--------------------------------------------------------------------------------------------------------
Charles M. Rosenthal, Senior Carnegie Hall Trustee
Managing Director
Marine Biological Laboratory Trustee
Arthur Joel Stainman, Senior Ark Restaurants Corp. Member, Board of Directors
Managing Director
Rider University Trustee
--------------------------------------------------------------------------------------------------------
Robert W. Gottesman, Chief Gruss Foundation Trustee
Executive Officer and Senior
Managing Director
--------------------------------------------------------------------------------------------------------
William F. Guardenier, John Hart Hunter Foundation Trustee
Senior Managing Director
New Hampton School Trustee
--------------------------------------------------------------------------------------------------------
HAMLIN CAPITAL MANAGEMENT, LLC
Hamlin Capital Management, LLC ("Hamlin") serves as the investment adviser for
the Hamlin High Dividend Equity Fund. The principal address of Hamlin is 477
Madison Avenue, Suite 520, New York, NY 10022. Hamlin is an investment adviser
registered under the Investment Advisers Act of 1940. [To be completed by
amendment.]
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
HARRIS ASSOCIATES L.P.
Harris Associates L.P. ("Harris") is a registered investment adviser under the
Investment Advisers Act of 1940. Harris serves as an investment sub-adviser for
the Cornerstone Advisors Global Public Equity Fund. The directors and executive
officers of Harris, or Harris Associates, Inc. ("HAI"), its general partner,
have had as their sole business, profession, vocation or employment during the
past two years only their duties as executive officers/employees of Harris;
Harris' ultimate parent company, Natixis Global Asset Management ("NGAM"); HAI;
Harris Associates Investment Trust ("HAIT"), a U.S. registered investment
company consisting of the seven Oakmark Funds for which Harris serves as the
advisor and sponsor; and/or Harris Associates Securities L.P. ("HASLP"), an
affiliated limited-purpose
28
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broker-dealer of which Harris is a limited partner. The business address of
Harris, HAI, HAIT and HASLP is Two North LaSalle Street, Suite 500, Chicago,
Illinois 60602.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER
INVESTMENT ADVISER COMPANY
--------------------------------------------------------------------------------------------------------
Robert M. Levy HAI Director, Chairman and Chief
Chairman, Chief Investment Investment Officer, Domestic
Officer, Domestic Equity and Equity
Portfolio Manager HAIT Executive Vice President
HASLP Chairman and Chief Investment
Officer, Domestic Equity
--------------------------------------------------------------------------------------------------------
Kristi L. Rowsell HAI Director and President
President HAIT Trustee and President
HASLP President
--------------------------------------------------------------------------------------------------------
Anthony P. Coniaris HAIT Portfolio Manager (Oakmark
Portfolio Manager and Analyst Select Fund), since 2013
John N. Desmond HAI Chief Operating Officer
Chief Operating Officer HAIT Vice President
HASLP Chief Operating Officer
--------------------------------------------------------------------------------------------------------
Thomas E. Herman HAI Chief Financial Officer and
Chief Financial Officer and Treasurer
Treasurer HAIT Principal Financial Officer, since
2011
HASLP Chief Financial Officer and
Treasurer
--------------------------------------------------------------------------------------------------------
David G. Herro HAI Director, Vice President and
Vice President, Chief Chief Investment Officer,
Investment Officer, International Equity
International Equity, Portfolio HAIT Vice President and Portfolio
Manager and Analyst Manager (Oakmark Global Select
Fund, Oakmark International
Fund and Oakmark International
Small Cap Fund)
--------------------------------------------------------------------------------------------------------
Edward S. Loeb HAI Vice President, since 2012
Vice President and Portfolio
Manager
--------------------------------------------------------------------------------------------------------
Colin P. McFarland HAI Chief Compliance Officer
Chief Compliance Officer
--------------------------------------------------------------------------------------------------------
Clyde S. McGregor HAI Vice President
Vice President and Portfolio HAIT Vice President and Portfolio
Manager Manager (Oakmark Equity and
Income Fund and Oakmark
Global Fund)
--------------------------------------------------------------------------------------------------------
Thomas W. Murray HAI Vice President and Director of
Vice President, Director of Domestic Research, since 2012
Domestic Research, Portfolio HAIT Vice President and Portfolio
Manager and Analyst Manager (Oakmark Select Fund),
since 2013
--------------------------------------------------------------------------------------------------------
Michael J. Neary HAI Managing Director, Marketing
--------------------------------------------------------------------------------------------------------
29
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Vice President and Managing and Client Relations
Director, Marketing and Client HAIT Vice President
Relations
--------------------------------------------------------------------------------------------------------
William C. Nygren HAI Vice President
Vice President, Portfolio HAIT Vice President and Portfolio
Manager and Analyst Manager (Oakmark Fund,
Oakmark Select Fund and
Oakmark Global Select Fund)
--------------------------------------------------------------------------------------------------------
Janet L. Reali HAI Director, Vice President, General
Vice President, General Counsel and Secretary
Counsel and Secretary HAIT Vice President, Secretary and
Chief Legal Officer
HASLP General Counsel and Chief
Compliance Officer
--------------------------------------------------------------------------------------------------------
Robert A. Taylor HAI Vice President and Director of
Vice President, Director of International Research
International Research, HAIT Vice President and Portfolio
Portfolio Manager and Analyst Manager (Oakmark Global Fund
and Oakmark International Fund)
--------------------------------------------------------------------------------------------------------
Pierre Servant HAI Director
Natixis Global Asset Chief Executive Officer and
Management Member of Executive Committee
21 quai d'Austerlitz 75013
Paris, France
--------------------------------------------------------------------------------------------------------
John Hailer HAI Director
Natixis Global Asset President and Chief Executive
Management LLC Officer
399 Boylston Street
Boston, MA 02116
--------------------------------------------------------------------------------------------------------
HARVEST GLOBAL INVESTMENTS LIMITED
Harvest Global Investments Limited ("Harvest") serves as the investment adviser
for the Harvest China All Assets Fund and the Harvest Intermediate Bond Fund.
The principal address of Harvest is 31/F One Exchange Square, 8 Connaught
Place, Central Hong Kong. Harvest is an investment adviser registered under the
Investment Advisers Act of 1940. [To be completed by amendment.]
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
HAVERFORD FINANCIAL SERVICES, INC.
Haverford Financial Services, Inc. ("Haverford") serves as the investment
adviser for the Haverford Quality Growth Stock Fund. The principal address of
Haverford is Three Radnor Corporate Center, Suite 450, Radnor, Pennsylvania
19087-4546. Haverford is an investment adviser registered under the Investment
Advisers Act of 1940. The information listed below is for the fiscal years
ended October 31, 2011 and 2012.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
George W. Connell The Haverford Trust Company Vice Chairman & Indirect Owner
--------------------------------------------------------------------------------------------------------
30
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NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Vice Chairman & Owner 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Haverford Trust Securities, Inc. Vice Chairman & Indirect Owner
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Drexel Morgan & Co. CEO,President & Owner
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Drexel Morgan Capital Advisers, Director, Indirect Owner
Inc.
3 Radnor Corporate Center, Suite
305
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
Joseph J. McLaughlin The Haverford Trust Company Chairman & CEO
Chairman, CEO & President 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Haverford Trust Securities, Inc. Registered Representative
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
Binney H. C. Wietlisbach The Haverford Trust Company President
Executive Vice President 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Haverford Trust Securities, Inc. CEO & President
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
Henry B. Smith The Haverford Trust Company Vice President & CIO
Vice President and CIO 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Haverford Trust Securities, Inc. Registered Representative
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
31
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--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
David Brune The Haverford Trust Company Vice President
Vice President 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Haverford Trust Securities, Inc. Registered Representative
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
John H. Donaldson The Haverford Trust Company Vice President
Vice President 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
Timothy A. Hoyle The Haverford Trust Company Vice President
Vice President 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Haverford Trust Securities, Inc. Registered Representative
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
Jeffrey M. Bagley The Haverford Trust Company Vice President
Vice President 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
--------------------------------------------------------------------------------------------------------
MarieElena V. Ness The Haverford Trust Company VP & Chief Compliance Officer
Chief Compliance Officer 3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Haverford Trust Securities, Inc. VP & Chief Compliance Officer
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Drexel Morgan & Co. VP & Chief Compliance Officer
3 Radnor Corporate Center, Suite
450
Radnor, PA 19087
Regulatory Compliance Assistance, Sole Member
LLC
--------------------------------------------------------------------------------------------------------
32
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INVESTMENT COUNSELORS OF MARYLAND, LLC
Investment Counselors of Maryland, LLC ("ICM") serves as the investment adviser
to the ICM Small Company Portfolio. The principal address of ICM is 803
Cathedral Street, Baltimore, Maryland 21201. ICM is an investment adviser
registered under the Investment Advisers Act of 1940. The information listed
below is for the fiscal years ended October 31, 2011 and 2012.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
William V. Heaphy, CFA Cognapse, Inc. Director
CIO, Portfolio Manager 458 Main Street
Reisterstown, MD 21136
--------------------------------------------------------------------------------------------------------
KAYNE ANDERSON CAPITAL ADVISORS, L.P.
Kayne Anderson Capital Advisors, L.P. ("KACALP") serves as an investment
sub-adviser for the Cornerstone Advisors Real Assets Fund. The principal
address of KACALP is 1800 Avenue of the Stars, Third Floor, Los Angeles,
California 90067. KACALP is an investment adviser registered under the
Investment Advisers Act of 1940.
During the last two fiscal years, the KACALP portfolio manager responsible for
the management of the Cornerstone Advisors Real Assets Fund has not engaged in
any other business profession, vocation or employment of a substantial nature
in the capacity of director, officer, employee, partner or trustee.
LOOMIS, SAYLES & COMPANY, L.P.
Loomis, Sayles & Company, L.P. ("Loomis Sayles") serves as the investment
adviser to the Loomis Sayles Full Discretion Institutional Securitized Fund.
The address of Loomis Sayles is One Financial Center, Boston, Massachusetts
02111. Loomis Sayles is an investment adviser registered under the Investment
Advisers Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
LSV ASSET MANAGEMENT
LSV Asset Management ("LSV") serves as the investment adviser to the LSV Value
Equity Fund, the LSV Conservative Core Equity Fund and the LSV Conservative
Value Equity Fund. LSV serves as the investment sub-adviser to the Cornerstone
Advisors Global Public Equity Fund. The address of LSV is 155 North Wacker
Drive, Suite 4600, Chicago, Illinois 60606. LSV is an investment adviser
registered under the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of LSV has
engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
MARSICO CAPITAL MANAGEMENT, LLC
Marsico Capital Management, LLC ("Marsico") serves as an investment sub-adviser
for the Cornerstone Advisors Global Public Equity Fund. The principal address
of Marsico is 1200 17th Street, Suite 1600,
33
|
Denver, CO 80202. Marsico is an investment adviser registered under the
Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of Marsico
has engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
OFI STEELPATH, INC.
OFI SteelPath, Inc. ("OFI SteelPath") serves as an investment sub-adviser for
the Cornerstone Advisors Income Opportunities Fund. The principal address of
OFI SteelPath is 2100 McKinney Ave., Suite 1401, Dallas, Texas 75201. OFI
SteelPath is an investment adviser registered under the Investment Advisers Act
of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Gabriel Hammond GKD Index Partners, LLC Majority Partner
CEO, Portfolio Manager 1717 McKinney Avenue
Suite 1450
Dallas, TX 75202
PostRock Energy Corp. Past Board Member (2011)
210 Park Ave.
Suite 2750
Oklahoma City, OK 73102
--------------------------------------------------------------------------------------------------------
James McCain Ranger Funds Investment Trust Independent Trustee
CCO 300 Crescent Court, Ste. 1100
Dallas, TX 75201
--------------------------------------------------------------------------------------------------------
PARAMETRIC PORTFOLIO ASSOCIATES LLC
Parametric Portfolio Associates LLC ("Parametric") serves as an investment
sub-adviser for the Cornerstone Advisors Global Public Equity Fund. The
principal address of Parametric is 1918 Eighth Avenue, Suite 3100, Seattle,
Washington 98101. Parametric is an investment adviser registered under the
Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of Parametric
has engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
PENNANT MANAGEMENT, INC.
Pennant Management, Inc. ("Pennant") serves as the investment adviser to the
USFS Funds Limited Duration Government Fund and USFS Funds Tactical Asset
Allocation Fund. The address of Pennant is 11270 West Park Place, Suite 1025,
Milwaukee, Wisconsin 53224. Pennant is an investment adviser registered under
the Investment Advisers Act of 1940. The information listed below is for the
fiscal years ended December 31, 2010 and 2011.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
INVESTMENT ADVISER
--------------------------------------------------------------------------------------------------------
Mark A. Elste U.S. FIDUCIARY SERVICES SENIOR EXECUTIVE VICE PRESIDENT, COO
--------------------------------------------------------------------------------------------------------
34
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NAME AND POSITION WITH NAME OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
INVESTMENT ADVISER
--------------------------------------------------------------------------------------------------------
CIO GreatBanc Trust Company Director
Salem Trust Company Director
USF Affiliate Services, Inc. Director
Waretech, Inc. Director
CIB Marine Bancshares, Inc. Director
(CIBM)
--------------------------------------------------------------------------------------------------------
Scott M. Conger, Chief Stone Pillar Advisors, Ltd Director, Treasury Analysis
Compliance Officer, Senior
Vice President AMCORE Bank, N.A. Vice President & Assistant Treasurer
Michael Welgat U.S. Fiduciary Services CEO, President, Director
Director GreatBanc Trust Company Director
Salem Trust Company Director
USF Affiliate Services, Inc. Director
Waretech, Inc. Director
--------------------------------------------------------------------------------------------------------
Todd C. Johnson U.S. Fiduciary Services Director
Director Todd C. Johnson CPA
Affinity, Inc. Director
DigiTenna, Inc. Director
Jaws, Inc. Director & Officer
PB Properties, LLC Managing Partner
ALJ Family Partnership General Partner
Carl & Irma Swenson Director & Officer
Foundation Director & Officer
RAJ Ministries Director / Officer
New Beginnings Are
Possible
--------------------------------------------------------------------------------------------------------
PHOCAS FINANCIAL CORPORATION
Phocas Financial Corporation ("Phocas") serves as an investment sub-adviser for
the Cornerstone Advisors Global Public Equity Fund. The principal address of
Phocas is 980 Atlantic Avenue, Suite 106, Alameda, CA 94501. Phocas is an
investment adviser registered under the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of Phocas has
engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
PNC CAPITAL ADVISORS, LLC
PNC Capital Advisors, LLC ("PNC Capital") serves as investment adviser to the
United Association S&P 500 Index Fund. PNC Capital was formed as a result of
the merger of Allegiant Asset Management Company, the former investment adviser
to the United Association S&P 500 Index Fund, with its affiliate, PNC Capital
Advisors, Inc. PNC Capital is a Delaware limited liability company and an
indirect wholly owned subsidiary of The PNC Financial Services Group, Inc.
("PNC"), a publicly held bank holding company, and is registered as an
investment adviser under the Investment Advisers Act of 1940.
Effective January 1, 2009, Allegiant Asset Management Company became an
indirect wholly owned subsidiary of PNC. Prior to such date, Allegiant Asset
Management Company was an indirect wholly
35
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owned subsidiary of National City Corporation. PNC Capital also provides
investment advisory to other institutions and individuals and provides
investment advisory and administrative services to other investment companies.
The information listed below is for the fiscal years ended October 31, 2011 and
2012.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Kevin A. McCreadie PNC Bank Executive Vice President
Director, President and Chief 22 Delaware Avenue
Executive Officer Wilmington DE 19801
PNC Funds, PNC Advantage Funds President
and PNC IG Fund GP, LLC
One East Pratt Street -- 5th Floor
Baltimore, MD 21202
--------------------------------------------------------------------------------------------------------
Robert Q. Reilly PNC Bank Executive Vice President
Director 22 Delaware Avenue
Wilmington DE 19801
--------------------------------------------------------------------------------------------------------
Bryan K. Garlock PNC Bank Executive Vice President &
Director 22 Delaware Avenue Chief Operating Officer
Wilmington DE 19801
--------------------------------------------------------------------------------------------------------
Jennifer A. Laclair PNC Bank Chief Financial Officer, Asset
Director 22 Delaware Avenue Management Group division
Wilmington DE 19801
--------------------------------------------------------------------------------------------------------
RICE HALL JAMES & ASSOCIATES, LLC
Rice Hall James & Associates, LLC ("Rice Hall James") serves as the investment
adviser to the Rice Hall James Micro Cap Portfolio, Rice Hall James Mid Cap
Portfolio and Rice Hall James Small Cap Portfolio. The principal address of
Rice Hall James is 600 West Broadway, Suite 1000, San Diego, California
92101-3383. Rice Hall James is an investment adviser registered under the
Investment Advisers Act of 1940.
For the fiscal years ended October 31, 2011 and 2012, none of the directors,
officers or partners of Rice Hall James is or has been engaged in any other
business, profession, vocation or employment of a substantial nature for his or
her own account or in the capacity of director, officer, employee, partner or
trustee.
SANDS CAPITAL MANAGEMENT, LLC
Sands Capital Management, LLC ("Sands Capital") serves as the investment
adviser to the Sands Capital Global Growth Fund. The principal address of Sands
Capital is 1101 Wilson Boulevard, Suite 2300, Arlington, VA 22209. Sands
Capital is an investment adviser registered under the Investment Advisers Act
of 1940.
For the fiscal years ended October 31, 2011 and 2012, none of the directors,
officers or partners of Sands Capital is or has been engaged in any other
business, profession, vocation or employment of a substantial nature for his or
her own account or in the capacity of director, officer, employee, partner or
trustee.
SKY HARBOR CAPITAL MANAGEMENT, LLC
SKY Harbor Capital Management LLC ("SKY Harbor") serves as investment
sub-adviser for the Registrant's Westwood Short Duration High Yield Fund. The
principal address of SKY Harbor is 20
36
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Horseneck Lane, Greenwich, CT 06830. SKY Harbor is an investment adviser
registered with the SEC under the Investment Advisers Act of 1940.
SKY Harbor's Board consists of three management directors who are the
co-founders of the firm and three outside directors. For the fiscal years ended
October 31, 2011 and 2012, none of the management directors, officers or
employees of SKY Harbor is or has been engaged in any other business,
profession, vocation or employment of a substantial nature for his or her own
account or in the capacity of director, officer, employee, partner or trustee.
The outside directors of SKY Harbor are engaged in other activities as set
forth in the chart below.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Meryl D. Hartzband Stone Point Capital, LLC Chief Investment Officer
Director 20 Horseneck Lane
Greenwich, CT 06830 USA
--------------------------------------------------------------------------------------------------------
David J. Wermuth Stone Point Capital, LLC Senior Principal and General
Director 20 Horseneck Lane Counsel
Greenwich, CT 06830 USA
--------------------------------------------------------------------------------------------------------
Fayez S. Muhtadie Stone Point Capital, LLC Principal
Director 20 Horseneck Lane
Greenwich, CT 06830 USA
--------------------------------------------------------------------------------------------------------
THOMSON HORSTMANN & BRYANT, INC.
Thomson Horstmann & Bryant, Inc. ("THB") serves as the investment adviser for
the Thomson Horstmann & Bryant MicroCap Fund. The principal address of THB is
501 Merritt 7, Norwalk, CT 06851. THB is an investment adviser registered under
the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of Thomson
Horstmann & Bryant, Inc. has engaged in any other business, profession,
vocation or employment of a substantial nature in the capacity of director,
officer, employee, partner or trustee.
TCW INVESTMENT MANAGEMENT COMPANY
TCW Investment Management Company ("TIMCO") serves as an investment sub-adviser
for the Cornerstone Advisors Global Public Equity Fund. The principal address
of TIMCO is 865 South Figueroa Street, Suite 1800, Los Angeles, CA 90017. TIMCO
is an investment adviser registered under the Investment Advisers Act of 1940.
During the last two fiscal years, no director, officer or partner of TIMCO has
engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
THOMPSON, SIEGEL & WALMSLEY LLC
Thompson, Siegel & Walmsley LLC ("TS&W") serves as the investment adviser to
the TS&W Equity Portfolio and the TS&W Fixed Income Portfolio. The principal
address of TS&W is 6806 Paragon Place, Suite 300, P.O. Box 6883, Richmond,
Virginia 23230. TS&W is an investment adviser registered under the Investment
Advisers Act of 1940.
37
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During the last two fiscal years, no director, officer or partner of TS&W has
engaged in any other business, profession, vocation or employment of a
substantial nature in the capacity of director, officer, employee, partner or
trustee.
THORNBURG INVESTMENT MANAGEMENT INC
Thornburg Investment Management Inc ("Thornburg") serves as an investment
sub-adviser to the Cornerstone Advisors Global Public Equity Fund. The
principal address of Thornburg is 2300 North Ridgetop Road, Santa Fe, New
Mexico, 87506. Thornburg is an investment adviser registered under the
Investment Advisers Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Garrett Thornburg, Thornburg Securities Corporation, Chairman
Chairman 2300 North Ridgetop Road, Santa Fe
NM 87506
Thornburg Investment Trust, 2300 Chairman
North Ridgetop Road, Santa Fe NM
87506
WEL, Inc., 2300 North Ridgetop Chairman, controlling interest
Road, Santa Fe NM 87506
Chamisa Energy, 2300 North Wel, Inc. is the managing
Ridgetop Road, Santa Fe NM 87506 member and has a controlling
interest
--------------------------------------------------------------------------------------------------------
TURNER INVESTMENTS, L.P.
Turner Investments, L.P. ("Turner") serves as an investment sub-adviser for the
Cornerstone Advisors Global Public Equity and Cornerstone Advisors Public
Alternatives Funds. The principal address of Turner is 1205 Westlakes Drive,
Suite 100, Berwyn, Pennsylvania 19312-2414. Turner is an investment adviser
registered under the Investment Advisers Act of 1940.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Thomas R. Trala Turner Funds President and Trustee
Chief Operating and Financial P.O. Box 219805
Officer, Executive Managing Kansas City, MO 64121-9805
Director Turner International Ltd. Trustee
12 Plumtree Court
London, EC4A 4HT
Turner Investment Partners Chief Executive Officer and
(Australia) Pty. Ltd. Chief Financial Officer
c/o Compliance & Risk Services
Pty. Ltd.
Level 9, 63 Exhibition Street
Melbourne, Victoria 3000
Australia
--------------------------------------------------------------------------------------------------------
Thomas R. Trala Widener School of Business Advisory Board
Chief Operating and Financial Administration
Officer, Executive Managing 1 University Place
Director Chester, PA 19013
--------------------------------------------------------------------------------------------------------
38
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--------------------------------------------------------------------------------------------------------
Mark D. Turner Turner International Ltd. Trustee
President, Senior 12 Plumtree Court
Portfolio Manager London, EC4A 4HT
The Haverford School Trustee
450 Lancaster Avenue,
Haverford, PA 19041
CityTeam International (Chester) Board of Director
11 West 7(th) Street,
Chester, PA 19013
The Philadelphia Ronald Board of Director
McDonald House
3925 Chestnut Street,
Philadelphia, PA 19104-3110
--------------------------------------------------------------------------------------------------------
Robert E. Turner Bradley University Board of Directors
Chairman, Chief Investment 1501 W. Bradley Ave
Officer Peoria, IL 61625
Delaware Valley Friends School Board Member
19 E. Central Avenue,
Paoli, PA 19301
University of Notre Dame School Advisory Council
of Architecture
110 Bond Hall,
Notre Dame, IN 46556
Drexel University President's Leadership Council
3141 Chestnut Street
Philadelphia, PA 19104
--------------------------------------------------------------------------------------------------------
Christopher K. McHugh Philadelphia University Trustee
Vice Chairman, Senior Portfolio 4201 Henry Avenue,
Manager Philadelphia, PA 19144-5497
--------------------------------------------------------------------------------------------------------
WESTWOOD MANAGEMENT CORP.
Westwood Management Corp. ("Westwood") serves as the investment adviser for the
Westwood Income Opportunity Fund, Westwood SMidCap Fund, Westwood SMidCap Plus
Fund, Westwood LargeCap Value Fund, Westwood SmallCap Value Fund, Westwood
Dividend Growth Fund, Westwood Short Duration High Yield Fund, Westwood Global
Equity Fund, Westwood Global Dividend Fund, Westwood Emerging Markets Fund and
Westwood Emerging Markets Plus Fund. The principal address of Westwood is 200
Crescent Court, Suite 1200, Dallas, Texas 75201. Westwood is an investment
adviser registered under the Investment Advisers Act of 1940. The information
listed below is for the fiscal year ended 2012.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Brian Casey Westwood Holdings Group, Inc.* President and Chief Executive
President and Chief (NYSE: WHG) Officer and Director
Executive Officer and 200 Crescent Court, Suite 1200
Director Dallas, TX 75201
Westwood Trust** President and Director
200 Crescent Court, Suite 1200
Dallas, TX 75201
--------------------------------------------------------------------------------------------------------
39
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NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Westwood International Advisors Inc. (A) Chief Executive Officer
161 Bay Street, Suite 3950
Toronto, Ontario M5J 2S1
--------------------------------------------------------------------------------------------------------
Mark R. Freeman, CFA Westwood Holdings Group, Inc.* Chief Investment Officer
Executive Vice President (NYSE: WHG)
and Chief Investment 200 Crescent Court, Suite 1200
Officer Dallas, TX 75201
--------------------------------------------------------------------------------------------------------
Mark Wallace Westwood Holdings Group, Inc.* Chief Financial Officer
Chief Financial Officer (NYSE: WHG)
200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood Advisors, LLC*** Chief Financial Officer
One Pacific Place
1125 South 103(rd) Street, Ste. 580
Omaha, NE 68124
--------------------------------------------------------------------------------------------------------
Sylvia L. Fry Westwood Holdings Group, Inc.* Chief Compliance Officer
Chief Compliance Officer (NYSE: WHG)
200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood Trust** Chief Compliance Officer
200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood Advisors, LLC*** Chief Compliance Officer
One Pacific Place
1125 South 103(rd) Street, Ste. 580
Omaha, NE 68124
--------------------------------------------------------------------------------------------------------
* Westwood Management Corp., Westwood Trust, Westwood Advisors, LLC, and
Westwood International Advisors Inc. are wholly owned subsidiaries of Westwood
Holdings Group, Inc., a publicly traded company on the NYSE (NYSE: WHG).
** Westwood Trust provides trust and custodial services and participation in
common trust funds that it sponsors to institutions and high net worth
individuals.
*** Westwood Advisors, LLC (formerly McCarthy Group Advisors, LLC) is an SEC
registered investment adviser located in Omaha, NE that manages investment
Limited Liability Companies and an investment Limited Partnership.
A Westwood International Advisors Inc. is a Canadian Corporation located in
Toronto, Ontario that is registered with the Ontario Securities Commission as a
Portfolio Manager and Exempt Market Dealer.
The information listed below is for the fiscal year ended October 31, 2011.
--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Susan Byrne Westwood Holdings Group, Inc.* Co-Chief Investment Officer
Chief Investment Officer and (NYSE: WHG) and Chairman of the Board
Chairman of the Board 200 Crescent Court, Suite 1200
Dallas, TX 75201
--------------------------------------------------------------------------------------------------------
40
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--------------------------------------------------------------------------------------------------------
NAME AND POSITION WITH NAME AND PRINCIPAL BUSINESS CONNECTION WITH OTHER
INVESTMENT ADVISER ADDRESS OF OTHER COMPANY COMPANY
--------------------------------------------------------------------------------------------------------
Brian Casey Westwood Holdings Group, Inc.* President and Chief Executive
President and Chief Executive (NYSE: WHG) Officer and Director
Officer and Director 200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood Trust** President and Director
200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood International Advisors Inc. (A) Chief Executive Officer
161 Bay Street, Suite 3950
Toronto, Ontario M5J 2S1
--------------------------------------------------------------------------------------------------------
Mark R. Freeman, CFA Westwood Holdings Group, Inc.* Co-Chief Investment Officer
Co-Chief Investment Officer (NYSE: WHG)
200 Crescent Court, Suite 1200
Dallas, TX 75201
--------------------------------------------------------------------------------------------------------
William R. Hardcastle Westwood Holdings Group, Inc.* Chief Financial Officer
Chief Financial Officer (NYSE: WHG)
200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood Advisors, LLC*** Chief Financial Officer
One Pacific Place
1125 South 103(rd) Street, Ste. 580
Omaha, NE 68124
--------------------------------------------------------------------------------------------------------
Sylvia L. Fry Westwood Holdings Group, Inc.* Chief Compliance Officer
Chief Compliance Officer (NYSE: WHG)
200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood Trust** Chief Compliance Officer
200 Crescent Court, Suite 1200
Dallas, TX 75201
Westwood Advisors, LLC*** Chief Compliance Officer
One Pacific Place
1125 South 103(rd) Street, Ste. 580
Omaha, NE 68124
--------------------------------------------------------------------------------------------------------
|
* Westwood Management Corp., Westwood Trust, Westwood Advisors, LLC, and Westwood International Advisors LLC are wholly owned subsidiaries of Westwood Holdings Group, Inc., a publicly traded company on the NYSE (NYSE: WHG).
** Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals.
*** Westwood Advisors, LLC (formerly McCarthy Group Advisors, LLC) is an SEC registered investment adviser located in Omaha, NE that manages investment Limited Liability Companies and an investment Limited Partnership.
A Westwood International Advisors Inc. is a Canadian Corporation located in Toronto, Ontario that is registered with the Ontario Securities Commission as a Portfolio Manager and Exempt Market Dealer.
ITEM 32. PRINCIPAL UNDERWRITERS
(a) Furnish the name of each investment company (other than the Registrant) for which each principal underwriter currently distributing the securities of the Registrant also acts as a principal underwriter, distributor or investment adviser.
Registrant's distributor, SEI Investments Distribution Co. (the "Distributor"), acts as distributor for:
SEI Daily Income Trust July 15, 1982 SEI Liquid Asset Trust November 29, 1982 SEI Tax Exempt Trust December 3, 1982 SEI Institutional Managed Trust January 22, 1987 SEI Institutional International Trust August 30, 1988 The Advisors' Inner Circle Fund II January 28, 1993 Bishop Street Funds January 27, 1995 SEI Asset Allocation Trust April 1, 1996 SEI Institutional Investments Trust June 14, 1996 CNI Charter Funds April 1, 1999 Causeway Capital Management Trust September 20, 2001 ProShares Trust November 14, 2005 Community Reinvestment Act Qualified Investment Fund January 8, 2007 SEI Alpha Strategy Portfolios, LP June 29, 2007 TD Asset Management USA Funds July 25, 2007 SEI Structured Credit Fund, LP July 31, 2007 Wilshire Mutual Funds, Inc. July 12, 2008 Wilshire Variable Insurance Trust July 12, 2008 Global X Funds October 24, 2008 ProShares Trust II November 17, 2008 Exchange Traded Concepts Trust (f/k/a FaithShares Trust) August 7, 2009 Schwab Strategic Trust October 12, 2009 RiverPark Funds September 8, 2010 Adviser Managed Trust Fund December 10, 2010 Huntington Strategy Shares July 26, 2011 New Covenant Funds March 30, 2012 Cambria ETF Trust August 30, 2012 Pyxis Funds I September 25, 2012 KKR Series Trust October 3, 2012 KKR Alternative Corporate Opportunities Fund October 3, 2012 KKR Alternative Corporate Opportunities Fund P October 3, 2012 KraneShares Trust December 18, 2012 |
The Distributor provides numerous financial services to investment managers, pension plan sponsors, and bank trust departments. These services include portfolio evaluation, performance measurement and consulting services ("Funds Evaluation") and automated execution, clearing and settlement of securities transactions ("MarketLink").
(b) Furnish the Information required by the following table with respect to each director, officer or partner of each principal underwriter named in the answer to Item 25 of Part B. Unless otherwise noted, the business address of each director or officer is Oaks, PA 19456.
POSITION AND OFFICE POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
William M. Doran Director --
Edward D. Loughlin Director --
Wayne M. Withrow Director --
Kevin P. Barr President & Chief Executive Officer --
Maxine J. Chou Chief Financial Officer, Chief Operations Officer,
& Treasurer --
Karen E. LaTourette Chief Compliance Officer, Anti-Money Laundering
Officer & Assistant Secretary --
John C. Munch General Counsel & Secretary --
Mark J. Held Senior Vice President --
Lori L. White Vice President & Assistant Secretary --
John P. Coary Vice President & Assistant Secretary --
John J. Cronin Vice President --
Robert M. Silvestri Vice President --
|
ITEM 33. LOCATION OF ACCOUNTS AND RECORDS:
Books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, and the rules promulgated thereunder, are maintained as follows:
(a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3); (6); (8);
(12); and 31a-1 (d), the required books and records are maintained at the
offices of Registrant's custodians:
U.S. Bank, National Association Union Bank of California, N.A.
800 Nicollett Mall 475 Sansome Street
Minneapolis, Minnesota 55402-4302 15(th) Floor
San Francisco, California 94111
National City Bank The Northern Trust Company
National City Center 50 LaSalle Street
1900 East Ninth Street Chicago, Illinois 60675
Cleveland, Ohio 44114
|
(b)/(c) With respect to Rules 31a-1(a); 31a-1 (b)(1),(4); (2)(C) and (D); (4);
(5); (6); (8); (9); (10); (11); and 31a-1(f), the required books and
records are maintained at the offices of Registrant's administrator:
SEI Investments Global Funds Services
One Freedom Valley Drive
Oaks, Pennsylvania 19456
(c) With respect to Rules 31a-1 (b)(5), (6), (9) and (10) and 31a-1 (f), the required books and records are maintained at the offices of the Registrant's investment advisers:
Acadian Asset Management LLC
260 Franklin Street
Boston, Massachusetts 02110
AIG Asset Management (U.S.), LLC
70 Pine Street, 20th Floor
New York, New York 10270
Allianz Global Investors U.S. LLC
1633 Broadway
New York, NY 10019
AlphaOne Investment Services, LLC
One Tower Bridge
100 Front Street, Suite 1250
West Conshohocken, PA 19428
AlphaSimplex Group, LLC
One Cambridge Center
Cambridge, Massachusetts 02142
AQR Capital Management, LLC
Two Greenwich Plaza, 3rd Floor
Greenwich, Connecticut 06830
BlackRock Financial Management, LLC
55 East 52(nd) Street
New York, NY 10055
Cambiar Investors LLC
2401 East Second Street, Suite 400
Denver, Colorado 80206
CBRE Clarion Securities LLC
201 King of Prussia Road, Suite 600
Radnor, PA 19087
Citigroup First Investment Management Americas LLC
388 Greenwich Street New
York, New York 10013
ClariVest Asset Management LLC
11452 El Camino Real, Suite 250
San Diego, CA 92130
Cornerstone Advisors, Inc.
225 108th Avenue NE, Suite 400
Bellevue, Washington 98004-5782
Cramer Rosenthal McGlynn LLC
520 Madison Avenue, 20th Floor
New York, New York 10022
C.S. McKee, LLP
One Gateway Center
Pittsburgh, Pennsylvania 15222
Driehaus Capital Management LLC
25 East Erie Street
Chicago, Illinois 60611-2703
Edgewood Management LLC
305 Park Avenue, 18th Floor
New York, New York 10022-6057
Fairpointe Capital LLC
One North Franklin Street, Suite 3300
Chicago, Illinois 60606-2401
First Manhattan Co. 437 Madison Avenue
New York, New York 10022-7022
Hamlin Capital Management, LLC
477 Madison Avenue, Suite 520
New York, NY 10022
Harris Associates L.P.
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602-3790
Harvest Global Investments Limited 31/F
One Exchange Square 8 Connaught Place,
Central Hong Kong
Haverford Investment Management, Inc.
Three Radnor Corporate Center, Suite 450
Radnor, Pennsylvania 19087-4546
HGK Asset Management, Inc. Newport Tower
525 Washington Blvd.
Jersey City, New Jersey 07310
Investment Counselors of Maryland, LLC
803 Cathedral Street
Baltimore, Maryland 21201
Kayne Anderson Capital Advisors, L.P.
1800 Avenue of the Stars, Third Floor Los
Angeles, California 90067
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts
02111-2621
LSV Asset Management
155 North Wacker Drive, Suite 4600,
Chicago, Illinois 60606
Marsico Capital Management, LLC 1200 17th Street, Suite 1600 Denver, Colorado 80202-5824
OFI SteelPath, Inc.
2100 McKinney Ave., Suite 1401
Dallas, Texas 75201
Parametric Portfolio Associates LLC
1918 Eighth Avenue, Suite 3100
Seattle, Washington 98109
Pennant Management, Inc.
11270 West Park Place, Suite 1025
Milwaukee, Wisconsin 53224
Phocas Financial Corporation
980 Atlantic Avenue, Suite 106
Alameda, California 94501-1001
PNC Capital Advisors, LLC
One East Pratt Street, 5th Floor
Baltimore, MD 21202
Rice Hall James & Associates, LLC
600 West Broadway, Suite 1000
San Diego, California 92101-3383
Sands Capital Management, LLC
1101 Wilson Boulevard, Suite 2300
Arlington, VA 22209
SKY Harbor Capital Management, LLC
20 Horseneck Lane
Greenwich, CT 06830
TCW Investment Management Company
865 South Figueroa Street, Suite 1800
Los Angeles, CA 90017
Thomson Horstmann & Bryant, Inc.
501 Merritt 7
Norwalk, CT 06851
Thompson, Siegel & Walmsley LLC
6806 Paragon Place, Suite 300
Richmond, Virginia 23230
Thornburg Investment Management Inc
2300 North Ridgetop Road
Santa Fe, New Mexico 87506
Turner Investments, L.P.
1205 Westlakes Drive, Suite 100
Berwyn, Pennsylvania 19312-2414
Westwood Management Corp.
200 Crescent Court, Suite 1200
Dallas, Texas 75201
ITEM 34. MANAGEMENT SERVICES: None.
ITEM 35. UNDERTAKINGS: None.
NOTICE
A copy of the Agreement and Declaration of Trust for The Advisors' Inner Circle Fund (the "Trust") is on file with the Secretary of State of the Commonwealth of Massachusetts and notice is hereby given that this registration statement has been executed on behalf of the Trust by an officer of the Trust as an officer and by its trustees as trustees and not individually and the obligations of or arising out of this registration statement are not binding upon any of the trustees, officers, or shareholders individually but are binding only upon the assets and property of the Trust.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended, and has duly caused this Post-Effective Amendment No. 206 to Registration Statement No. 033-42484 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Oaks, Commonwealth of Pennsylvania on the 28th day of February, 2013.
THE ADVISORS' INNER CIRCLE FUND
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date(s) indicated.
* Trustee February 28, 2012
------------------------
Charles E. Carlbom
* Trustee February 28, 2012
------------------------
John K. Darr
* Trustee February 28, 2012
------------------------
William M. Doran
* Trustee February 28, 2012
------------------------
Joseph T. Grause, Jr.
* Trustee February 28, 2012
------------------------
Mitchell A. Johnson
* Trustee February 28, 2012
------------------------
Betty L. Krikorian
* Trustee February 28, 2012
------------------------
Robert A. Nesher
* Trustee February 28, 2012
------------------------
Bruce Speca
* Trustee February 28, 2012
------------------------
James M. Storey
* Trustee February 28, 2012
------------------------
George J. Sullivan, Jr.
* President February 28, 2012
------------------------
Michael Beattie
* Treasurer, Controller & February 28, 2012
------------------------ Chief Financial Officer
Michael Lawson
*By: /s/ Dianne M. Sulzbach
-----------------------
Dianne M. Sulzbach, pursuant to Powers of Attorney dated
November 16, 2011 and November 30, 2011, incorporated
herein by reference to Exhibit (q) of Post-Effective Amendment
No. 179, filed on February 28, 2012
|
EXHIBIT INDEX
EXHIBIT DESCRIPTION
(d)(9) Revised Schedule to the Investment Advisory Agreement dated March 15, 1999
between the Registrant and LSV Asset Management
(d)(10) Amended and Restated Expense Limitation Agreement dated February 13, 2013
between the Registrant and LSV Asset Management, relating to the LSV Family of
Funds
(d)(20) Expense Limitation Agreement dated March 1, 2008, between the Registrant and Rice
Hall James & Associates, LLC, relating to the Rice Hall James Family of Funds
(d)(23) Investment Advisory Agreement dated January 29, 2010 between the Registrant and
PNC Capital Advisors, LLC, relating to the UA S&P 500 Index Fund
(d)(25) Expense Limitation Agreement dated March 1, 2008, between the Registrant and
Haverford Investment Management, Inc., relating to the Haverford Quality Growth
Stock Fund
(d)(28) Amended and Restated Expense Limitation Agreement dated February 26, 2013,
between the Registrant and Westwood Management Corp., relating to the Westwood
Family of Funds
(d)(29) Investment Sub-Advisory Agreement dated December 27, 2011, between Westwood
Management Corp. and SKY Harbor Capital Management, LLC, relating to the
Westwood Short Duration High Yield Fund
(d)(34) Expense Limitation Agreement dated March 31, 2010, between the Registrant and
Sands Capital Management, LLC, relating to the Sands Capital Global Growth Fund
(d)(35) Investment Advisory Agreement dated March 24, 2011, between the Registrant and
AlphaOne Investment Services, LLC, relating to the AlphaOne Family of Funds
(d)(37) Investment Advisory Agreement dated June 20, 2011, between the Registrant and
Loomis, Sayles & Company, L.P., relating to the Loomis Sayles Full Discretion
Institutional Securitized Fund
(d)(38) Expense Limitation Agreement dated December 15, 2011, between the Registrant and
Loomis, Sayles & Company, L.P., relating to the Loomis Sayles Full Discretion
Institutional Securitized Fund
(d)(39) Investment Advisory Agreement dated December 19, 2011, between the Registrant and
CBRE Clarion Securities LLC, relating to the CBRE Clarion Long/Short Fund
(d)(45) Investment Advisory Agreement dated February 3, 2012, between the Trust and
Thomson Horstmann & Bryant, Inc., relating to the Thomson Horstmann & Bryant
MicroCap Fund
(d)(46) Expense Limitation Agreement dated March 28, 2012, between the Registrant and
Thomson Horstmann & Bryant, Inc., relating to the Thomson Horstmann & Bryant
MicroCap Fund
(h)(3) Administration Agreement dated November 14, 1991, as amended and restated
November 12, 2002, between the Registrant and SEI Investments Global Funds Services
(i) Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP, relating to the
Acadian Family of Funds, AIG Money Market Fund, AlphaOne Family of Funds,
CBRE Clarion Long/Short Fund, Cornerstone Family of Funds, Edgewood Growth
Fund, FMC Family of Funds, Haverford Quality Growth Stock Fund, ICM Small
Company Portfolio, Loomis Sayles Full Discretion Institutional Securitized Fund, LSV
Family of Funds, McKee International Equity Portfolio, Rice Hall James Family of
Funds, Sands Capital Global Growth Fund, TS&W Family of Funds, Thomson
Horstmann & Bryant MicroCap Fund, UA S&P 500 Index Fund and Westwood Family
of Funds
(j)(1) Consent of independent registered public accounting firm, Ernst & Young LLP
(j)(2) Consents of independent registered public accounting firm, PricewaterhouseCoopers
LLP
(j)(3) Consent of independent registered public accounting firm, Deloitte & Touche LLP
(p)(7) Thompson, Siegel & Walmsley, LLC Revised Code of Ethics
(p)(9) Haverford Investment Management, Inc. Revised Code of Ethics
(p)(11) Rice Hall James & Associates, LLC Revised Code of Ethics
(p)(13) Westwood Management Corp. Revised Code of Ethics
(p)(19) Loomis, Sayles & Company L.P. Code of Ethics
(p)(20) CBRE Clarion Securities LLC Code of Ethics
(p)(21) SKY Harbor Capital Management, LLC Code of Ethics
(p)(30) Marsico Capital Management LLC Revised Code of Ethics
(p)(38) Driehaus Capital Management LLC Revised Code of Ethics
(p)(39) OFI SteelPath, Inc. Code of Ethics
(p)(42) ClariVest Asset Management LLC Revised Code of Ethics
|
SCHEDULE
TO THE
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE ADVISORS' INNER CIRCLE FUND
AND
LSV ASSET MANAGEMENT
Pursuant to Article 3, the Trust shall pay the Adviser compensation at an annual rate as follows:
PORTFOLIO FEE (IN BASIS POINTS) --------- --------------------- LSV Value Equity Fund 0.55% of the average daily net assets LSV Conservative Value Equity Fund 0.38% of the average daily net assets LSV Conservative Core Equity Fund 0.38% of the average daily net assets LSV Small Cap Value Fund 0.70% of the average daily net assets |
AMENDED AND RESTATED EXPENSE LIMITATION AGREEMENT
EXPENSE LIMITATION AGREEMENT, effective as of March 1, 2010 by and between LSV Asset Management (the "Adviser") and The Advisors' Inner Circle Fund (the "Trust") (the "Agreement"), on behalf of each series of the Trust set forth in Schedule A attached hereto (each a "Fund," and collectively, the "Funds").
WHEREAS, the Trust is a Massachusetts voluntary association (commonly known as a business trust) organized under an Agreement and Declaration of Trust, dated July 18, 1991, as amended and restated as of February 18, 1997 and amended May 15, 2012 (the "Declaration of Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and each Fund is a series of the Trust;
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory Agreement dated March 15, 1999 (the "Advisory Agreement"), pursuant to which the Adviser provides investment advisory services to each Fund for compensation based on the value of the average daily net assets of each such Fund;
WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of each Fund and its shareholders to maintain the expenses of each Fund at a level below the level to which each such Fund would normally be subject in order to maintain each Fund's expense ratios at the Maximum Annual Operating Expense Limit (as hereinafter defined) specified for such Fund in Schedule A hereto;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses of every character incurred by a Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser (but excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles and other extraordinary expenses not incurred in the ordinary course of such Fund's business) and expenses for which payment has been made through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund ("Fund Operating Expenses"), exceed the Maximum Annual Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser.
1.2. MAXIMUM ANNUAL OPERATING EXPENSE LIMIT. The Maximum Annual Operating Expense Limit with respect to each Fund shall be the amount specified in Schedule A based on a percentage of the average daily net assets of each Fund. That Maximum Annual Operating Expense Limit for each Fund contemplates that certain expenses for each Fund may be paid through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund.
1.3. METHOD OF COMPUTATION. To determine the Adviser's liability with respect to the Excess Amount, each month the Fund Operating Expenses for each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses for any month of a Fund exceed the Maximum Annual Operating Expense Limit of such Fund, the Adviser shall first waive or reduce its investment advisory fee for such month by an amount sufficient to reduce the annualized Fund Operating Expenses to an amount no higher than the Maximum Annual Operating Expense Limit. If the amount of the waived or reduced investment advisory fee for any such month is insufficient to pay the Excess Amount, the Adviser may also remit to the appropriate Fund or Funds an amount that, together with the waived or reduced investment advisory fee, is sufficient to pay such Excess Amount.
1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the investment advisory fees waived or reduced and other payments remitted by the Adviser to the Fund or Funds with respect to the previous fiscal year shall equal the Excess Amount.
2. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall continue in effect with respect to each Fund until the date indicated on Schedule A ("Initial Term End Date") and shall thereafter continue in effect from year to year for successive one-year periods, provided that this Agreement may be terminated, without payment of any penalty, with respect to any Fund:
(i) by the Trust, for any reason and at any time; and
(ii) by the Adviser, for any reason, upon ninety (90) days' prior written notice to the Trust at its principal place of business, such termination to be effective as of the close of business on the last day of the then-current one-year period; or at such earlier time provided that such termination is approved by majority vote of the Trustees and the Independent Trustees voting separately.
3. MISCELLANEOUS.
3.1. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
3.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Trust or the Funds to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Funds. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Declaration of Trust, as amended from time to time, is on
file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
3.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act.
3.4. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the day and year first above written.
THE ADVISORS INNER CIRCLE FUND, on behalf of each series of the Trust set forth in Schedule A
/S/ JOSEPH GALLO -------------------------- Joseph Gallo Vice President and Secretary |
LSV ASSET MANAGEMENT
/S/ TREMAINE ATKINSON --------------------------- Tremaine Atkinson Partner |
Amended and Restated on: February 13, 2013
SCHEDULE A
TO THE EXPENSE LIMITATION AGREEMENT EFFECTIVE MARCH 1, 2010
BY AND BETWEEN LSV ASSET MANAGEMENT AND THE ADVISORS' INNER CIRCLE FUND
MAXIMUM ANNUAL OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds of the Trust:
MAXIMUM
ANNUAL OPERATING
NAME OF FUND EXPENSE LIMIT INITIAL TERM END DATE
------------ ---------------- ---------------------
LSV Conservative Value Equity Fund 0.35% February 28, 2011
LSV Conservative Core Equity Fund 0.35% February 28, 2011
LSV Small Cap Value Fund 0.85% February 28, 2014
|
EXPENSE LIMITATION AGREEMENT
EXPENSE LIMITATION AGREEMENT, effective as of March 1, 2008 by and between Rice Hall James & Associates, LLC (the "Adviser") and The Advisors' Inner Circle Fund (the "Trust") (the "Agreement"), on behalf of each series of the Trust set forth in Schedule A attached hereto (each a "Fund," and collectively, the "Funds").
WHEREAS, the Trust is a Massachusetts voluntary association (commonly known as a business trust) organized under an Agreement and Declaration of Trust, dated July 18, 1991, as amended and restated as of February 18, 1997 (the "Declaration of Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and each Fund is a series of the Trust;
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory Agreement dated June 24, 2003 (the "Advisory Agreement"), pursuant to which the Adviser provides investment advisory services to each Fund for compensation based on the value of the average daily net assets of each such Fund;
WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of each Fund and its shareholders to maintain the expenses of each Fund at a level below the level to which each such Fund would normally be subject in order to maintain each Fund's expense ratios at the Maximum Annual Operating Expense Limit (as hereinafter defined) specified for such Fund in Schedule A hereto;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses of every character incurred by a Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser (but excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of such Fund's business and amounts payable pursuant to any plan adopted in accordance with Rule 12b-1 under the 1940 Act) and expenses for which payment has been made through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund ("Fund Operating Expenses"), exceed the Maximum Annual Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser.
1.2. MAXIMUM ANNUAL OPERATING EXPENSE LIMIT. The Maximum Annual Operating Expense Limit with respect to each Fund shall be the amount specified in Schedule A based on a percentage of the average daily net assets of each Fund. That Maximum Annual Operating Expense Limit for each Fund contemplates that certain expenses for each Fund may be paid through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund.
1.3. METHOD OF COMPUTATION. To determine the Adviser's liability with respect to the Excess Amount, each month the Fund Operating Expenses for each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses for any month of a Fund exceed the Maximum Annual Operating Expense Limit of such Fund, the Adviser shall first waive or reduce its investment advisory fee for such month by an amount sufficient to reduce the annualized Fund Operating Expenses to an amount no higher than the Maximum Annual Operating Expense Limit. If the amount of the waived or reduced investment advisory fee for any such month is insufficient to pay the Excess Amount, the Adviser may also remit to the appropriate Fund or Funds an amount that, together with the waived or reduced investment advisory fee, is sufficient to pay such Excess Amount.
1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the investment advisory fees waived or reduced and other payments remitted by the Adviser to the Fund or Funds with respect to the previous fiscal year shall equal the Excess Amount.
2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1. REIMBURSEMENT. If in any year in which the Advisory Agreement is still in
effect and the estimated aggregate Fund Operating Expenses of such Fund for the
fiscal year are less than the Maximum Annual Operating Expense Limit for that
year, subject to approval by the Trust's Board of Trustees as provided in
Section 2.2 below, the Adviser shall be entitled to reimbursement by such Fund,
in whole or in part as provided below, of the investment advisory fees waived or
reduced and other payments remitted by the Adviser to such Fund pursuant to
Section 1 hereof. The total amount of reimbursement to which the Adviser may be
entitled ("Reimbursement Amount") shall equal, at any time, the sum of all
investment advisory fees previously waived or reduced by the Adviser and all
other payments remitted by the Adviser to the Fund, pursuant to Section 1
hereof, during any of the previous three (3) fiscal years, less any
reimbursement previously paid by such Fund to the Adviser, pursuant to this
Section 2, with respect to such waivers, reductions, and payments. The
Reimbursement Amount shall not include any additional charges or fees
whatsoever, including, e.g., interest accruable on the Reimbursement Amount.
2.2. BOARD APPROVAL. No reimbursement shall be paid to the Adviser with respect to any Fund pursuant to this Section 2 unless the Trust's Board of Trustees has determined in advance that the payment of such reimbursement to the Adviser is in the best interests of such Fund and its shareholders.
2.3. METHOD OF COMPUTATION. To determine each Fund's accrual, if any, to reimburse the Adviser for the Reimbursement Amount, each month the Fund Operating Expenses of each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses of a Fund for any month are less than the Maximum Annual Operating Expense Limit of such Fund, such Fund shall accrue into its net asset value an amount payable to the Adviser sufficient to increase the annualized Fund Operating Expenses of that Fund to an amount no greater than the Maximum Annual Operating Expense Limit of that Fund, provided that such amount paid to
the Adviser will in no event exceed the total Reimbursement Amount. For accounting purposes, amounts accrued pursuant to this Section 2 shall be a liability of the Fund for purposes of determining the Fund's net asset value.
2.4. PAYMENT AND YEAR-END ADJUSTMENT. Amounts accrued pursuant to this Agreement shall be payable to the Adviser as of the last day of each month. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the actual Fund Operating Expenses of a Fund for the prior fiscal year (including any reimbursement payments hereunder with respect to such fiscal year) do not exceed the Maximum Annual Operating Expense Limit.
3. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall continue in effect with respect to all Funds until February 28, 2009 and shall thereafter continue in effect from year to year for successive one-year periods, provided that this Agreement may be terminated, without payment of any penalty, with respect to any Fund:
(i) by the Trust, for any reason and at any time; and
(ii) by the Adviser, for any reason, upon ninety (90) days' prior written notice to the Trust at its principal place of business, such termination to be effective as of the close of business on the last day of the then-current one-year period; or at such earlier time provided that such termination is approved by majority vote of the Trustees and the Independent Trustees voting separately.
4. MISCELLANEOUS.
4.1. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
4.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Trust or the Funds to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Funds. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
4.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values,
and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act.
4.4. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the day and year first above written.
THE ADVISORS INNER CIRCLE FUND,
on behalf of each series of the Trust set forth in Schedule A
/s/ Joseph Gallo ---------------------------- Joseph Gallo Vice President and Secretary |
RICE HALL JAMES & ASSOCIATES
/s/ Kevin T. Hamilton ---------------------------- Kevin T. Hamilton President |
SCHEDULE A
MAXIMUM ANNUAL OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds of the Trust:
NAME OF FUND MAXIMUM ANNUAL
OPERATING EXPENSE LIMIT
Rice Hall James Mid Cap Portfolio -- Investor Shares 1.40%
|
EXHIBIT A
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT (the "Agreement") made as of this 29th day of January, 2010 by and between THE ADVISORS' INNER CIRCLE FUND (the "Trust"), a Massachusetts voluntary association registered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and PNC CAPITAL ADVISORS, LLC (the "Adviser"), a Delaware limited liability company with its principal place of business at Two Hopkins Plaza, Baltimore, Maryland 21201.
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the Adviser to act as investment adviser to the Trust on behalf of the series set forth on Schedule A to this Agreement (the "Fund"), as such Schedule may be amended from time to time upon mutual agreement of the parties, and to provide certain related services, as more fully set forth below, and to perform such services under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall act as investment adviser with respect to the Fund. In such capacity, the Adviser shall, subject to the supervision of the Board, regularly provide the Fund with investment research, advice and supervision and shall furnish continuously an investment program for the Fund, consistent with the respective investment objectives and policies of the Fund. The Adviser shall determine, from time to time, what securities shall be purchased for the Fund, what securities shall be held or sold by the Fund and what portion of the Fund's assets shall be held uninvested in cash, subject always to the provisions of the Trust's Agreement and Declaration of Trust, By-Laws and its registration statement on Form N-1A (the "Registration Statement") under the 1940 Act, and under the Securities Act of 1933, as amended (the "1933 Act"), covering Fund shares, as filed with the Securities and Exchange Commission (the "Commission"), and to the investment objectives, policies and restrictions of the Fund, as each of the same shall be from time to time in effect. To carry out such obligations, the Adviser shall exercise full discretion and act for the Fund in the same manner and with the same force and effect as the Fund itself might or could do with respect to purchases, sales or other transactions, as well as with respect to all other such things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. No reference in this Agreement to the Adviser having full discretionary authority over the Fund's investments shall in any way limit the right of the Board, in its sole discretion, to establish or revise policies in connection with the management of the Fund's assets or to otherwise exercise its right to control the overall management of the Fund.
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of the 1940 Act, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act and the respective rules and regulations thereunder, as applicable, as well as with all other applicable federal and state laws, rules, regulations and case law that relate to the services and
relationships described hereunder and to the conduct of its business as a registered investment adviser. The Adviser also agrees to comply with the objectives, policies and restrictions set forth in the Registration Statement, as amended or supplemented, of the Fund, and with any policies, guidelines, instructions and procedures approved by the Board and provided to the Adviser. In selecting the Fund's portfolio securities and performing the Adviser's obligations hereunder, the Adviser shall cause the Fund to comply with the diversification and source of income requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. The Adviser shall maintain compliance procedures that it reasonably believes are adequate to ensure its compliance with the foregoing. No supervisory activity undertaken by the Board shall limit the Adviser's full responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies with respect to securities that are held by the Fund shall be voted, and the Board has initially determined to delegate the authority and responsibility to vote proxies for the Fund's securities to the Adviser. So long as proxy voting authority for the Fund has been delegated to the Adviser, the Adviser shall exercise its proxy voting responsibilities. The Adviser shall carry out such responsibility in accordance with any instructions that the Board shall provide from time to time, and at all times in a manner consistent with Rule 206(4)-6 under the Advisers Act and its fiduciary responsibilities to the Trust. The Adviser shall provide periodic reports and keep records relating to proxy voting as the Board may reasonably request or as may be necessary for the Fund to comply with the 1940 Act and other applicable law. Any such delegation of proxy voting responsibility to the Adviser may be revoked or modified by the Board at any time.
The Adviser is authorized to instruct the Fund's custodian and/or broker(s) to forward promptly to the Adviser or designate service provider copies of all proxies and shareholder communications relating to securities held in the portfolio of the Fund (other than materials relating to legal proceedings against the Fund). The Adviser may also instruct the Fund's custodian and/or broker(s) to provide reports of holdings in the portfolio of the Fund. The Adviser has the authority to engage a service provided to assist with administrative functions related to voting Fund proxies. The Trust shall direct the Fund's custodian and/or broker(s) to provide any assistance requested by the Adviser in facilitating the use of a service provider. In no event shall the Adviser have any responsibility to vote proxies that are not received on a timely basis. The Trust acknowledges that the Adviser, consistent with the Adviser's written proxy voting policies and procedures, may refrain from voting a proxy if, in the Adviser's discretion, refraining from voting would be in the best interests of the Fund and its shareholders.
(d) RECORDKEEPING. The Adviser shall not be responsible for the provision of administrative, bookkeeping or accounting services to the Fund, except as otherwise provided herein or as may be necessary for the Adviser to supply to the Trust or its Board the information required to be supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all matters pertaining to Fund assets advised by the Adviser required by Rule 31a-1 under the 1940 Act (other than those records being maintained by any administrator, custodian or transfer agent appointed by the Fund) relating to its responsibilities provided hereunder with respect to the Fund, and shall preserve such records for the periods and in a manner prescribed therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records"). The Fund Books and Records shall be available
to the Board at any time upon request, shall be delivered to the Trust upon the termination of this Agreement and shall be available without delay during any day the Trust is open for business.
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide regular reports regarding Fund holdings, and may, on its own initiative, furnish the Trust and its Board from time to time with whatever information the Adviser believes is appropriate for this purpose. The Adviser agrees to notify the Trust promptly if the Adviser reasonably believes that the value of any security held by the Fund may not reflect fair value. The Adviser agrees to provide upon request any pricing information of which the Adviser is aware to the Trust, its Board and/or any Fund pricing agent to assist in the determination of the fair value of any Fund holdings for which market quotations are not readily available or as otherwise required in accordance with the 1940 Act or the Trust's valuation procedures for the purpose of calculating the Fund net asset value in accordance with procedures and methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to cooperate with and provide reasonable assistance to the Trust, any Trust custodian or foreign sub-custodians, any Trust pricing agents and all other agents and representatives of the Trust with respect to such information regarding the Fund as such entities may reasonably request from time to time in the performance of their obligations, provide prompt responses to reasonable requests made by such persons and establish appropriate interfaces with each so as to promote the efficient exchange of information and compliance with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it reasonably believes complies with the requirements of Rule 17j-1 under the 1940 Act, which it has provided to the Trust. The Adviser shall ensure that its Access Persons (as defined in the Adviser's Code of Ethics) comply in all material respects with the Adviser's Code of Ethics, as in effect from time to time. Upon request, the Adviser shall provide the Trust with a (i) copy of the Adviser's current Code of Ethics, as in effect from time to time, and (ii) certification that it has adopted procedures reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Adviser's Code of Ethics. Annually, the Adviser shall furnish a written report, which complies with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to the Trust's Board. The Adviser shall respond to requests for information from the Trust as to violations of the Code by Access Persons and the sanctions imposed by the Adviser. The Adviser shall immediately notify the Trust of any material violation of the Code, whether or not such violation relates to a security held by the Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its respective officers with such periodic reports concerning the obligations the Adviser has assumed under this Agreement as the Trust may from time to time reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust's chief compliance officer immediately upon detection of
(i) any material failure to manage the Fund in accordance with its
investment objectives and policies or any applicable law; or (ii) any
material breach of any of the Fund's or the Adviser's policies, guidelines
or procedures. In addition, the Adviser shall provide a quarterly report
regarding the Fund's compliance with its investment objectives and
policies, applicable law, including, but not limited to the 1940 Act and
Subchapter M of the Code, and the Fund's policies, guidelines or procedures
as applicable to the Adviser's obligations under this Agreement. The
Adviser agrees to correct any such failure promptly and to take any action
that the Board may reasonably request in connection with any
such breach. Upon request, the Adviser shall also provide the officers of the Trust with supporting certifications in connection with such certifications of Fund financial statements and disclosure controls pursuant to the Sarbanes-Oxley Act. The Adviser will promptly notify the Trust in the event (i) the Adviser is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Trust (excluding class action suits in which the Fund is a member of the plaintiff class by reason of the Fund's ownership of shares in the defendant) or the compliance by the Adviser with the federal or state securities laws or (ii) an actual change in control of the Adviser resulting in an "assignment" (as defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will also provide the Trust with any information reasonably requested regarding its management of the Fund required for any meeting of the Board, or for any shareholder report, Form N-CSR, Form N-Q, Form N-PX, Form N-SAR, amended registration statement, proxy statement, or prospectus supplement to be filed by the Trust with the Commission. The Adviser will make its officers and employees available to meet with the Board from time to time on due notice to review its investment management services to the Fund in light of current and prospective economic and market conditions and shall furnish to the Board such information as may reasonably be necessary in order for the Board to evaluate this Agreement or any proposed amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust such information concerning portfolio transactions as may be necessary to enable the Trust or its designated agent to perform such compliance testing on the Fund and the Adviser's services as the Trust may, in its sole discretion, determine to be appropriate. The provision of such information by the Adviser to the Trust or its designated agent in no way relieves the Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(d) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of securities for the account of the Fund, neither the Adviser nor any of its directors, officers or employees will act as a principal or agent or receive any commission except as permitted by the 1940 Act.
(e) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of all orders for the purchase and sale of securities for the Fund's account with brokers or dealers selected by the Adviser. In the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek for the Fund the most favorable execution and net price available under the circumstances. It is also understood that it is desirable for the Fund that the Adviser have access to brokerage and research services provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers, consistent with section 28(e) of the 1934 Act and any Commission staff interpretations thereof. Therefore, the Adviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, subject to review by the Board from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Adviser in connection with its or its affiliates' services to other clients.
(f) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients of the Adviser, the Adviser may, to the extent permitted by applicable law and regulations, aggregate the order for securities to be sold or purchased. In such event, the Adviser will allocate securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction, in the manner the Adviser reasonably considers to be equitable and consistent with its fiduciary obligations to the Fund and to such other clients under the circumstances.
(g) AFFILIATED BROKERS. The Adviser or any of its affiliates may act as broker in connection with the purchase or sale of securities or other investments for the Fund, subject to: (a) the requirement that the Adviser seek to obtain best execution and price within the policy guidelines determined by the Board and set forth in the Fund's current Registration Statement; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers Act; (d) the provisions of the 1934 Act; and (e) other provisions of applicable law. These brokerage services are not within the scope of the duties of the Adviser under this Agreement. Subject to the requirements of applicable law and any procedures adopted by the Board, the Adviser or its affiliates may receive brokerage commissions, fees or other remuneration from the Fund for these services in addition to the Adviser's fees for services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or receive physical possession of cash, securities or other investments of the Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs of providing services hereunder. Other than as herein specifically indicated, the Adviser shall not be responsible for the Fund's expenses, including brokerage and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(h) PROPERLY REGISTERED. The Adviser is registered as an investment adviser under the Advisers Act, and will remain so registered for the duration of this Agreement. The Adviser is not prohibited by the Advisers Act or the 1940 Act from performing the services contemplated by this Agreement, and to the best knowledge of the Adviser, there is no proceeding or investigation that is reasonably likely to result in the Adviser being prohibited from performing the services contemplated by this Agreement. The Adviser agrees to promptly notify the Trust of the occurrence of any event that would disqualify the Adviser from serving as an investment adviser to an investment company. The Adviser is in compliance in all material respects with all applicable federal and state law in connection with its investment management operations.
(i) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of its Form ADV Part I as most recently filed with the SEC and its current Part II and will, promptly after filing any amendment to its Form ADV with the SEC updating its Part II, furnish a copy of such amendments or updates to the Trust. The information contained in the Adviser's Form ADV is accurate and complete in all material respects and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
(j) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed, and will in the future review, the Registration Statement, and any amendments or supplements thereto, the annual or semi-annual reports to shareholders, other reports filed with the Commission and any marketing material of the Fund (collectively the "Disclosure Documents") and represents and warrants that with respect to disclosure about the Adviser, the manner in which the Adviser manages the Fund or information relating directly or indirectly to the Adviser, such Disclosure Documents contain or will contain, as of the date thereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading.
(k) USE OF THE NAME "PNC". The Adviser has the right to use the name "PNC" in connection with its services to the Trust and that, subject to the terms set forth in Section 8 of this Agreement, the Trust shall have the right to use the name "Allegiant" in connection with the management and operation of the Fund. The Adviser is not aware of any threatened or existing actions, claims, litigation or proceedings that would adversely affect or prejudice the rights of the Adviser or the Trust to use the name "PNC."
(l) INSURANCE. The Adviser maintains errors and omissions insurance coverage in an appropriate amount and shall provide prior written notice to the Trust (i) of any material changes in its insurance policies or insurance coverage; or (ii) if any material claims will be made on its insurance policies. Furthermore, the Adviser shall, upon reasonable request, provide the Trust with any information it may reasonably require concerning the amount of or scope of such insurance.
(m) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that it has no arrangement or understanding with any party, other than the Trust, that would influence the decision of the Adviser with respect to its selection of securities for the Fund, and that all selections shall be done in accordance with what is in the best interest of the Fund.
(n) CONFLICTS. The Adviser shall act honestly, in good faith and in the best interests of the Trust including requiring any of its personnel with knowledge of Fund activities to place the interest of the Fund first, ahead of their own interests, in all personal trading scenarios that may involve a conflict of interest with the Fund, consistent with its fiduciary duties under applicable law.
(o) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "PNC". The Adviser grants to the Trust a license to use the name "PNC" (the "Name") as part of the name of the Fund. The foregoing authorization by the Adviser to the Trust to use the Name as part of the name of the Fund is not exclusive of the right of the Adviser itself to use, or to authorize others to use, the Name; the Trust acknowledges and agrees that, as between the Trust and the Adviser, the Adviser has the right to use, or authorize others to use, the Name. The Trust shall (1) only use the Name in a manner consistent with uses approved by the Adviser; (2) use its best efforts to maintain the quality of the services offered using the Name; (3) adhere to such other specific quality control standards as the Adviser may from time to time promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser representative samples of any promotional materials using the Name; and
(b) change the name of the Fund within three months of its receipt of the Adviser's request, or such other shorter time period as may be required under the terms of a settlement agreement or court order, so as to eliminate all reference to the Name and will not thereafter transact any business using the Name in the name of the Fund; provided, however, that the Trust may continue to use beyond such date any supplies of prospectuses, marketing materials and similar documents that the Trust had on the date of such name change in quantities not exceeding those historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Fund shall pay to the Adviser, as compensation for the Adviser's services hereunder, a fee, determined as described in Schedule A that is attached hereto and made a part hereof. Such fee shall be computed daily and paid not less than monthly in arrears by the Fund.
The method for determining net assets of the Fund for purposes hereof shall be the same as the method for determining net assets for purposes of establishing the offering and redemption prices of Fund shares as described in the Fund's prospectus. In the event of termination of this Agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the Adviser is and shall be an independent contractor and, unless otherwise expressly provided herein or otherwise authorized in writing, shall have no authority to act for or represent the Trust or the Fund in any way or otherwise be deemed to be an agent of the Trust or the Fund. If any occasion should arise in which the Adviser gives any advice to its clients concerning the shares of the Fund, the Adviser will act solely as investment counsel for such clients and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in section 2(a)(4) of the 1940 Act); provided that such termination shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
This Agreement shall become effective as of the date executed and shall
remain in full force and effect continually thereafter, subject to renewal as
provided in Section 12(c) and unless terminated automatically as set forth in
Section 11 hereof or until terminated as follows:
(a) The Trust may cause this Agreement to terminate either (i) by vote of its Board or (ii) with respect to the Fund, upon the affirmative vote of a majority of the outstanding voting securities of the Fund; or
(b) The Adviser may at any time terminate this Agreement by not more than sixty (60) days' nor less than thirty (30) days' written notice delivered or mailed by registered mail, postage prepaid, to the Trust; or
(c) This Agreement shall automatically terminate two years from the date of its execution unless its renewal is specifically approved at least annually thereafter by (i) a majority vote of the Trustees, including a majority vote of such Trustees who are not interested persons of the Trust or the Adviser, at a meeting called for the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities of the Fund; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Adviser may continue to serve hereunder as to the Fund in a manner consistent with the 1940 Act and the rules and regulations thereunder; and
(d) Termination of this Agreement pursuant to this Section shall be without payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser shall, immediately upon notice of termination or on such later date as may be specified in such notice, cease all activity on behalf of the Fund and with respect to any of its assets, except as otherwise required by any fiduciary duties of the Adviser under applicable law. In addition, the Adviser shall deliver the Fund Books and Records to the Trust by such means and in accordance with such schedule as the Trust shall direct and shall otherwise cooperate, as reasonably directed by the Trust, in the transition of portfolio asset management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting securities of the Fund" shall have the meaning as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
(b) "Interested persons" and "Assignment" shall have their respective meanings as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER. The Adviser shall indemnify and hold harmless the Trust and all affiliated persons thereof (within the meaning of Section 2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15 of the 1933 Act) (collectively, the "Adviser Indemnitees") against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses) by reason of or arising out of: (a) the Adviser being in material violation of any applicable federal or state law, rule or regulation or any investment policy or restriction set forth in the Fund's Registration Statement or any written guidelines or instruction provided in writing by the Board, (b) the Fund's failure to satisfy the diversification or source of income requirements of Subchapter M of the Code, or (c) the Adviser's misfeasance or negligence generally in the performance of its duties hereunder or its negligent disregard of its obligations and duties under this Agreement.
15. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Certificate of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Certificate of Trust and the Trust's Agreement and Declaration of Trust describe in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
17. CHANGE IN THE ADVISER'S OWNERSHIP. The Adviser agrees that it shall notify the Trust of any anticipated or otherwise reasonably foreseeable change in the ownership of the Adviser within a reasonable time prior to such change being effected.
18. JURISDICTION. This Agreement shall be governed by and construed in accordance with the substantive laws of Commonwealth of Massachusetts and the Adviser consents to the jurisdiction of courts, both state or federal, in Massachusetts, with respect to any dispute under this Agreement.
19. PARAGRAPH HEADINGS. The headings of paragraphs contained in this Agreement are provided for convenience only, form no part of this Agreement and shall not affect its construction.
20. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed on their behalf by their duly authorized officers as of the date first above written.
THE ADVISORS' INNER CIRCLE FUND, on behalf of the Fund listed on Schedule A
By: /s/ Philip T. Masterson --------------------------- Name: Philip T. Masterson Title: President |
PNC CAPITAL ADVISORS, LLC
By: /s/ Joseph Tenko --------------------------- Name: Joseph Tenko Title: Managing Director |
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
DATED JANUARY 29, 2010 BETWEEN
THE ADVISORS' INNER CIRCLE FUND
AND
PNC CAPITAL ADVISORS, LLC
The Trust will pay to the Adviser as compensation for the Adviser's services rendered, a fee, computed daily at an annual rate based on the average daily net assets of the Fund in accordance the following fee schedule:
FUND RATE ---- ---- United Association S&P 500 Index Fund ..................................0.095% |
EXPENSE LIMITATION AGREEMENT
EXPENSE LIMITATION AGREEMENT, effective as of March 1, 2008 by and between Haverford Investment Management, Inc. (the "Adviser") and The Advisors' Inner Circle Fund (the "Trust") (the "Agreement"), on behalf of each series of the Trust set forth in Schedule A attached hereto (each a "Fund," and collectively, the "Funds").
WHEREAS, the Trust is a Massachusetts voluntary association (commonly known as a business trust) organized under an Agreement and Declaration of Trust, dated July 18, 1991, as amended and restated as of February 18, 1997 (the "Declaration of Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and each Fund is a series of the Trust;
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory Agreement dated May 28, 2004 (the "Advisory Agreement"), pursuant to which the Adviser provides investment advisory services to each Fund for compensation based on the value of the average daily net assets of each such Fund;
WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of each Fund and its shareholders to maintain the expenses of each Fund at a level below the level to which each such Fund would normally be subject in order to maintain each Fund's expense ratios at the Maximum Annual Operating Expense Limit (as hereinafter defined) specified for such Fund in Schedule A hereto;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses of every character incurred by a Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser (but excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of such Fund's business and amounts payable pursuant to any plan adopted in accordance with Rule 12b-1 under the 1940 Act) and expenses for which payment has been made through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund ("Fund Operating Expenses"), exceed the Maximum Annual Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser.
1.2. MAXIMUM ANNUAL OPERATING EXPENSE LIMIT. The Maximum Annual Operating Expense Limit with respect to each Fund shall be the amount specified in Schedule A based on a percentage of the average daily net assets of each Fund. That Maximum Annual Operating Expense Limit for each Fund contemplates that certain expenses for each Fund may be paid through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund.
1.3. METHOD OF COMPUTATION. To determine the Adviser's liability with respect to the Excess Amount, each month the Fund Operating Expenses for each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses for any month of a Fund exceed the Maximum Annual Operating Expense Limit of such Fund, the Adviser shall first waive or reduce its investment advisory fee for such month by an amount sufficient to reduce the annualized Fund Operating Expenses to an amount no higher than the Maximum Annual Operating Expense Limit. If the amount of the waived or reduced investment advisory fee for any such month is insufficient to pay the Excess Amount, the Adviser may also remit to the appropriate Fund or Funds an amount that, together with the waived or reduced investment advisory fee, is sufficient to pay such Excess Amount.
1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the investment advisory fees waived or reduced and other payments remitted by the Adviser to the Fund or Funds with respect to the previous fiscal year shall equal the Excess Amount.
2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1. REIMBURSEMENT. If in any year in which the Advisory Agreement is still in
effect and the estimated aggregate Fund Operating Expenses of such Fund for the
fiscal year are less than the Maximum Annual Operating Expense Limit for that
year, subject to approval by the Trust's Board of Trustees as provided in
Section 2.2 below, the Adviser shall be entitled to reimbursement by such Fund,
in whole or in part as provided below, of the investment advisory fees waived or
reduced and other payments remitted by the Adviser to such Fund pursuant to
Section 1 hereof. The total amount of reimbursement to which the Adviser may be
entitled ("Reimbursement Amount") shall equal, at any time, the sum of all
investment advisory fees previously waived or reduced by the Adviser and all
other payments remitted by the Adviser to the Fund, pursuant to Section 1
hereof, during any of the previous three (3) fiscal years, less any
reimbursement previously paid by such Fund to the Adviser, pursuant to this
Section 2, with respect to such waivers, reductions, and payments. The
Reimbursement Amount shall not include any additional charges or fees
whatsoever, including, e.g., interest accruable on the Reimbursement Amount.
2.2. BOARD APPROVAL. No reimbursement shall be paid to the Adviser with respect to any Fund pursuant to this Section 2 unless the Trust's Board of Trustees has determined in advance that the payment of such reimbursement to the Adviser is in the best interests of such Fund and its shareholders.
2.3. METHOD OF COMPUTATION. To determine each Fund's accrual, if any, to reimburse the Adviser for the Reimbursement Amount, each month the Fund Operating Expenses of each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses of a Fund for any month are less than the Maximum Annual Operating Expense Limit of such Fund, such Fund shall accrue into its net asset value an amount payable to the Adviser sufficient to increase the annualized Fund Operating Expenses of that Fund to an amount no greater than the Maximum Annual Operating Expense Limit of that Fund, provided that such amount paid to
the Adviser will in no event exceed the total Reimbursement Amount. For accounting purposes, amounts accrued pursuant to this Section 2 shall be a liability of the Fund for purposes of determining the Fund's net asset value.
2.4. PAYMENT AND YEAR-END ADJUSTMENT. Amounts accrued pursuant to this Agreement shall be payable to the Adviser as of the last day of each month. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the actual Fund Operating Expenses of a Fund for the prior fiscal year (including any reimbursement payments hereunder with respect to such fiscal year) do not exceed the Maximum Annual Operating Expense Limit.
3. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall continue in effect with respect to all Funds until February 28, 2009 and shall thereafter continue in effect from year to year for successive one-year periods, provided that this Agreement may be terminated, without payment of any penalty, with respect to any Fund:
(i) by the Trust, for any reason and at any time; and
(ii) by the Adviser, for any reason, upon ninety (90) days' prior written notice to the Trust at its principal place of business, such termination to be effective as of the close of business on the last day of the then-current one-year period; or at such earlier time provided that such termination is approved by majority vote of the Trustees and the Independent Trustees voting separately.
4. MISCELLANEOUS.
4.1. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
4.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Trust or the Funds to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Funds. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
4.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values,
and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act.
4.4. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the day and year first above written.
THE ADVISORS INNER CIRCLE FUND,
on behalf of each series of the Trust set forth in Schedule A
/s/ Joseph Gallo ---------------------------- Joseph Gallo Vice President and Secretary |
HAVERFORD INVESTMENT MANAGEMENT, INC.
/s/ Joseph J. Mclaughlin ---------------------------- Joseph J. McLaughlin President |
SCHEDULE A
MAXIMUM ANNUAL OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds of the Trust:
NAME OF FUND MAXIMUM ANNUAL
OPERATING EXPENSE LIMIT
Haverford Quality Growth Stock Fund 1.00%
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AMENDED AND RESTATED EXPENSE LIMITATION AGREEMENT
AMENDED AND RESTATED EXPENSE LIMITATION AGREEMENT, effective as of August 12, 2008 by and between Westwood Management Corp. (the "Adviser") and The Advisors' Inner Circle Fund (the "Trust") (the "Agreement"), on behalf of each series of the Trust set forth in Schedule A attached hereto (each a "Fund," and collectively, the "Funds").
WHEREAS, the Trust is a Massachusetts voluntary association (commonly known as a business trust) organized under an Agreement and Declaration of Trust, dated July 18, 1991, as amended and restated as of February 18, 1997 and amended May 15, 2012 (the "Declaration of Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and each Fund is a series of the Trust;
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory Agreement dated December 16, 2005 (the "Advisory Agreement"), pursuant to which the Adviser provides investment advisory services to each Fund for compensation based on the value of the average daily net assets of each such Fund;
WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of each Fund and its shareholders to maintain the expenses of each Fund at a level below the level to which each such Fund would normally be subject in order to maintain each Fund's expense ratios at the Maximum Annual Operating Expense Limit (as hereinafter defined) specified for such Fund in Schedule A hereto;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses of every character incurred by a Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser (but excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of such Fund's business) and expenses for which payment has been made through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund ("Fund Operating Expenses"), exceed the Maximum Annual Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser.
1.2. MAXIMUM ANNUAL OPERATING EXPENSE LIMIT. The Maximum Annual Operating Expense Limit with respect to each Fund shall be the amount specified in Schedule A based on a percentage of the average daily net assets of each Fund. That Maximum Annual Operating Expense Limit for each Fund contemplates that certain expenses for each Fund may be paid through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund.
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1.3. METHOD OF COMPUTATION. To determine the Adviser's liability with respect
to the Excess Amount, each month the Fund Operating Expenses for each Fund
shall be annualized as of the last day of the month. If the annualized Fund
Operating Expenses for any month of a Fund exceed the Maximum Annual Operating
Expense Limit of such Fund, the Adviser shall first waive or reduce its
investment advisory fee for such month by an amount sufficient to reduce the
annualized Fund Operating Expenses to an amount no higher than the Maximum
Annual Operating Expense Limit. If the amount of the waived or reduced
investment advisory fee for any such month is insufficient to pay the Excess
Amount, the Adviser may also remit to the appropriate Fund or Funds an amount
that, together with the waived or reduced investment advisory fee, is
sufficient to pay such Excess Amount.
1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the investment advisory fees waived or reduced and other payments remitted by the Adviser to the Fund or Funds with respect to the previous fiscal year shall equal the Excess Amount.
2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1. REIMBURSEMENT. If in any year in which the Advisory Agreement is still in effect and the estimated aggregate Fund Operating Expenses of such Fund for the fiscal year are less than the Maximum Annual Operating Expense Limit for that year, the Adviser shall be entitled to reimbursement by such Fund, in whole or in part as provided below, of the investment advisory fees waived or reduced and other payments remitted by the Adviser to such Fund pursuant to Section 1 hereof. The total amount of reimbursement to which the Adviser may be entitled ("Reimbursement Amount") shall equal, at any time, the sum of all investment advisory fees previously waived or reduced by the Adviser and all other payments remitted by the Adviser to the Fund, pursuant to Section 1 hereof, during any of the previous three (3) fiscal years, less any reimbursement previously paid by such Fund to the Adviser, pursuant to this Section 2, with respect to such waivers, reductions, and payments. The Reimbursement Amount shall not include any additional charges or fees whatsoever, including, e.g., interest accruable on the Reimbursement Amount.
2.2. BOARD NOTIFICATION. The Board shall be provided a quarterly report of any reimbursements paid to the Adviser pursuant to this agreement.
2.3. METHOD OF COMPUTATION. To determine each Fund's accrual, if any, to reimburse the Adviser for the Reimbursement Amount, each month the Fund Operating Expenses of each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses of a Fund for any month are less than the Maximum Annual Operating Expense Limit of such Fund, such Fund shall accrue into its net asset value an amount payable to the Adviser sufficient to increase the annualized Fund Operating Expenses of that Fund to an amount no greater than the Maximum Annual Operating Expense Limit of that Fund, provided that such amount paid to the Adviser will in no event exceed the total Reimbursement Amount. For accounting purposes, amounts accrued pursuant to this Section 2 shall be a liability of the Fund for purposes of C:\Users\MP073054\Desktop\(d)(28).docx determining the Fund's net asset value.
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2.4. PAYMENT AND YEAR-END ADJUSTMENT. Amounts accrued pursuant to this
Agreement shall be payable to the Adviser as of the last day of each month. If
necessary, on or before the last day of the first month of each fiscal year, an
adjustment payment shall be made by the appropriate party in order that the
actual Fund Operating Expenses of a Fund for the prior fiscal year (including
any reimbursement payments hereunder with respect to such fiscal year) do not
exceed the Maximum Annual Operating Expense Limit.
3. TERM AND TERMINATION OF AGREEMENT.
3.1 ALL FUNDS (EXCEPT THE WESTWOOD DIVIDEND GROWTH FUND).
This Agreement shall continue in effect with respect to each Fund (except the Westwood Dividend Growth Fund) until the date indicated on Schedule A ("Initial Term End Date") and shall thereafter continue in effect from year to year for successive one-year periods, provided that this Agreement may be terminated, without payment of any penalty, with respect to any such Fund:
(i) by the Trust, for any reason and at any time; and
(ii) by the Adviser, for any reason, upon ninety (90) days' prior written notice to the Trust at its principal place of business, such termination to be effective as of the close of business on the last day of the then-current term; or at such earlier time provided that such termination is approved by majority vote of the Trustees and the Independent Trustees voting separately.
3.2 WESTWOOD DIVIDEND GROWTH FUND.
This Agreement shall continue in effect with respect to the Westwood Dividend Growth Fund until the date indicated on Schedule A ("Initial Term End Date") and shall thereafter continue in effect until its termination by shareholders of the Westwood Dividend Growth Fund.
4. MISCELLANEOUS.
4.1. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
4.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Trust or the Funds to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Funds. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of C:\Users\MP073054\Desktop\(d)(28).docx the foregoing liabilities. The Trust's Declaration of Trust, as amended from time to time, is on
3 <!--$$/page=--> file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
4.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act.
4.4. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the day and year first above written.
THE ADVISORS INNER CIRCLE FUND,
on behalf of each series of the Trust set forth in Schedule A
WESTWOOD MANAGEMENT CORP.
Amended and Restated on: February 26, 2013
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SCHEDULE A
MAXIMUM ANNUAL OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds of the Trust:
NAME OF FUND MAXIMUM ANNUAL INITIAL TERM
OPERATING EXPENSE LIMIT END DATE
Westwood Large Cap Value Fund
Institutional Shares 1.00% February 28, 2016
Class A Shares 1.25% February 28, 2016
Westwood Income Opportunity Fund
Institutional Shares 0.90%* February 28, 2016
Class A Shares 1.15%* February 28, 2016
Westwood SMidCap Fund
Institutional Shares 1.25% February 28, 2016
Westwood SmallCap Value Fund
Institutional Shares 1.10%** February 28, 2016
Westwood Dividend Growth Fund***
Institutional Shares 1.00% February 28, 2016
Westwood SMidCap Plus Fund
Institutional Shares 1.00% February 28, 2016
Westwood Short Duration High Yield Fund
Institutional Shares 0.90% February 28, 2016
Class A Shares 1.15% February 28, 2016
Westwood Global Equity Fund
Institutional Shares 1.00% February 28, 2016
Class A Shares 1.25% February 28, 2016
Westwood Global Dividend Fund
Institutional Shares 1.00% February 28, 2016
Class A Shares 1.25% February 28, 2016
Westwood Emerging Markets Fund
Institutional Shares 1.20% February 28, 2016
Class A Shares 1.45% February 28, 2016
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Institutional Shares 1.20% February 28, 2016 Class A Shares 1.45% February 28, 2016 |
* Prior to November 1, 2009, the Maximum Annual Operating Expense Limits for Institutional Shares and Class A Shares of the Westwood Income Opportunity Fund were 1.00% and 1.25%, respectively.
** Prior to February 26, 2013, the Maximum Annual Operating Expense Limit for Institutional Shares of the Westwood SmallCap Value Fund was 1.25%.
*** The Maximum Annual Operating Expense Limitation of the Westwood Dividend Growth Fund cannot increase above 1.00% without shareholder approval.
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SUB-ADVISORY AGREEMENT
SUB-ADVISORY AGREEMENT (the "Agreement") made as of this 27th day of December, 2011 by and between WESTWOOD MANAGEMENT CORP. a New York Corporation with its principal place of business at 200 Crescent Court, Suite 1200, Dallas, Texas 75201 (the "Adviser"), and SKY HARBOR CAPITAL MANAGEMENT, LLC a Delaware limited liability company with its principal place of business at 20 Horseneck Lane, Greenwich, CT 06830 (the "Sub-Adviser").
W I T N E S S E T H
WHEREAS, pursuant to authority granted to the Adviser by the Board of Trustees (the "Board") of THE ADVISORS' INNER CIRCLE FUND (the "Trust") on behalf of the series set forth on Schedule A to this Agreement (the "Fund") and pursuant to the provisions of the Investment Advisory Agreement dated as of December 16, 2005 between the Adviser and the Fund (the "Management Agreement"), the Adviser has selected the Sub-Adviser to act as sub-investment adviser of the Fund and to provide certain related services, as more fully set forth below, and to perform such services under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set forth herein, the Adviser and the Sub-Adviser do hereby agree as follows:
1. THE SUB-ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Sub-Adviser shall act as sub-investment adviser with respect to the Fund. In such capacity, the Sub-Adviser shall, subject to the supervision of the Adviser and the Board, regularly provide the Fund with investment research, advice and supervision and shall furnish continuously an investment program for such Fund assets as may be allocated by the Adviser to the Sub-Adviser, consistent with the investment objectives and policies of the Fund. The Sub-Adviser shall determine, from time to time, what investments shall be purchased for the Fund and what such securities shall be held or sold by the Fund, subject always to the provisions of the Trust's Agreement and Declaration of Trust, By-Laws and its registration statement on Form N-1A (the "Registration Statement") under the Investment Company Act of 1940, as amended (the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), covering Fund shares, as filed with the Securities and Exchange Commission (the "Commission"), and to the investment objectives, policies and restrictions of the Fund, as each of the same shall be from time to time in effect. To carry out such obligations, the Sub-Adviser shall exercise full discretion and act for the Fund in the same manner and with the same force and effect as the Fund itself might or could do with respect to purchases, sales or other transactions, as well as with respect to all other such things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. Notwithstanding the foregoing, the Sub-Adviser shall, upon written instructions from the Adviser, effect such portfolio transactions for the Fund as the Adviser may from time to time direct; provided however, that the Sub-Adviser shall not be responsible for any such portfolio transactions effected
upon written instructions from the Adviser. No reference in this Agreement to the Sub-Adviser having full discretionary authority over the Fund's investments shall in any way limit the right of the Adviser, in its sole discretion, to establish or revise policies in connection with the management of the Fund's assets or to otherwise exercise its right to control the overall management of the Fund's assets.
(b) COMPLIANCE. The Sub-Adviser agrees to comply with the requirements of the 1940 Act, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act and the respective rules and regulations thereunder, as applicable, as well as with all other applicable federal and state laws, rules, regulations and case law that relate to the services and relationships described hereunder and to the conduct of its business as a registered investment adviser. The Sub-Adviser also agrees to comply with the objectives, policies and restrictions set forth in the Registration Statement, as amended or supplemented, of the Fund, and with any policies, guidelines, instructions and procedures approved by the Board or the Adviser and provided to the Sub-Adviser. In selecting the Fund's portfolio securities and performing the Sub-Adviser's obligations hereunder, the Sub-Adviser shall cause the Fund to comply with the diversification and source of income requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. The Sub-Adviser shall maintain compliance procedures that it reasonably believes are adequate to ensure the compliance with the foregoing. No supervisory activity undertaken by the Adviser shall limit the Sub-Adviser's full responsibility for any of the foregoing.
(c) PROXY VOTING. Pursuant to Board authority, the Adviser has the authority to determine how proxies with respect to securities that are held by the Fund shall be voted, and the Adviser may delegate the authority and responsibility to vote proxies for the Fund's securities to the Sub-Adviser. So long as proxy voting authority for the Fund has been delegated to the Sub-Adviser, the Adviser shall provide such assistance to the Sub-Adviser with respect to the voting of proxies for the Fund as the Sub-Adviser may from time to time reasonably request, and the Adviser shall promptly forward to the Sub-Adviser any information or documents necessary for the Sub-Adviser to exercise its proxy voting responsibilities. The Sub-Adviser shall carry out such responsibility in accordance with any instructions that the Board or the Adviser shall provide from time to time, and at all times in a manner consistent with Rule 206(4)-6 under the Advisers Act and its fiduciary responsibilities to the Trust. The Sub-Adviser shall provide periodic reports and keep such records relating to proxy voting as the Board may reasonably request or as may be necessary for the Fund to comply with the 1940 Act and other applicable law. Any such delegation of proxy voting responsibility to the Sub-Adviser may be revoked or modified by the Board or the Adviser at any time.
The Sub-Adviser is authorized to instruct the Fund's custodian and/or broker(s) to forward promptly to the Sub-Adviser or designated service provider copies of all proxies and shareholder communications relating to securities held in the portfolio of a Fund (other than materials relating to legal proceedings against the Fund). The Sub-Adviser
may also instruct the Fund's custodian and/or broker(s) to provide reports of holdings in the portfolio of the Fund. The Sub-Adviser has the authority to engage a service provider to assist with administrative functions related to voting Fund proxies. The Trust shall direct the Fund's custodian and/or broker(s) to provide any assistance requested by the Sub-Adviser in facilitating the use of a service provider. In no event shall the Sub-Adviser have any responsibility to vote proxies that are not received on a timely basis. The Trust acknowledges that the Sub-Adviser, consistent with the Sub-Adviser's written proxy voting policies and procedures, may refrain from voting a proxy if, in the Sub-Adviser's discretion, refraining from voting would be in the best interests of the Fund and its shareholders.
(d) RECORDKEEPING. The Sub-Adviser shall not be responsible for the provision of administrative, bookkeeping or accounting services to the Fund, except as otherwise provided herein or as may be necessary for the Sub-Adviser to supply to the Adviser, the Trust or its Board the information required to be supplied under this Agreement.
The Sub-Adviser shall maintain separate books and detailed records of all matters pertaining to the Fund's assets advised by the Sub-Adviser required by Rule 31a-1 under the 1940 Act (other than those records being maintained by the Adviser, or any administrator custodian or transfer agent appointed by the Fund) relating to its responsibilities provided hereunder with respect to the Fund, and shall preserve such records for the periods and in a manner prescribed therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records"). The Fund Books and Records shall be available to the Adviser and the Board at any time upon request shall be delivered to the Trust upon the termination of this Agreement and shall be available without delay during any day the Trust is open for business.
(e) HOLDINGS INFORMATION AND PRICING. The Sub-Adviser shall provide regular reports regarding the Fund's holdings, and may, on its own initiative, furnish the Adviser, the Trust and its Board from time to time with whatever information the Sub-Adviser believes is appropriate for this purpose. The Sub-Adviser agrees to notify the Adviser and the Board promptly if the Sub-Adviser reasonably believes that the value of any security held by a Fund may not reflect fair value. The Sub-Adviser agrees to provide upon request any pricing information of which the Sub-Adviser is aware to the Adviser, Trust, its Board and/or any Fund pricing agent to assist in the determination of the fair value of any Fund holdings for which market quotations are not readily available or as otherwise required in accordance with the 1940 Act or the Fund valuation procedures for the purpose of calculating the Trust's net asset value in accordance with procedures and methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE ADVISER AND THE TRUST. The Sub-Adviser agrees to cooperate with and provide reasonable assistance to the Adviser, the Trust and any Trust custodian or foreign sub-custodians, any Trust pricing agents and all other agents and representatives of the Adviser and the Trust with respect to such information regarding the Fund as such entities may reasonably request from time to time in the
performance of their obligations, provide prompt responses to reasonable requests made by such persons and establish appropriate interfaces with each so as to promote the efficient exchange of information and compliance with applicable laws and regulations.
(g) CONSULTATION WITH OTHER SUB-ADVISERS. In performance of its duties and obligations under this Agreement, the Sub-Adviser shall not consult with any other sub-adviser to the Fund or a sub-adviser to a portfolio that is under common control with the Fund concerning transactions for the Fund, except as permitted by the policies and procedures of the Fund. The Sub-Adviser shall not provide investment advice to any assets of the Fund other than the assets managed by the Sub-Adviser.
2. CODE OF ETHICS. The Sub-Adviser has adopted a written code of ethics that it reasonably believes complies with the requirements of Rule 17j-1 under the 1940 Act, which it has provided to the Adviser and the Trust. The Sub-Adviser shall ensure that its Access Persons (as defined in the Sub-Adviser's Code of Ethics) comply in all material respects with the Sub-Adviser's Code of Ethics, as in effect from time to time. Upon request, the Sub-Adviser shall provide the Trust with (i) a copy of the Sub-Adviser's current Code of Ethics, as in effect from time to time, and (ii) a certification that it has adopted procedures reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Sub-Adviser's Code of Ethics. Annually, the Sub-Adviser shall furnish a written report, which complies with the requirements of Rule 17j-1, concerning the Sub-Adviser's Code of Ethics to the Adviser and the Trust's Board. The Sub-Adviser shall respond to requests for information from the Adviser and the Trust as to violations of the Code by Access Persons and the sanctions imposed by the Sub-Adviser. The Sub-Adviser shall immediately notify the Adviser and the Trust of any material violation of the Code, whether or not such violation relates to a security held by any Fund.
3. INFORMATION AND REPORTING. The Sub-Adviser shall provide the Adviser, the Trust, and their respective officers with such periodic reports concerning the obligations the Sub-Adviser has assumed under this Agreement as the Adviser and the Trust may from time to time reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Sub-Adviser shall notify the Trust's Chief Compliance Officer and Adviser immediately upon detection of (i) any material failure to manage any Fund in accordance with its investment objectives and policies or any applicable law; or (ii) any material breach of any of the Fund's or the Adviser's policies, guidelines or procedures. In addition, the Sub-Adviser shall provide a quarterly report regarding the Fund's compliance with its investment objectives and policies, applicable law, including, but not limited to the 1940 Act and Subchapter M of the Code, and the Fund's and the Adviser's policies, guidelines or procedures as applicable to the Sub-Adviser's obligations under this Agreement. The Sub-Adviser acknowledges and agrees that the Adviser may, in its discretion, provide such quarterly compliance certifications to the Board. The Sub-Adviser agrees to correct any such failure promptly and to take any action that the Board and/or the Adviser may reasonably request in connection with any such breach. Upon request, the Sub-Adviser shall also provide the officers of the Trust with supporting certifications in connection with such certifications of Fund financial statements and disclosure controls pursuant to the
Sarbanes-Oxley Act. The Sub-Adviser will promptly notify the Trust in the event (i) the Sub-Adviser is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Trust (excluding class action suits in which a Fund is a member of the plaintiff class by reason of the Fund's ownership of shares in the defendant) or the compliance by the Sub-Adviser with the federal or state securities laws or (ii) an actual change in control of the Sub-Adviser resulting in an "assignment" (as defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) INSPECTION. Upon reasonable request, the Sub-Adviser agrees to make its records and premises (including the availability of the Sub-Adviser's employees for interviews) to the extent that they relate to the conduct of services provided to the Fund or the Sub-Adviser's conduct of its business as an investment adviser reasonably available for compliance audits by the Adviser or the Trust's officers, employees, accountants or counsel; in this regard, the Trust and the Adviser acknowledge that the Sub-Adviser shall have no obligation to make available proprietary information unrelated to the services provided to the Fund or any information related to other clients of the Sub-Adviser, except to the extent necessary for the Adviser to confirm the absence of any conflict of interest and compliance with any laws, rules or regulations in the management of the Fund.
(c) BOARD AND FILINGS INFORMATION. The Sub-Adviser will also provide the Adviser and Trust with any information reasonably requested regarding its management of the Fund required for any meeting of the Board, or for any shareholder report, Form N-CSR, Form N-Q, Form N-PX, Form N-SAR, amended registration statement, proxy statement, or prospectus supplement to be filed by the Trust with the Commission. The Sub-Adviser will make its officers and employees available to meet with the Board from time to time on due notice to review its investment management services to the Fund in light of current and prospective economic and market conditions and shall furnish to the Board such information as may reasonably be necessary in order for the Board to evaluate this Agreement or any proposed amendments thereto.
(d) TRANSACTION INFORMATION. The Sub-Adviser shall furnish to the Adviser and the Trust such information concerning portfolio transactions as may be necessary to enable the Adviser, Trust or their designated agents to perform such compliance testing on the Fund and the Sub-Adviser's services as the Adviser and the Trust may, in their sole discretion, determine to be appropriate. The provision of such information by the Sub-Adviser to the Adviser, Trust or their designated agents in no way relieves the Sub-Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of securities for the account of a Fund, neither the Sub-Adviser nor any of its directors, officers or employees will act as a principal or agent or receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Sub-Adviser shall arrange for the placing of all orders for the purchase and sale of securities for a Fund's account with brokers or dealers selected by the Sub-Adviser. In the selection of such brokers or dealers and the placing of such orders, the Sub-Adviser is directed at all times to seek for a Fund the most favorable execution and net price available under the circumstances. It is also understood that it is desirable for the Fund that the Sub-Adviser have access to brokerage and research services provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers, consistent with section 28(e) of the 1934 Act and any Commission staff interpretations thereof. Therefore, the Sub-Adviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, subject to review by the Adviser and the Board from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Sub-Adviser in connection with its or its affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Sub-Adviser deems the purchase or sale of a security to be in the best interest of a Fund as well as other clients of the Sub-Adviser, the Sub-Adviser may, to the extent permitted by applicable law and regulations, aggregate the order for securities to be sold or purchased. In such event, the Sub-Adviser will allocate securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction, in the manner the Sub-Adviser reasonably considers to be equitable and consistent with its fiduciary obligations to a Fund and to such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Sub-Adviser or any of its affiliates may act as broker in connection with the purchase or sale of securities or other investments for a Fund, subject to: (a) the requirement that the Sub-Adviser seek to obtain best execution and price within the policy guidelines determined by the Board and set forth in a Fund's current Registration Statement; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers Act; (d) the provisions of the 1934 Act; and (e) other provisions of applicable law. These brokerage services are not within the scope of the duties of the Sub-Adviser under this Agreement. Subject to the requirements of applicable law and any procedures adopted by the Board, the Sub-Adviser or its affiliates may receive brokerage commissions, fees or other remuneration from a Fund for these services in addition to the Sub-Adviser's fees for services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Sub-Adviser to take or receive physical possession of cash, securities or other investments of a Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Sub-Adviser will bear its own costs of providing services hereunder. Other than as herein specifically indicated, the Sub-Adviser shall not be responsible for a Fund's or the Adviser's expenses, including brokerage and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Sub-Adviser is registered as an investment adviser under the Advisers Act, and will remain so registered for the duration of this Agreement. The Sub-Adviser is not prohibited by the Advisers Act or the 1940 Act from performing the services contemplated by this Agreement, and to the best knowledge of the Sub-Adviser, there is no proceeding or investigation that is reasonably likely to result in the Sub-Adviser being prohibited from performing the services contemplated by this Agreement. The Sub-Adviser agrees to promptly notify the Trust of the occurrence of any event that would disqualify the Sub-Adviser from serving as an investment adviser to an investment company. The Sub-Adviser is in compliance in all material respects with all applicable federal and state law in connection with its investment management operations.
(b) ADV DISCLOSURE. The Sub-Adviser has provided the Trust with a copy of Part I of its Form ADV as most recently filed with the Commission and its Part II as most recently updated and will, promptly after filing any amendment to its Form ADV with the Commission or updating its Part II, furnish a copy of such amendments or updates to the Trust. The information contained in the Adviser's Form ADV is accurate and complete in all material respects and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Sub-Adviser has reviewed and will in the future review, the Registration Statement, summary prospectus, prospectus, statement of additional information, periodic reports to shareholders, reports and schedules filed with the Commission (including any amendment, supplement or sticker to any of the foregoing) and advertising and sales material relating to the Fund (collectively the "Disclosure Documents") and represents and warrants that such Disclosure Documents contain or will contain no untrue statement of any material fact and do not and will not omit any statement of material fact required to be stated therein or necessary to make the statements therein not misleading.
(d) USE OF THE NAME "WESTWOOD" OR THE ACRONYM "WHG." The Sub-Adviser has the right to use the name "Westwood" or the acronym "WHG" in connection with its services to the Trust. The Sub-Adviser is not aware of any threatened or existing actions, claims, litigation or proceedings that would adversely affect or prejudice the rights of the Sub-Adviser or the Trust to use the name "Westwood" or the acronym "WHG."
(e) INSURANCE. The Sub-Adviser maintains errors and omissions insurance coverage in an appropriate amount and shall provide prior written notice to the Trust (i) of any material changes in its insurance policies or insurance coverage; or (ii) if any material claims will be made on its insurance policies. Furthermore, the Sub-Adviser shall, upon reasonable request, provide the Trust with any information it may reasonably require concerning the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Sub-Adviser represents and warrants that it has no arrangement or understanding with any party, other than the Trust, that would influence the decision of the Sub-Adviser with respect to its selection of securities for a Fund, and that all selections shall be done in accordance with what is in the best interest of the Fund.
(g) CONFLICTS. The Sub-Adviser shall act honestly, in good faith and in the best interests of the Trust including requiring any of its personnel with knowledge of Fund activities to place the interest of the Fund first, ahead of their own interests, in all personal trading scenarios that may involve a conflict of interest with the Fund, consistent with its fiduciary duties under applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "WESTWOOD" OR THE ACRONYM "WHG." The Adviser has granted to the Trust a license to use the name "Westwood" or the acronym "WHG" (collectively, the "Name") as part of the name of the Fund. The foregoing authorization by the Adviser to the Trust to use the Name as part of the name of the Fund is not exclusive of the right of the Adviser itself to use, or to authorize others to use, the Name; the Sub-Adviser acknowledges and agrees that as between the Sub-Adviser and the Adviser, the Adviser has the right to use, or authorize others to use, the Name and the Sub-Adviser agrees to take such action as may reasonably be requested by the Adviser to give full effect to the provisions of this section. Without limiting the generality of the foregoing, the Sub-Adviser agrees that, upon any termination of this Agreement, the Sub-Adviser will not thereafter transact any business using the name "Westwood" or the acronym "WHG."
9. SUB-ADVISER'S COMPENSATION. The Adviser shall pay to the Sub-Adviser, as compensation for the Sub-Adviser's services hereunder, a fee, determined as described in Schedule A that is attached hereto and made a part hereof. Such fee shall be computed daily and paid not less than monthly in arrears by the Adviser. The Fund shall have no responsibility for any fee payable to the Sub-Adviser.
The Sub-Adviser will be compensated based on the portion of Fund assets allocated to the Sub-Adviser by the Adviser. The method for determining net assets of the Fund for purposes hereof shall be the same as the method for determining net assets for purposes of establishing the offering and redemption prices of Fund shares as described in the Fund's prospectus. In the event of termination of this Agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the Sub-Adviser is and shall be an independent contractor and, unless otherwise expressly provided herein or otherwise authorized in writing, shall have no authority to act for or represent the Fund,
the Trust or the Adviser in any way or otherwise be deemed to be an agent of the Fund, the Trust or the Adviser. If any occasion should arise in which the Sub-Adviser gives any advice to its clients concerning the shares of a Fund, the Sub-Adviser will act solely as investment counsel for such clients and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically terminate, without the payment of any penalty, (i) in the event of its assignment (as defined in section 2(a)(4) of the 1940 Act) or (ii) in the event of the termination of the Management Agreement; provided that such termination shall not relieve the Adviser or the Sub-Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
This Agreement shall become effective as of the date executed and shall remain in full force and effect continually thereafter, subject to renewal as provided in Section 12(c) and unless terminated automatically as set forth in Section 11 hereof or until terminated as follows:
(a) The Trust may cause this Agreement to terminate either (i) by vote of its Board or (ii) with respect to the Fund, upon the affirmative vote of a majority of the outstanding voting securities of the Fund; or
(b) The Adviser may at any time terminate this Agreement by not more than sixty (60) days' nor less than thirty (30) days' written notice delivered or mailed by registered mail, postage prepaid, to the Sub-Adviser; or
(c) The Sub-Adviser may at any time terminate this Agreement by not more than sixty (60) days' nor less than thirty (30) days' written notice delivered or mailed by registered mail, postage prepaid, to the Adviser; or
(d) This Agreement shall automatically terminate two years from the date of its execution unless its renewal is specifically approved at least annually thereafter by (i) a majority vote of the Trustees, including a majority vote of such Trustees who are not interested persons of the Trust, the Adviser or the Sub-Adviser, at a meeting called for the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities of the Fund; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Sub-Adviser may continue to serve hereunder as to the Fund in a manner consistent with the 1940 Act and the rules and regulations thereunder; and
(e) Termination of this Agreement pursuant to this Section shall be without payment of any penalty.
In the event of termination of this Agreement for any reason, the Sub-Adviser shall, immediately upon notice of termination or on such later date as may be specified in such notice, cease all activity on behalf of the Fund and with respect to any of its assets, except as expressly directed by the Adviser or as otherwise required by any fiduciary duties of the Sub-Adviser under applicable law. In addition, the Sub-Adviser shall deliver the Fund's Books and Records to the Adviser by such means and in accordance with such schedule as the Adviser shall direct and shall otherwise cooperate, as reasonably directed by the Adviser, in the transition of portfolio asset management to any successor of the Sub-Adviser, including the Adviser.
13. CERTAIN DEFINITIONS. FOR THE PURPOSES OF THIS AGREEMENT:
(a) "Affirmative vote of a majority of the outstanding voting securities of the Fund" shall have the meaning as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
(b) "Interested persons" and "Assignment" shall have their respective meanings as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
14. LIABILITY OF THE SUB-ADVISER.
(a) The Sub-Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of statements in the Fund's Disclosure Documents.
(b) The Sub-Adviser shall be liable to the Fund for any loss (including transaction costs) incurred by the Fund as a result of any investment made by the Sub-Adviser in contravention of: (i) any investment policy, guideline or restriction set forth in the Registration Statement or as approved by the Board from time to time and provided to the Sub-Adviser; or (ii) applicable law, including but not limited to the 1940 Act and the Code (including but not limited to the Fund's failure to satisfy the diversification or source of income requirements of Subchapter M of the Code) (the investments described in this subsection (b) collectively are referred to as "Improper Investments").
(c) The Sub-Adviser shall indemnify and hold harmless the Trust, each
affiliated person of the Trust within the meaning of Section 2(a)(3) of the
1940 Act, and each person who controls the Trust within the meaning of
Section 15 of the 1933 Act (any such person, an "Indemnified Party")
against any and all losses, claims, damages, expenses or liabilities
(including the reasonable cost of investigating and defending any alleged
loss, claim, damage, expense or liability and reasonable counsel fees
incurred in connection therewith) to which any such person may become
subject under the 1933 Act, the 1934 Act, the 1940 Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages, expenses or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) a breach by the Sub-
Adviser of this Agreement or of the representations and warranties made by
the Sub-Adviser herein; (ii) any Improper Investment; (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
Disclosure Document or the omission or alleged omission from a Disclosure
Document of a material fact required to be stated therein or necessary to
make the statements therein not misleading; or (iv) the Sub-Adviser's
performance or non-performance of its duties hereunder; provided, however,
that nothing herein shall be deemed to protect any Indemnified Party who is
a Trustee or officer of the Trust against any liability to the Trust or to
its shareholders to which such Indemnified Party would otherwise be subject
by reason or willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties
involved in the conduct of such person's office with the Trust.
15. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Certificate of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Certificate of Trust and the Trust's Agreement and Declaration of Trust describe in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
17. CHANGE IN THE ADVISER'S OWNERSHIP. The Sub-Adviser agrees that it shall notify the Trust of any anticipated or otherwise reasonably foreseeable change in the ownership of the Sub-Adviser within a reasonable time prior to such change being effected.
18. JURISDICTION. This Agreement shall be governed by and construed in accordance with the substantive laws of the Commonwealth of Massachusetts and the Sub-Adviser consents to the jurisdiction of courts, both state or federal, in Massachusetts, with respect to any dispute under this Agreement.
19. PARAGRAPH HEADINGS. The headings of paragraphs contained in this Agreement are provided for convenience only, form no part of this Agreement and shall not affect its construction.
20. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed on their behalf by their duly authorized officers as of the date first above written.
WESTWOOD MANAGEMENT CORP.
By: /s/ Brian O. Casey ------------------------------ Name: Brian O. Casey Title: President & CEO |
SKY HARBOR CAPITAL MANAGEMENT, LLC
By: /s/ Thomas P. Kelleher ------------------------------- Name: Thomas P. Kelleher Title: Director |
SCHEDULE A
TO THE
SUB-ADVISORY AGREEMENT
DATED DECEMBER 27, 2011 BETWEEN
WESTWOOD MANAGEMENT CORP.
AND
SKY HARBOR CAPITAL MANAGEMENT, LLC
The Adviser will pay to the Sub-Adviser as compensation for the Sub-Adviser's services rendered, a fee, computed daily at an annual rate based on the average daily net assets of the respective Fund as may be allocated by the Adviser to the Sub-Adviser from time to time under the following fee schedule:
FUND RATE ---- ---- WHG Short Duration High Yield Fund 0.35% |
EXPENSE LIMITATION AGREEMENT
EXPENSE LIMITATION AGREEMENT, effective as of March 31st, 2010 by and between Sands Capital Management, LLC (the "Adviser") and The Advisors' Inner Circle Fund (the "Trust") (the "Agreement"), on behalf of each series of the Trust set forth in Schedule A attached hereto (each a "Fund," and collectively, the "Funds").
WHEREAS, the Trust is a Massachusetts business trust organized under an Agreement and Declaration of Trust, dated July 18, 1991, as amended and restated as of February 18, 1997 (the "Declaration of Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and each Fund is a series of the Trust;
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory Agreement dated March 31st, 2010 (the "Advisory Agreement"), pursuant to which the Adviser provides investment advisory services to each Fund for compensation based on the value of the average daily net assets of each such Fund;
WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of each Fund and its shareholders to maintain the expenses of each Fund at a level below the level to which each such Fund would normally be subject in order to maintain each Fund's expense ratios at the Maximum Annual Operating Expense Limit (as hereinafter defined) specified for such Fund in Schedule A hereto;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses of every character incurred by a Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser (but excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of such Fund's business and amounts payable pursuant to any plan adopted in accordance with Rule 12b-1 under the 1940 Act) and expenses for which payment has been made through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund ("Fund Operating Expenses"), exceed the Maximum Annual Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser.
1.2. MAXIMUM ANNUAL OPERATING EXPENSE LIMIT. The Maximum Annual Operating Expense Limit with respect to each Fund shall be the amount specified in Schedule A based on a percentage of the average daily net assets of each Fund. That Maximum Annual Operating Expense Limit for each Fund contemplates that certain expenses for each Fund may be paid through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund.
1.3. METHOD OF COMPUTATION. To determine the Adviser's liability with respect to the Excess Amount, each month the Fund Operating Expenses for each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses for any month of a Fund exceed the Maximum Annual Operating Expense Limit of such Fund, the Adviser shall first waive or reduce its investment advisory fee for such month by an amount sufficient to reduce the annualized Fund Operating Expenses to an amount no higher than the Maximum Annual Operating Expense Limit. If the amount of the waived or reduced investment advisory fee for any such month is insufficient to pay the Excess Amount, the Adviser may also remit to the appropriate Fund or Funds an amount that, together with the waived or reduced investment advisory fee, is sufficient to pay such Excess Amount.
1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the investment advisory fees waived or reduced and other payments remitted by the Adviser to the Fund or Funds with respect to the previous fiscal year shall equal the Excess Amount.
2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1. REIMBURSEMENT. If in any year in which the Advisory Agreement is still in
effect and the estimated aggregate Fund Operating Expenses of such Fund for the
fiscal year are less than the Maximum Annual Operating Expense Limit for that
year, subject to approval by the Trust's Board of Trustees as provided in
Section 2.2 below, the Adviser shall be entitled to reimbursement by such Fund,
in whole or in part as provided below, of the investment advisory fees waived or
reduced and other payments remitted by the Adviser to such Fund pursuant to
Section 1 hereof. The total amount of reimbursement to which the Adviser may be
entitled ("Reimbursement Amount") shall equal, at any time, the sum of all
investment advisory fees previously waived or reduced by the Adviser and all
other payments remitted by the Adviser to the Fund, pursuant to Section 1
hereof, during any of the previous three (3) fiscal years, less any
reimbursement previously paid by such Fund to the Adviser, pursuant to this
Section 2, with respect to such waivers, reductions, and payments. The
Reimbursement Amount shall not include any additional charges or fees
whatsoever, including, e.g., interest accruable on the Reimbursement Amount.
2.2. BOARD APPROVAL. No reimbursement shall be paid to the Adviser with respect to any Fund pursuant to this Section 2 unless the Trust's Board of Trustees has determined in advance that the payment of such reimbursement to the Adviser is in the best interests of such Fund and its shareholders.
2.3. METHOD OF COMPUTATION. To determine each Fund's accrual, if any, to reimburse the Adviser for the Reimbursement Amount, each month the Fund Operating Expenses of each Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses of a Fund for any month are less than the Maximum Annual Operating Expense Limit of such Fund, such Fund shall accrue into its net asset value an amount payable to the Adviser sufficient to increase the annualized Fund Operating Expenses of that Fund to an amount no greater than the Maximum Annual Operating Expense Limit of that Fund, provided that such amount paid to
the Adviser will in no event exceed the total Reimbursement Amount. For accounting purposes, amounts accrued pursuant to this Section 2 shall be a liability of the Fund for purposes of determining the Fund's net asset value.
2.4. PAYMENT AND YEAR-END ADJUSTMENT. Amounts accrued pursuant to this Agreement shall be payable to the Adviser as of the last day of each month. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the actual Fund Operating Expenses of a Fund for the prior fiscal year (including any reimbursement payments hereunder with respect to such fiscal year) do not exceed the Maximum Annual Operating Expense Limit.
3. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall continue in effect with respect to all Funds until March 31, 2011 and shall thereafter continue in effect from year to year for successive one-year periods, provided that this Agreement may be terminated, without payment of any penalty, with respect to any Fund:
(i) by the Trust, for any reason and at any time; and
(ii) by the Adviser, for any reason, upon ninety (90) days' prior written notice to the Trust at its principal place of business, such termination to be effective as of the close of business on the last day of the then-current one-year period; or at such earlier time provided that such termination is approved by majority vote of the Trustees and the Independent Trustees voting separately.
4. MISCELLANEOUS.
4.1. CAPTIONS. The captions in this Agreement are included for convenience of reference
only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
4.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Trust or the Funds to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Funds. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
4.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and
provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act.
4.4. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the day and year first above written.
THE ADVISORS INNER CIRCLE FUND,
on behalf of each series of the Trust set forth in Schedule A
/s/ Joseph Gallo ---------------------------- Joseph Gallo Vice President and Secretary |
NAME OF ADVISER
/s/ Robert C. Hancock ---------------------------- Robert C. Hancock COO |
SCHEDULE A
MAXIMUM ANNUAL OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds of the Trust:
NAME OF FUND MAXIMUM ANNUAL
OPERATING EXPENSE LIMIT
Sands Capital Global Growth Fund
Institutional Class 1.10%
Investor Class 1.35%
|
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT (the "Agreement") made as of this 24th day of March, 2011 by and between THE ADVISORS' INNER CIRCLE FUND (the "Trust"), a Massachusetts voluntary association (commonly known as a business trust) registered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and AlphaOne Investment Services, LLC (the "Adviser"), a Delaware limited liability company with its principal place of business at One Tower Bridge, 100 Front Street, Suite 1250, West Conshohocken, PA 19428.
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the Adviser to act as investment adviser to the Trust on behalf of the series set forth on Schedule A to this Agreement (the "Funds"), as such Schedule may be amended from time to time upon mutual agreement of the parties, and to provide certain related services, as more fully set forth below, and to perform such services under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall act as investment adviser with respect to the Funds. In such capacity, the Adviser shall, subject to the supervision of the Board, regularly provide the Funds with investment research, advice and supervision and shall furnish continuously an investment program for each Fund, consistent with the investment objectives and policies of each Fund. The Adviser shall determine, from time to time, what securities shall be purchased for a Fund, what securities shall be held or sold by a Fund and what portion of a Fund's assets shall be held uninvested in cash, subject always to the provisions of the Trust's Agreement and Declaration of Trust, By-Laws and its registration statement on Form N-1A (the "Registration Statement") under the 1940 Act, and under the Securities Act of 1933, as amended (the "1933 Act"), covering Fund shares, as filed with the Securities and Exchange Commission (the "Commission"), and to the investment objectives, policies and restrictions of the Funds, as each of the same shall be from time to time in effect. To carry out such obligations, the Adviser shall exercise full discretion and act for the Funds in the same manner and with the same force and effect as a Fund itself might or could do with respect to purchases, sales or other transactions, as well as with respect to all other such things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. No reference in this Agreement to the Adviser having full discretionary authority over a Fund's investments shall in any way limit the right of the Board, in its sole discretion, to establish or revise policies in connection with the management of a Fund's assets or to otherwise exercise its right to control the overall management of a Fund.
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of the 1940 Act, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act and the respective rules and regulations thereunder, as applicable, as well as with all other applicable federal and state laws, rules, regulations and case law that relate to the services and relationships described hereunder and to the conduct of its business as a registered investment adviser. The Adviser also agrees to comply with the objectives, policies and restrictions set forth in the Registration Statement, as amended or supplemented, of the Funds, and with any policies, guidelines, instructions and procedures approved by the Board and provided to the Adviser. In selecting a Fund's portfolio securities and performing the Adviser's obligations hereunder, the Adviser shall cause the Funds to comply with the diversification and source of income requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. The Adviser shall maintain compliance procedures that it reasonably believes are adequate to ensure its compliance with the foregoing. No supervisory activity undertaken by the Board shall limit the Adviser's full responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies with respect to securities that are held by each Fund shall be voted, and the Board has initially determined to delegate the authority and responsibility to vote proxies for a Fund's securities to the Adviser. So long as proxy voting authority for each Fund has been delegated to the Adviser, the Adviser shall exercise its proxy voting responsibilities. The Adviser shall carry out such responsibility in accordance with any instructions that the Board shall provide from time to time, and at all times in a manner consistent with Rule 206(4)-6 under the Advisers Act and its fiduciary responsibilities to the Trust. The Adviser shall provide periodic reports and keep records relating to proxy voting as the Board may reasonably request or as may be necessary for the Funds to comply with the 1940 Act and other applicable law. Any such delegation of proxy voting responsibility to the Adviser may be revoked or modified by the Board at any time.
The Adviser is authorized to instruct the Funds' custodian and/or broker(s) to forward promptly to the Adviser or designate service provider copies of all proxies and shareholder communications relating to securities held in the portfolio of a Fund (other than materials relating to legal proceedings against a Fund). The Adviser may also instruct the Funds' custodian and/or broker(s) to provide reports of holdings in the portfolio of the Funds. The Adviser has the authority to engage a service provided to assist with administrative functions related to voting Fund proxies. The Trust shall direct the Funds' custodian and/or broker(s) to provide any assistance requested by the Adviser in facilitating the use of a service provider. In no event shall the Adviser have any responsibility to vote proxies that are not received on a timely basis. The Trust acknowledges that the Adviser, consistent with the Adviser's written proxy voting policies and procedures, may refrain from voting a proxy if, in the Adviser's discretion, refraining from voting would be in the best interests of the Funds and their shareholders.
(d) RECORDKEEPING. The Adviser shall not be responsible for the provision of administrative, bookkeeping or accounting services to the Funds, except as otherwise provided herein or as may be necessary for the Adviser to supply to the Trust or its Board the information required to be supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all matters pertaining to Fund assets advised by the Adviser required by Rule 31a-1 under the 1940 Act (other than those records being maintained by any administrator, custodian or transfer agent appointed by the Funds) relating to its responsibilities provided hereunder with respect to the Funds, and shall preserve such records for the periods and in a manner prescribed therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records"). The Fund Books and Records shall be available to the Board at any time upon request, shall be delivered to the Trust upon the termination of this Agreement and shall be available without delay during any day the Trust is open for business.
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide regular reports regarding Fund holdings, and may, on its own initiative, furnish the Trust and its Board from time to time with whatever information the Adviser believes is appropriate for this purpose. The Adviser agrees to notify the Trust promptly if the Adviser reasonably believes that the value of any security held by the Funds may not reflect fair value. The Adviser agrees to provide upon request any pricing information of which the Adviser is aware to the Trust, its Board and/or any Fund pricing agent to assist in the determination of the fair value of any Fund holdings for which market quotations are not readily available or as otherwise required in accordance with the 1940 Act or the Trust's valuation procedures for the purpose of calculating a Fund's net asset value in accordance with procedures and methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to cooperate with and provide reasonable assistance to the Trust, any Trust custodian or foreign sub-custodians, any Trust pricing agents and all other agents and representatives of the Trust with respect to such information regarding the Funds as such entities may reasonably request from time to time in the performance of their obligations, provide prompt responses to reasonable requests made by such persons and establish appropriate interfaces with each so as to promote the efficient exchange of information and compliance with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it reasonably believes complies with the requirements of Rule 17j-1 under the 1940 Act, which it has provided to the Trust. The Adviser shall ensure that its Access Persons (as defined in the Adviser's Code of Ethics) comply in all material respects with the Adviser's Code of Ethics, as in effect from time to time. Upon request, the Adviser shall provide the Trust with a (i) copy of the Adviser's current Code of Ethics, as in effect from time to time, and (ii) certification that it has adopted procedures reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Adviser's Code of Ethics. Annually, the Adviser shall furnish a written report, which complies with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to the Trust's Board. The Adviser shall respond to requests for information from the
Trust as to violations of the Code by Access Persons and the sanctions imposed by the Adviser. The Adviser shall immediately notify the Trust of any material violation of the Code, whether or not such violation relates to a security held by the Funds.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its officers with such periodic reports concerning the obligations the Adviser has assumed under this Agreement as the Trust may from time to time reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust's chief compliance officer immediately upon detection of
(i) any material failure to manage the Funds in accordance with its
investment objectives and policies or any applicable law; or (ii) any
material breach of any of the Funds' or the Adviser's policies, guidelines
or procedures. In addition, the Adviser shall provide a quarterly report
regarding the Funds' compliance with its investment objectives and
policies, applicable law, including, but not limited to the 1940 Act and
Subchapter M of the Code, and the Funds' policies, guidelines or procedures
as applicable to the Adviser's obligations under this Agreement. The
Adviser agrees to correct any such failure promptly and to take any action
that the Board may reasonably request in connection with any such breach.
Upon request, the Adviser shall also provide the officers of the Trust with
supporting certifications in connection with such certifications of Fund
financial statements and disclosure controls pursuant to the Sarbanes-Oxley
Act. The Adviser will promptly notify the Trust in the event (i) the
Adviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board, or body, involving the affairs of the Trust (excluding
class action suits in which a Fund is a member of the plaintiff class by
reason of a Fund's ownership of shares in the defendant) or the compliance
by the Adviser with the federal or state securities laws or (ii) an actual
change in control of the Adviser resulting in an "assignment" (as defined
in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will provide the Trust with any information reasonably requested regarding its management of the Funds required for any meeting of the Board, or for any shareholder report, Form N-CSR, Form N-Q, Form N-PX, Form N-SAR, amended registration statement, proxy statement, or prospectus supplement to be filed by the Trust with the Commission. The Adviser will make its officers and employees available to meet with the Board from time to time on due notice to review its investment management services to the Funds in light of current and prospective economic and market conditions and shall furnish to the Board such information as may reasonably be necessary in order for the Board to evaluate this Agreement or any proposed amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust such information concerning portfolio transactions as may be necessary to enable the Trust or its designated agent to perform such compliance testing on the Funds and the Adviser's services as the Trust may, in its sole discretion, determine to be appropriate. The provision of such information by the Adviser to the Trust or its designated agent in no way relieves the Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of securities for the account of the Funds, neither the Adviser nor any of its directors, officers or employees will act as a principal or agent or receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of all orders for the purchase and sale of securities for a Fund's account with brokers or dealers selected by the Adviser. In the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek for the Funds the most favorable execution and net price available under the circumstances. It is also understood that it is desirable for the Funds that the Adviser have access to brokerage and research services provided by brokers who may execute brokerage transactions at a higher cost to the Funds than may result when allocating brokerage to other brokers, consistent with section 28(e) of the 1934 Act and any Commission staff interpretations thereof. Therefore, the Adviser is authorized to place orders for the purchase and sale of securities for the Funds with such brokers, subject to review by the Board from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Adviser in connection with its or its affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Funds as well as other clients of the Adviser, the Adviser may, to the extent permitted by applicable law and regulations, aggregate the order for securities to be sold or purchased. In such event, the Adviser will allocate securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction, in the manner the Adviser reasonably considers to be equitable and consistent with its fiduciary obligations to the Funds and to such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act as broker in connection with the purchase or sale of securities or other investments for the Funds, subject to: (a) the requirement that the Adviser seek to obtain best execution and price within the policy guidelines determined by the Board and set forth in the Funds' current Registration Statement; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers Act; (d) the provisions of the 1934 Act; and (e) other provisions of applicable law. These brokerage services are not within the scope of the duties of the Adviser under this Agreement. Subject to the requirements of applicable law and any procedures adopted by the Board, the Adviser or its affiliates may receive brokerage commissions, fees or other remuneration from the Funds for these services in addition to the Adviser's fees for services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or receive physical possession of cash, securities or other investments of the Funds.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs of providing services hereunder. Other than as herein specifically indicated, the Adviser shall not be responsible for a Fund's expenses, including brokerage and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment adviser under the Advisers Act, and will remain so registered for the duration of this Agreement. The Adviser is not prohibited by the Advisers Act or the 1940 Act from performing the services contemplated by this Agreement, and to the best knowledge of the Adviser, there is no proceeding or investigation that is reasonably likely to result in the Adviser being prohibited from performing the services contemplated by this Agreement. The Adviser agrees to promptly notify the Trust of the occurrence of any event that would disqualify the Adviser from serving as an investment adviser to an investment company. The Adviser is in compliance in all material respects with all applicable federal and state law in connection with its investment management operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of its Form ADV Part I as most recently filed with the SEC and its current Part II and will, promptly after filing any amendment to its Form ADV with the SEC updating its Part II, furnish a copy of such amendments or updates to the Trust. The information contained in the Adviser's Form ADV is accurate and complete in all material respects and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed, and will in the future review, the Registration Statement, summary prospectus, prospectus, statement of additional information, periodic reports to shareholders, reports and schedules filed with the Commission (including any amendment, supplement or sticker to any of the foregoing) and advertising and sales material relating to the Funds (collectively the "Disclosure Documents") and represents and warrants that such Disclosure Documents contain or will contain no untrue statement of any material fact and do not and will not omit any statement of material fact required to be stated therein or necessary to make the statements therein not misleading.
(d) USE OF THE NAME "ALPHAONE". The Adviser has the right to use the name "AlphaOne" in connection with its services to the Trust and that, subject to the terms set forth in Section 8 of this Agreement, the Trust shall have the right to use the name "AlphaOne" in connection with the management and operation of the Funds. The Adviser is not aware of any threatened or existing actions, claims, litigation or proceedings that would adversely affect or prejudice the rights of the Adviser or the Trust to use the name "AlphaOne."
(e) INSURANCE. The Adviser maintains errors and omissions insurance coverage in an appropriate amount and shall provide prior written notice to the Trust (i) of any material changes in its insurance policies or insurance coverage; or (ii) if any
material claims will be made on its insurance policies. Furthermore, the Adviser shall, upon reasonable request, provide the Trust with any information it may reasonably require concerning the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that it has no arrangement or understanding with any party, other than the Trust, that would influence the decision of the Adviser with respect to its selection of securities for the Funds, and that all selections shall be done in accordance with what is in the best interest of the Funds.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in the best interests of the Trust including requiring any of its personnel with knowledge of Fund activities to place the interest of the Funds first, ahead of their own interests, in all personal trading scenarios that may involve a conflict of interest with the Funds, consistent with its fiduciary duties under applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "ALPHAONE". The Adviser grants to the Trust a license to
use the name "AlphaOne" (the "Name") as part of the name of the Funds. The
foregoing authorization by the Adviser to the Trust to use the Name as part of
the name of the Funds is not exclusive of the right of the Adviser itself to
use, or to authorize others to use, the Name; the Trust acknowledges and agrees
that, as between the Trust and the Adviser, the Adviser has the right to use,
or authorize others to use, the Name. The Trust shall (1) only use the Name in
a manner consistent with uses approved by the Adviser; (2) use its best efforts
to maintain the quality of the services offered using the Name; (3) adhere to
such other specific quality control standards as the Adviser may from time to
time promulgate. At the request of the Adviser, the Trust will (a) submit to
Adviser representative samples of any promotional materials using the Name; and
(b) change the name of a Fund within three months of its receipt of the
Adviser's request, or such other shorter time period as may be required under
the terms of a settlement agreement or court order, so as to eliminate all
reference to the Name and will not thereafter transact any business using the
Name in the name of a Fund; provided, however, that the Trust may continue to
use beyond such date any supplies of prospectuses, marketing materials and
similar documents that the Trust had on the date of such name change in
quantities not exceeding those historically produced and used in connection
with such Funds.
9. ADVISER'S COMPENSATION. Each Fund shall pay to the Adviser, as compensation for the Adviser's services hereunder, a fee, determined as described in Schedule A that is attached hereto and made a part hereof. Such fee shall be computed daily and paid not less than monthly in arrears by a Fund.
The method for determining net assets of a Fund for purposes hereof shall be the same as the method for determining net assets for purposes of establishing the offering and redemption prices of Fund shares as described in the Funds' prospectuses. In the event of termination of this
Agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the Adviser is and shall be an independent contractor and, unless otherwise expressly provided herein or otherwise authorized in writing, shall have no authority to act for or represent the Trust or the Funds in any way or otherwise be deemed to be an agent of the Trust or the Funds. If any occasion should arise in which the Adviser gives any advice to its clients concerning the shares of the Funds, the Adviser will act solely as investment counsel for such clients and not in any way on behalf of the Funds.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in section 2(a)(4) of the 1940 Act); provided that such termination shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
This Agreement shall become effective as of the date executed and shall remain in full force and effect continually thereafter, subject to renewal as provided in Section 12(c) and unless terminated automatically as set forth in Section 11 hereof or until terminated as follows:
(a) The Trust may cause this Agreement to terminate either (i) by vote of its Board or (ii) with respect to the Funds, upon the affirmative vote of a majority of the outstanding voting securities of the Funds; or
(b) The Adviser may at any time terminate this Agreement by not more than sixty (60) days' nor less than thirty (30) days' written notice delivered or mailed by registered mail, postage prepaid, to the Trust; or
(c) This Agreement shall automatically terminate two years from the date of its execution unless its renewal is specifically approved at least annually thereafter by (i) a majority vote of the Trustees, including a majority vote of such Trustees who are not interested persons of the Trust or the Adviser, at a meeting called for the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities of the Funds; provided, however, that if the continuance of this Agreement is submitted to the shareholders of a Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Adviser may continue to serve hereunder as to the Funds in a manner consistent with the 1940 Act and the rules and regulations thereunder; and
(d) Termination of this Agreement pursuant to this Section shall be without payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser shall, immediately upon notice of termination or on such later date as may be specified in such notice, cease all activity on behalf of the Funds and with respect to any of its assets, except as otherwise required by any fiduciary duties of the Adviser under applicable law. In addition, the Adviser shall deliver the Fund Books and Records to the Trust by such means and in accordance with such schedule as the Trust shall direct and shall otherwise cooperate, as reasonably directed by the Trust, in the transition of portfolio asset management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting securities of the Fund" shall have the meaning as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
(b) "Interested persons" and "Assignment" shall have their respective meanings as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER.
(a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of statements in the Funds' Disclosure Documents.
(b) The Adviser shall be liable to the Funds for any loss (including transaction costs) incurred by the Funds as a result of any investment made by the Adviser in contravention of: (i) any investment policy, guideline or restriction set forth in the Registration Statement or as approved by the Board from time to time and provided to the Adviser; or (ii) applicable law, including but not limited to the 1940 Act and the Code (including but not limited to a Fund's failure to satisfy the diversification or source of income requirements of Subchapter M of the Code) (the investments described in this subsection (b) collectively are referred to as "Improper Investments").
(c) The Adviser shall indemnify and hold harmless the Trust, each
affiliated person of the Trust within the meaning of Section 2(a)(3) of the
1940 Act, and each person who controls the Trust within the meaning of
Section 15 of the 1933 Act (any such person, an "Indemnified Party")
against any and all losses, claims, damages, expenses or liabilities
(including the reasonable cost of investigating and defending any alleged
loss, claim, damage, expense or liability and reasonable counsel fees
incurred in connection therewith) to which any such person may become
subject under the 1933 Act, the 1934 Act, the 1940 Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages, expenses or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) a breach by the
Adviser
of this Agreement or of the representations and warranties made by the Adviser herein; (ii) any Improper Investment; (iii) any untrue statement or alleged untrue statement of a material fact contained in any Disclosure Document or the omission or alleged omission from a Disclosure Document of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) the Adviser's performance or non-performance of its duties hereunder; provided, however, that nothing herein shall be deemed to protect any Indemnified Party who is a Trustee or officer of the Trust against any liability to the Trust or to its shareholders to which such Indemnified Party would otherwise be subject by reason or willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office with the Trust.
15. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Funds shall be personally liable for any of the foregoing liabilities. The Trust's Certificate of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Certificate of Trust and the Trust's Agreement and Declaration of Trust describe in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
17. CHANGE IN THE ADVISER'S OWNERSHIP. The Adviser agrees that it shall notify the Trust of any anticipated or otherwise reasonably foreseeable change in the ownership of the Adviser within a reasonable time prior to such change being effected.
18. JURISDICTION. This Agreement shall be governed by and construed in accordance with the substantive laws of Commonwealth of Massachusetts and the Adviser consents to the jurisdiction of courts, both state or federal, in Massachusetts, with respect to any dispute under this Agreement.
19. PARAGRAPH HEADINGS. The headings of paragraphs contained in this Agreement are provided for convenience only, form no part of this Agreement and shall not affect its construction.
20. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed on their behalf by their duly authorized officers as of the date first above written.
THE ADVISORS' INNER CIRCLE FUND, on behalf of the Fund(s) listed on Schedule A
By: /s/ Philip T. Masterson --------------------------- Name: Philip T. Masterson Title: President |
ALPHAONE INVESTMENT SERVICES, LLC
By: /s/ Gerald Holland ---------------------- Name: Gerald Holland Title: COO |
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
DATED MARCH 24, 2011 BETWEEN
THE ADVISORS' INNER CIRCLE FUND
AND
ALPHAONE INVESTMENT SERVICES, LLC
The Trust will pay to the Adviser as compensation for the Adviser's services rendered, a fee, computed daily at an annual rate based on the average daily net assets of each Fund in accordance the following fee schedule:
FUND RATE ---- ---- AlphaOne Small Cap Growth Fund 0.85% AlphaOne Micro Cap Equity Fund 1.00% AlphaOne U.S. Equity Long Short Fund 1.25% |
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT (the "Agreement") made as of this 20th day of June, 2011 by and between THE ADVISORS' INNER CIRCLE FUND (the "Trust"), a Massachusetts voluntary association (commonly known as a business trust) registered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and LOOMIS, SAYLES & COMPANY, L.P. (the "Adviser"), a Delaware corporation with its principal place of business at One Financial Center, Boston, Massachusetts 02111-2621.
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the Adviser to act as investment adviser to the Trust on behalf of the series set forth on Schedule A to this Agreement (the "Funds"), as such Schedule may be amended from time to time upon mutual agreement of the parties, and to provide certain related services, as more fully set forth below, and to perform such services under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall act as investment adviser with respect to the Funds. In such capacity, the Adviser shall, subject to the supervision of the Board, regularly provide the Funds with investment research, advice and supervision and shall furnish continuously an investment program for each Fund, consistent with the investment objectives and policies of each Fund. The Adviser shall determine, from time to time, what securities shall be purchased for a Fund, what securities shall be held or sold by a Fund and what portion of a Fund's assets shall be held uninvested in cash, subject always to the provisions of the Trust's Agreement and Declaration of Trust, By-Laws and its registration statement on Form N-1A (the "Registration Statement") under the 1940 Act, and under the Securities Act of 1933, as amended (the "1933 Act"), covering Fund shares, as filed with the Securities and Exchange Commission (the "Commission"), and to the investment objectives, policies and restrictions of the Funds, as each of the same shall be from time to time in effect. To carry out such obligations, the Adviser shall exercise full discretion and act for the Funds in the same manner and with the same force and effect as a Fund itself might or could do with respect to purchases, sales or other transactions, as well as with respect to all other such things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. No reference in this Agreement to the Adviser having full discretionary authority over a Fund's investments shall in any way limit the right of the Board, in its sole discretion, to establish or revise policies in connection with the management of a Fund's assets or to otherwise exercise its right to control the overall management of a Fund.
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of the 1940 Act, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act and the respective rules and regulations thereunder, as applicable, as well as with all other applicable federal and state laws, rules, regulations and case law that relate to the services and relationships described hereunder and to the conduct of its business as a registered investment adviser. The Adviser also agrees to comply with the objectives, policies and restrictions set forth in the Registration Statement, as amended or supplemented, of the Funds, and with any policies, guidelines, instructions and procedures approved by the Board and provided to the Adviser. In selecting a Fund's portfolio securities and performing the Adviser's obligations hereunder, the Adviser shall cause the Funds to comply with the diversification and source of income requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. The Adviser shall maintain compliance procedures that it reasonably believes are adequate to ensure its compliance with the foregoing. No supervisory activity undertaken by the Board shall limit the Adviser's full responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies with respect to securities that are held by each Fund shall be voted, and the Board has initially determined to delegate the authority and responsibility to vote proxies for a Fund's securities to the Adviser. So long as proxy voting authority for each Fund has been delegated to the Adviser, the Adviser shall exercise its proxy voting responsibilities. The Adviser shall carry out such responsibility in accordance with any instructions that the Board shall provide from time to time, and at all times in a manner consistent with Rule 206(4)-6 under the Advisers Act and its fiduciary responsibilities to the Trust. The Adviser shall provide periodic reports and keep records relating to proxy voting as the Board may reasonably request or as may be necessary for the Funds to comply with the 1940 Act and other applicable law. Any such delegation of proxy voting responsibility to the Adviser may be revoked or modified by the Board at any time.
The Adviser is authorized to instruct the Funds' custodian and/or broker(s) to forward promptly to the Adviser or designate service provider copies of all proxies and shareholder communications relating to securities held in the portfolio of a Fund (other than materials relating to legal proceedings against a Fund). The Adviser may also instruct the Funds' custodian and/or broker(s) to provide reports of holdings in the portfolio of the Funds. The Adviser has the authority to engage a service provided to assist with administrative functions related to voting Fund proxies. The Trust shall direct the Funds' custodian and/or broker(s) to provide any assistance requested by the Adviser in facilitating the use of a service provider. In no event shall the Adviser have any responsibility to vote proxies that are not received on a timely basis. The Trust acknowledges that the Adviser, consistent with the Adviser's written proxy voting policies and procedures, may refrain from voting a proxy if, in the Adviser's discretion, refraining from voting would be in the best interests of the Funds and their shareholders.
(d) RECORDKEEPING. The Adviser shall not be responsible for the provision of administrative, bookkeeping or accounting services to the Funds, except as otherwise
provided herein or as may be necessary for the Adviser to supply to the Trust or its Board the information required to be supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all matters pertaining to Fund assets advised by the Adviser required by Rule 31a-1 under the 1940 Act (other than those records being maintained by any administrator, custodian or transfer agent appointed by the Funds) relating to its responsibilities provided hereunder with respect to the Funds, and shall preserve such records for the periods and in a manner prescribed therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records"). The Fund Books and Records shall be available to the Board at any time upon request, shall be delivered to the Trust upon the termination of this Agreement and shall be available without delay during any day the Trust is open for business.
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide regular reports regarding Fund holdings, and may, on its own initiative, furnish the Trust and its Board from time to time with whatever information the Adviser believes is appropriate for this purpose. The Adviser agrees to notify the Trust promptly if the Adviser reasonably believes that the value of any security held by the Funds may not reflect fair value. The Adviser agrees to provide upon request any pricing information of which the Adviser is aware to the Trust, its Board and/or any Fund pricing agent to assist in the determination of the fair value of any Fund holdings for which market quotations are not readily available or as otherwise required in accordance with the 1940 Act or the Trust's valuation procedures for the purpose of calculating a Fund's net asset value in accordance with procedures and methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to cooperate with and provide reasonable assistance to the Trust, any Trust custodian or foreign sub-custodians, any Trust pricing agents and all other agents and representatives of the Trust with respect to such information regarding the Funds as such entities may reasonably request from time to time in the performance of their obligations, provide prompt responses to reasonable requests made by such persons and establish appropriate interfaces with each so as to promote the efficient exchange of information and compliance with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it reasonably believes complies with the requirements of Rule 17j-1 under the 1940 Act, which it has provided to the Trust. The Adviser shall ensure that its Access Persons (as defined in the Adviser's Code of Ethics) comply in all material respects with the Adviser's Code of Ethics, as in effect from time to time. Upon request, the Adviser shall provide the Trust with a (i) copy of the Adviser's current Code of Ethics, as in effect from time to time, and (ii) certification that it has adopted procedures reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Adviser's Code of Ethics. Annually, the Adviser shall furnish a written report, which complies with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to the Trust's Board. The Adviser shall respond to requests for information from the Trust as to violations of the Code by Access Persons and the sanctions imposed by the Adviser.
The Adviser shall immediately notify the Trust of any material violation of the Code, whether or not such violation relates to a security held by the Funds.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its officers with such periodic reports concerning the obligations the Adviser has assumed under this Agreement as the Trust may from time to time reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust's chief compliance officer immediately upon detection of
(i) any material failure to manage the Funds in accordance with its
investment objectives and policies or any applicable law; or (ii) any
material breach of any of the Funds' or the Adviser's policies, guidelines
or procedures. In addition, the Adviser shall provide a quarterly report
regarding the Funds' compliance with its investment objectives and
policies, applicable law, including, but not limited to the 1940 Act and
Subchapter M of the Code, and the Funds' policies, guidelines or procedures
as applicable to the Adviser's obligations under this Agreement. The
Adviser agrees to correct any such failure promptly and to take any action
that the Board may reasonably request in connection with any such breach.
Upon request, the Adviser shall also provide the officers of the Trust with
supporting certifications in connection with such certifications of Fund
financial statements and disclosure controls pursuant to the Sarbanes-Oxley
Act. The Adviser will promptly notify the Trust in the event (i) the
Adviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board, or body, involving the affairs of the Trust (excluding
class action suits in which a Fund is a member of the plaintiff class by
reason of a Fund's ownership of shares in the defendant) or the compliance
by the Adviser with the federal or state securities laws or (ii) an actual
change in control of the Adviser resulting in an "assignment" (as defined
in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will provide the Trust with any information reasonably requested regarding its management of the Funds required for any meeting of the Board, or for any shareholder report, Form N-CSR, Form N-Q, Form N-PX, Form N-SAR, amended registration statement, proxy statement, or prospectus supplement to be filed by the Trust with the Commission. The Adviser will make its officers and employees available to meet with the Board from time to time on due notice to review its investment management services to the Funds in light of current and prospective economic and market conditions and shall furnish to the Board such information as may reasonably be necessary in order for the Board to evaluate this Agreement or any proposed amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust such information concerning portfolio transactions as may be necessary to enable the Trust or its designated agent to perform such compliance testing on the Funds and the Adviser's services as the Trust may, in its sole discretion, determine to be appropriate. The provision of such information by the Adviser to the Trust or its designated agent in no way relieves the Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of securities for the account of the Funds, neither the Adviser nor any of its directors, officers or employees will act as a principal or agent or receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of all orders for the purchase and sale of securities for a Fund's account with brokers or dealers selected by the Adviser. In the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek for the Funds the most favorable execution and net price available under the circumstances. It is also understood that it is desirable for the Funds that the Adviser have access to brokerage and research services provided by brokers who may execute brokerage transactions at a higher cost to the Funds than may result when allocating brokerage to other brokers, consistent with section 28(e) of the 1934 Act and any Commission staff interpretations thereof. Therefore, the Adviser is authorized to place orders for the purchase and sale of securities for the Funds with such brokers, subject to review by the Board from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Adviser in connection with its or its affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Funds as well as other clients of the Adviser, the Adviser may, to the extent permitted by applicable law and regulations, aggregate the order for securities to be sold or purchased. In such event, the Adviser will allocate securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction, in the manner the Adviser reasonably considers to be equitable and consistent with its fiduciary obligations to the Funds and to such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act as broker in connection with the purchase or sale of securities or other investments for the Funds, subject to: (a) the requirement that the Adviser seek to obtain best execution and price within the policy guidelines determined by the Board and set forth in the Funds' current Registration Statement; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers Act; (d) the provisions of the 1934 Act; and (e) other provisions of applicable law. These brokerage services are not within the scope of the duties of the Adviser under this Agreement. Subject to the requirements of applicable law and any procedures adopted by the Board, the Adviser or its affiliates may receive brokerage commissions, fees or other remuneration from the Funds for these services in addition to the Adviser's fees for services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or receive physical possession of cash, securities or other investments of the Funds.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs of providing services hereunder. Other than as herein specifically indicated, the Adviser shall not be responsible for a Fund's expenses, including brokerage and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment adviser under the Advisers Act, and will remain so registered for the duration of this Agreement. The Adviser is not prohibited by the Advisers Act or the 1940 Act from performing the services contemplated by this Agreement, and to the best knowledge of the Adviser, there is no proceeding or investigation that is reasonably likely to result in the Adviser being prohibited from performing the services contemplated by this Agreement. The Adviser agrees to promptly notify the Trust of the occurrence of any event that would disqualify the Adviser from serving as an investment adviser to an investment company. The Adviser is in compliance in all material respects with all applicable federal and state law in connection with its investment management operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of its Form ADV Part I as most recently filed with the SEC and its current Part II and will, promptly after filing any amendment to its Form ADV with the SEC updating its Part II, furnish a copy of such amendments or updates to the Trust. The information contained in the Adviser's Form ADV is accurate and complete in all material respects and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed, and will in the future review, the Registration Statement, summary prospectus, prospectus, statement of additional information, periodic reports to shareholders, reports and schedules filed with the Commission (including any amendment, supplement or sticker to any of the foregoing) and advertising and sales material relating to the Funds (collectively the "Disclosure Documents") and represents and warrants that such Disclosure Documents contain or will contain no untrue statement of any material fact and do not and will not omit any statement of material fact required to be stated therein or necessary to make the statements therein not misleading.
(d) USE OF THE NAME "LOOMIS". The Adviser has the right to use the name "Loomis" in connection with its services to the Trust and that, subject to the terms set forth in Section 8 of this Agreement, the Trust shall have the right to use the name "Loomis" in connection with the management and operation of the Fund. The Adviser is not aware of any threatened or existing actions, claims, litigation or proceedings that would adversely affect or prejudice the rights of the Adviser or the Trust to use the name "Loomis."
(e) INSURANCE. The Adviser maintains errors and omissions insurance coverage in an appropriate amount and shall provide prior written notice to the Trust (i) of any material changes in its insurance policies or insurance coverage; or (ii) if any
material claims will be made on its insurance policies. Furthermore, the Adviser shall, upon reasonable request, provide the Trust with any information it may reasonably require concerning the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that it has no arrangement or understanding with any party, other than the Trust, that would influence the decision of the Adviser with respect to its selection of securities for the Funds, and that all selections shall be done in accordance with what is in the best interest of the Funds.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in the best interests of the Trust including requiring any of its personnel with knowledge of Fund activities to place the interest of the Funds first, ahead of their own interests, in all personal trading scenarios that may involve a conflict of interest with the Funds, consistent with its fiduciary duties under applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "LOOMIS". The Adviser grants to the Trust a license to
use the name "Loomis" (the "Name") as part of the name of the Fund. The
foregoing authorization by the Adviser to the Trust to use the Name as part of
the name of the Fund is not exclusive of the right of the Adviser itself to
use, or to authorize others to use, the Name; the Trust acknowledges and agrees
that, as between the Trust and the Adviser, the Adviser has the right to use,
or authorize others to use, the Name. The Trust shall (1) only use the Name in
a manner consistent with uses approved by the Adviser; (2) use its best efforts
to maintain the quality of the services offered using the Name; (3) adhere to
such other specific quality control standards as the Adviser may from time to
time promulgate. At the request of the Adviser, the Trust will (a) submit to
Adviser representative samples of any promotional materials using the Name; and
(b) change the name of the Fund within three months of its receipt of the
Adviser's request, or such other shorter time period as may be required under
the terms of a settlement agreement or court order, so as to eliminate all
reference to the Name and will not thereafter transact any business using the
Name in the name of the Fund; provided, however, that the Trust may continue to
use beyond such date any supplies of prospectuses, marketing materials and
similar documents that the Trust had on the date of such name change in
quantities not exceeding those historically produced and used in connection
with such Fund.
9. ADVISER'S COMPENSATION. Each Fund shall pay to the Adviser, as compensation for the Adviser's services hereunder, a fee, determined as described in Schedule A that is attached hereto and made a part hereof. Such fee shall be computed daily and paid not less than monthly in arrears by a Fund.
The method for determining net assets of a Fund for purposes hereof shall be the same as the method for determining net assets for purposes of establishing the offering and redemption prices of Fund shares as described in the Funds' prospectuses. In the event of termination of this
Agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the Adviser is and shall be an independent contractor and, unless otherwise expressly provided herein or otherwise authorized in writing, shall have no authority to act for or represent the Trust or the Funds in any way or otherwise be deemed to be an agent of the Trust or the Funds. If any occasion should arise in which the Adviser gives any advice to its clients concerning the shares of the Funds, the Adviser will act solely as investment counsel for such clients and not in any way on behalf of the Funds.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in section 2(a)(4) of the 1940 Act); provided that such termination shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
This Agreement shall become effective as of the date executed and shall remain in full force and effect continually thereafter, subject to renewal as provided in Section 12(c) and unless terminated automatically as set forth in Section 11 hereof or until terminated as follows:
(a) The Trust may cause this Agreement to terminate either (i) by vote of its Board or (ii) with respect to the Funds, upon the affirmative vote of a majority of the outstanding voting securities of the Funds; or
(b) The Adviser may at any time terminate this Agreement by not more than sixty (60) days' nor less than thirty (30) days' written notice delivered or mailed by registered mail, postage prepaid, to the Trust; or
(c) This Agreement shall automatically terminate two years from the date of its execution unless its renewal is specifically approved at least annually thereafter by (i) a majority vote of the Trustees, including a majority vote of such Trustees who are not interested persons of the Trust or the Adviser, at a meeting called for the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities of the Funds; provided, however, that if the continuance of this Agreement is submitted to the shareholders of a Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Adviser may continue to serve hereunder as to the Funds in a manner consistent with the 1940 Act and the rules and regulations thereunder; and
(d) Termination of this Agreement pursuant to this Section shall be without payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser shall, immediately upon notice of termination or on such later date as may be specified in such notice, cease all activity on behalf of the Funds and with respect to any of its assets, except as otherwise required by any fiduciary duties of the Adviser under applicable law. In addition, the Adviser shall deliver the Fund Books and Records to the Trust by such means and in accordance with such schedule as the Trust shall direct and shall otherwise cooperate, as reasonably directed by the Trust, in the transition of portfolio asset management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting securities of the Fund" shall have the meaning as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
(b) "Interested persons" and "Assignment" shall have their respective meanings as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER.
(a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of statements in the Funds' Disclosure Documents.
(b) The Adviser shall be liable to the Funds for any loss (including transaction costs) incurred by the Funds as a result of any investment made by the Adviser in contravention of: (i) any investment policy, guideline or restriction set forth in the Registration Statement or as approved by the Board from time to time and provided to the Adviser; or (ii) applicable law, including but not limited to the 1940 Act and the Code (including but not limited to a Fund's failure to satisfy the diversification or source of income requirements of Subchapter M of the Code) (the investments described in this subsection (b) collectively are referred to as "Improper Investments").
(c) The Adviser shall indemnify and hold harmless the Trust, each
affiliated person of the Trust within the meaning of Section 2(a)(3) of the
1940 Act, and each person who controls the Trust within the meaning of
Section 15 of the 1933 Act (any such person, an "Indemnified Party")
against any and all losses, claims, damages, expenses or liabilities
(including the reasonable cost of investigating and defending any alleged
loss, claim, damage, expense or liability and reasonable counsel fees
incurred in connection therewith) to which any such person may become
subject under the 1933 Act, the 1934 Act, the 1940 Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages, expenses or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) a breach by the
Adviser
of this Agreement or of the representations and warranties made by the Adviser herein; (ii) any Improper Investment; (iii) any untrue statement or alleged untrue statement of a material fact contained in any Disclosure Document or the omission or alleged omission from a Disclosure Document of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) the Adviser's performance or non-performance of its duties hereunder; provided, however, that nothing herein shall be deemed to protect any Indemnified Party who is a Trustee or officer of the Trust against any liability to the Trust or to its shareholders to which such Indemnified Party would otherwise be subject by reason or willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office with the Trust.
15. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Funds shall be personally liable for any of the foregoing liabilities. The Trust's Certificate of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Certificate of Trust and the Trust's Agreement and Declaration of Trust describe in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
17. CHANGE IN THE ADVISER'S OWNERSHIP. The Adviser agrees that it shall notify the Trust of any anticipated or otherwise reasonably foreseeable change in the ownership of the Adviser within a reasonable time prior to such change being effected.
18. JURISDICTION. This Agreement shall be governed by and construed in accordance with the substantive laws of Commonwealth of Massachusetts and the Adviser consents to the jurisdiction of courts, both state or federal, in Massachusetts, with respect to any dispute under this Agreement.
19. PARAGRAPH HEADINGS. The headings of paragraphs contained in this Agreement are provided for convenience only, form no part of this Agreement and shall not affect its construction.
20. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed on their behalf by their duly authorized officers as of the date first above written.
THE ADVISORS' INNER CIRCLE FUND, on behalf of the Fund(s) listed on Schedule A
By:/s/ Philip T. Masterson -------------------------- Name: Philip T. Masterson Title: President |
LOOMIS, SAYLES & COMPANY, L.P.
By:/s/ Kevin P. Charleston ---------------------------- Name: Kevin P. Charleston Title: CFO |
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
DATED JUNE 20, 2011 BETWEEN
THE ADVISORS' INNER CIRCLE FUND
AND
LOOMIS, SAYLES & COMPANY, L.P.
The Trust will pay to the Adviser as compensation for the Adviser's services rendered, a fee, computed daily at an annual rate based on the average daily net assets of each Fund in accordance the following fee schedule:
FUND RATE ---- ---- Loomis Sayles Full Discretion Institutional Securitized Fund............0.00%(1) |
EXPENSE LIMITATION AGREEMENT
EXPENSE LIMITATION AGREEMENT, effective as of December 15, 2011 by and between Loomis, Sayles & Company, L.P. (the "Adviser") and The Advisors' Inner Circle Fund (the "Trust") (the "Agreement"), on behalf of each series of the Trust set forth in Schedule A attached hereto (each a "Fund," and collectively, the "Funds").
WHEREAS, the Trust is a Massachusetts voluntary association (commonly known as a business trust) organized under an Agreement and Declaration of Trust, dated July 18, 1991, as amended and restated as of February 18, 1997 (the "Declaration of Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and each Fund is a series of the Trust;
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory Agreement dated June 20, 2011 (the "Advisory Agreement"), pursuant to which the Adviser provides investment advisory services to each Fund;
WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of each Fund and its shareholders to maintain the expenses of each Fund at a level below the level to which each such Fund would normally be subject in order to maintain each Fund's expense ratio at the Maximum Annual Operating Expense Limit (as hereinafter defined) specified for such Fund in Schedule A hereto;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses of every character incurred by a Fund in any fiscal year, including but not limited to expenses for which payment has been made through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund (but excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of such Fund's business) ("Fund Operating Expenses"), exceed the Maximum Annual Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser.
1.2. MAXIMUM ANNUAL OPERATING EXPENSE LIMIT. The Maximum Annual Operating Expense Limit with respect to each Fund shall be the amount specified in Schedule A based on a percentage of the average daily net assets of each Fund. That Maximum Annual Operating Expense Limit for each Fund contemplates that certain expenses for each Fund may be paid through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund.
1.3. METHOD OF COMPUTATION. To determine the Adviser's liability with respect to the Excess Amount, each month the Fund Operating Expenses for each Fund shall be annualized as
of the last day of the month. If the annualized Fund Operating Expenses for any month of a Fund exceed the Maximum Annual Operating Expense Limit of such Fund, the Adviser shall remit to the appropriate Fund or Funds an amount that is sufficient to pay such Excess Amount.
1.4. YEAR-END ADJUSTMENT. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the payments remitted by the Adviser to the Fund or Funds with respect to the previous fiscal year shall equal the Excess Amount.
2. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall become effective as of the date hereof and continue in
effect until its termination. This Agreement may be terminated only (i) by the
Board of Trustees, at any time and without payment of any penalty, upon a
majority vote of the Trustees and the Independent Trustees voting separately or
(ii) upon the termination of the Advisory Agreement.
3. MISCELLANEOUS.
3.1. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
3.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Trust or the Funds to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Funds. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
3.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement, including but not limited to the computations of net asset values and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act.
3.4. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the day and year first above written.
THE ADVISORS INNER CIRCLE FUND,
on behalf of each series of the Trust set forth in Schedule A
/s/ Dianne M. Sulzbach ---------------------------- Dianne M. Sulzbach Vice President and Secretary |
LOOMIS, SAYLES & COMPANY, L.P.
/s/ Kevin P. Charleston ----------------------------- Kevin P. Charleston Principal |
SCHEDULE A
MAXIMUM ANNUAL OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds of the Trust:
----------------------------------------------------------------------------------------------------------
NAME OF FUND SHARE CLASS MAXIMUM ANNUAL OPERATING EXPENSE
LIMIT
----------------------------------------------------------------------------------------------------------
Loomis Sayles Full Discretion Institutional 0.10% through October 31, 2012 and
Institutional Securitized Fund 0.20% thereafter
----------------------------------------------------------------------------------------------------------
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INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT (the "Agreement") made as of this 19th day of December, 2011 by and between THE ADVISORS' INNER CIRCLE FUND (the "Trust"), a Massachusetts voluntary association (commonly known as a business trust) registered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and CBRE Clarion Securities LLC (the "Adviser"), a Delaware limited liability company with its principal place of business at 201 King of Prussia Road, Suite 600, Radnor, PA 19087.
W I T N E S S E T H
WHEREAS, the Board of Trustees (the "Board") of the Trust has selected the Adviser to act as investment adviser to the Trust on behalf of the series set forth on Schedule A to this Agreement (the "Fund"), as such Schedule may be amended from time to time upon mutual agreement of the parties, and to provide certain related services, as more fully set forth below, and to perform such services under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall act as investment adviser with respect to the Fund. In such capacity, the Adviser shall, subject to the supervision of the Board, regularly provide the Fund with investment research, advice and supervision and shall furnish continuously an investment program for the Fund, consistent with the investment objectives and policies of the Fund. The Adviser shall determine, from time to time, what securities shall be purchased for the Fund, what securities shall be held or sold by the Fund and what portion of the Fund's assets shall be held uninvested in cash, subject always to the provisions of the Trust's Agreement and Declaration of Trust, By-Laws and its registration statement on Form N-1A (the "Registration Statement") under the 1940 Act, and under the Securities Act of 1933, as amended (the "1933 Act"), covering Fund shares, as filed with the Securities and Exchange Commission (the "Commission"), and to the investment objectives, policies and restrictions of the Fund, as each of the same shall be from time to time in effect. To carry out such obligations, the Adviser shall exercise full discretion and act for the Fund in the same manner and with the same force and effect as the Fund itself might or could do with respect to purchases, sales or other transactions, as well as with respect to all other such things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. No reference in this Agreement to the Adviser having full discretionary authority over the Fund's investments shall in any way limit the right of the Board, in its sole discretion, to establish or revise policies in connection with the management of the Fund's assets or to otherwise exercise its right to control the overall management of the Fund.
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of the 1940 Act, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act and the respective rules and regulations thereunder, as applicable, as well as with all other applicable federal and state laws, rules, regulations and case law that relate to the services and relationships described hereunder and to the conduct of its business as a registered investment adviser. The Adviser also agrees to comply with the objectives, policies and restrictions set forth in the Registration Statement, as amended or supplemented, of the Fund, and with any policies, guidelines, instructions and procedures approved by the Board and provided to the Adviser. In selecting the Fund's portfolio securities and performing the Adviser's obligations hereunder, the Adviser shall cause the Fund to comply with the diversification and source of income requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. The Adviser shall maintain compliance procedures that it reasonably believes are adequate to ensure its compliance with the foregoing. No supervisory activity undertaken by the Board shall limit the Adviser's full responsibility for any of the foregoing.
(c) PROXY VOTING. The Board has the authority to determine how proxies with respect to securities that are held by the Fund shall be voted, and the Board has initially determined to delegate the authority and responsibility to vote proxies for the Fund's securities to the Adviser. So long as proxy voting authority for the Fund has been delegated to the Adviser, the Adviser shall exercise its proxy voting responsibilities. The Adviser shall carry out such responsibility in accordance with any instructions that the Board shall provide from time to time, and at all times in a manner consistent with Rule 206(4)-6 under the Advisers Act and its fiduciary responsibilities to the Trust. The Adviser shall provide periodic reports and keep records relating to proxy voting as the Board may reasonably request or as may be necessary for the Fund to comply with the 1940 Act and other applicable law. Any such delegation of proxy voting responsibility to the Adviser may be revoked or modified by the Board at any time.
The Adviser is authorized to instruct the Fund's custodian and/or broker(s) to forward promptly to the Adviser or designate service provider copies of all proxies and shareholder communications relating to securities held in the portfolio of a Fund (other than materials relating to legal proceedings against the Fund). The Adviser may also instruct the Fund's custodian and/or broker(s) to provide reports of holdings in the portfolio of the Fund. The Adviser has the authority to engage a service provided to assist with administrative functions related to voting Fund proxies. The Trust shall direct the Fund's custodian and/or broker(s) to provide any assistance requested by the Adviser in facilitating the use of a service provider. In no event shall the Adviser have any responsibility to vote proxies that are not received on a timely basis. The Trust acknowledges that the Adviser, consistent with the Adviser's written proxy voting policies and procedures, may refrain from voting a proxy if, in the Adviser's discretion, refraining from voting would be in the best interests of the Fund and its shareholders.
(d) RECORDKEEPING. The Adviser shall not be responsible for the provision of administrative, bookkeeping or accounting services to the Fund, except as otherwise
provided herein or as may be necessary for the Adviser to supply to the Trust or its Board the information required to be supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all matters pertaining to Fund assets advised by the Adviser required by Rule 31a-1 under the 1940 Act (other than those records being maintained by any administrator, custodian or transfer agent appointed by the Fund) relating to its responsibilities provided hereunder with respect to the Fund, and shall preserve such records for the periods and in a manner prescribed therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records"). The Fund Books and Records shall be available to the Board at any time upon request, shall be delivered to the Trust upon the termination of this Agreement and shall be available without delay during any day the Trust is open for business.
(e) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide regular reports regarding Fund holdings, and may, on its own initiative, furnish the Trust and its Board from time to time with whatever information the Adviser believes is appropriate for this purpose. The Adviser agrees to notify the Trust promptly if the Adviser reasonably believes that the value of any security held by the Fund may not reflect fair value. The Adviser agrees to provide upon request any pricing information of which the Adviser is aware to the Trust, its Board and/or any Fund pricing agent to assist in the determination of the fair value of any Fund holdings for which market quotations are not readily available or as otherwise required in accordance with the 1940 Act or the Trust's valuation procedures for the purpose of calculating the Fund net asset value in accordance with procedures and methods established by the Board.
(f) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to cooperate with and provide reasonable assistance to the Trust, any Trust custodian or foreign sub-custodians, any Trust pricing agents and all other agents and representatives of the Trust with respect to such information regarding the Fund as such entities may reasonably request from time to time in the performance of their obligations, provide prompt responses to reasonable requests made by such persons and establish appropriate interfaces with each so as to promote the efficient exchange of information and compliance with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it reasonably believes complies with the requirements of Rule 17j-1 under the 1940 Act, which it has provided to the Trust. The Adviser shall ensure that its Access Persons (as defined in the Adviser's Code of Ethics) comply in all material respects with the Adviser's Code of Ethics, as in effect from time to time. Upon request, the Adviser shall provide the Trust with a (i) copy of the Adviser's current Code of Ethics, as in effect from time to time, and (ii) certification that it has adopted procedures reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Adviser's Code of Ethics. Annually, the Adviser shall furnish a written report, which complies with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to the Trust's Board. The Adviser shall respond to requests for information from the Trust as to violations of the Code by Access Persons and the sanctions imposed by the Adviser.
The Adviser shall immediately notify the Trust of any material violation of the Code, whether or not such violation relates to a security held by the Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its officers with such periodic reports concerning the obligations the Adviser has assumed under this Agreement as the Trust may from time to time reasonably request.
(a) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust's chief compliance officer immediately upon detection of
(i) any material failure to manage the Fund in accordance with its
investment objectives and policies or any applicable law; or (ii) any
material breach of any of the Fund's or the Adviser's policies, guidelines
or procedures. In addition, the Adviser shall provide a quarterly report
regarding the Fund's compliance with its investment objectives and
policies, applicable law, including, but not limited to the 1940 Act and
Subchapter M of the Code, and the Fund's policies, guidelines or procedures
as applicable to the Adviser's obligations under this Agreement. The
Adviser agrees to correct any such failure promptly and to take any action
that the Board may reasonably request in connection with any such breach.
Upon request, the Adviser shall also provide the officers of the Trust with
supporting certifications in connection with such certifications of Fund
financial statements and disclosure controls pursuant to the Sarbanes-Oxley
Act. The Adviser will promptly notify the Trust in the event (i) the
Adviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board, or body, involving the affairs of the Trust (excluding
class action suits in which the Fund is a member of the plaintiff class by
reason of the Fund's ownership of shares in the defendant) or the
compliance by the Adviser with the federal or state securities laws or (ii)
an actual change in control of the Adviser resulting in an "assignment" (as
defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(b) BOARD AND FILINGS INFORMATION. The Adviser will provide the Trust with any information reasonably requested regarding its management of the Fund required for any meeting of the Board, or for any shareholder report, Form N-CSR, Form N-Q, Form N-PX, Form N-SAR, amended registration statement, proxy statement, or prospectus supplement to be filed by the Trust with the Commission. The Adviser will make its officers and employees available to meet with the Board from time to time on due notice to review its investment management services to the Fund in light of current and prospective economic and market conditions and shall furnish to the Board such information as may reasonably be necessary in order for the Board to evaluate this Agreement or any proposed amendments thereto.
(c) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust such information concerning portfolio transactions as may be necessary to enable the Trust or its designated agent to perform such compliance testing on the Fund and the Adviser's services as the Trust may, in its sole discretion, determine to be appropriate. The provision of such information by the Adviser to the Trust or its designated agent in no way relieves the Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(a) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of securities for the account of the Fund, neither the Adviser nor any of its directors, officers or employees will act as a principal or agent or receive any commission except as permitted by the 1940 Act.
(b) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of all orders for the purchase and sale of securities for the Fund's account with brokers or dealers selected by the Adviser. In the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek for the Fund the most favorable execution and net price available under the circumstances. It is also understood that it is desirable for the Fund that the Adviser have access to brokerage and research services provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers, consistent with section 28(e) of the 1934 Act and any Commission staff interpretations thereof. Therefore, the Adviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, subject to review by the Board from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Adviser in connection with its or its affiliates' services to other clients.
(c) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients of the Adviser, the Adviser may, to the extent permitted by applicable law and regulations, aggregate the order for securities to be sold or purchased. In such event, the Adviser will allocate securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction, in the manner the Adviser reasonably considers to be equitable and consistent with its fiduciary obligations to the Fund and to such other clients under the circumstances.
(d) AFFILIATED BROKERS. The Adviser or any of its affiliates may act as broker in connection with the purchase or sale of securities or other investments for the Fund, subject to: (a) the requirement that the Adviser seek to obtain best execution and price within the policy guidelines determined by the Board and set forth in the Fund's current Registration Statement; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers Act; (d) the provisions of the 1934 Act; and (e) other provisions of applicable law. These brokerage services are not within the scope of the duties of the Adviser under this Agreement. Subject to the requirements of applicable law and any procedures adopted by the Board, the Adviser or its affiliates may receive brokerage commissions, fees or other remuneration from the Fund for these services in addition to the Adviser's fees for services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or receive physical possession of cash, securities or other investments of the Fund.
6. ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs of providing services hereunder. Other than as herein specifically indicated, the Adviser shall not be responsible for the Fund's expenses, including brokerage and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) PROPERLY REGISTERED. The Adviser is registered as an investment adviser under the Advisers Act, and will remain so registered for the duration of this Agreement. The Adviser is not prohibited by the Advisers Act or the 1940 Act from performing the services contemplated by this Agreement, and to the best knowledge of the Adviser, there is no proceeding or investigation that is reasonably likely to result in the Adviser being prohibited from performing the services contemplated by this Agreement. The Adviser agrees to promptly notify the Trust of the occurrence of any event that would disqualify the Adviser from serving as an investment adviser to an investment company. The Adviser is in compliance in all material respects with all applicable federal and state law in connection with its investment management operations.
(b) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of its Form ADV Part I as most recently filed with the SEC and its current Part II and will, promptly after filing any amendment to its Form ADV with the SEC updating its Part II, furnish a copy of such amendments or updates to the Trust. The information contained in the Adviser's Form ADV is accurate and complete in all material respects and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
(c) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed, and will in the future review, the Registration Statement, summary prospectus, prospectus, statement of additional information, periodic reports to shareholders, reports and schedules filed with the Commission (including any amendment, supplement or sticker to any of the foregoing) and advertising and sales material relating to the Fund (collectively the "Disclosure Documents") and represents and warrants that such Disclosure Documents contain or will contain no untrue statement of any material fact and do not and will not omit any statement of material fact required to be stated therein or necessary to make the statements therein not misleading.
(d) USE OF THE NAME "CBRE" OR "CLARION". The Adviser has the right to use the name "CBRE" or "Clarion" in connection with its services to the Trust and that, subject to the terms set forth in Section 8 of this Agreement, the Trust shall have the right to use the name "CBRE" or "Clarion" in connection with the management and operation of the Fund. The Adviser is not aware of any threatened or existing actions, claims, litigation or proceedings that would adversely affect or prejudice the rights of the Adviser or the Trust to use the name "CBRE" or "Clarion."
(e) INSURANCE. The Adviser maintains errors and omissions insurance coverage in an appropriate amount and shall provide prior written notice to the Trust (i) of any material changes in its insurance policies or insurance coverage; or (ii) if any
material claims will be made on its insurance policies. Furthermore, the Adviser shall, upon reasonable request, provide the Trust with any information it may reasonably require concerning the amount of or scope of such insurance.
(f) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that it has no arrangement or understanding with any party, other than the Trust, that would influence the decision of the Adviser with respect to its selection of securities for the Fund, and that all selections shall be done in accordance with what is in the best interest of the Fund.
(g) CONFLICTS. The Adviser shall act honestly, in good faith and in the best interests of the Trust including requiring any of its personnel with knowledge of Fund activities to place the interest of the Fund first, ahead of their own interests, in all personal trading scenarios that may involve a conflict of interest with the Fund, consistent with its fiduciary duties under applicable law.
(h) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "CBRE CLARION." The Adviser grants to the Trust a license
to use the name "CBRE Clarion" (the "Name") as part of the name of the Fund.
The foregoing authorization by the Adviser to the Trust to use the Name as part
of the name of the Fund is not exclusive of the right of the Adviser itself to
use, or to authorize others to use, the Name; the Trust acknowledges and agrees
that, as between the Trust and the Adviser, the Adviser has the right to use,
or authorize others to use, the Name. The Trust shall (1) only use the Name in
a manner consistent with uses approved by the Adviser; (2) use its best efforts
to maintain the quality of the services offered using the Name; (3) adhere to
such other specific quality control standards as the Adviser may from time to
time promulgate. At the request of the Adviser, the Trust will (a) submit to
Adviser representative samples of any promotional materials using the Name; and
(b) change the name of the Fund within three months of its receipt of the
Adviser's request, or such other shorter time period as may be required under
the terms of a settlement agreement or court order, so as to eliminate all
reference to the Name and will not thereafter transact any business using the
Name in the name of the Fund; provided, however, that the Trust may continue to
use beyond such date any supplies of prospectuses, marketing materials and
similar documents that the Trust had on the date of such name change in
quantities not exceeding those historically produced and used in connection
with such Fund.
9. ADVISER'S COMPENSATION. The Fund shall pay to the Adviser, as compensation for the Adviser's services hereunder, a fee, determined as described in Schedule A that is attached hereto and made a part hereof. Such fee shall be computed daily and paid not less than monthly in arrears by the Fund.
The method for determining net assets of the Fund for purposes hereof shall be the same as the method for determining net assets for purposes of establishing the offering and redemption prices of Fund shares as described in the Fund's prospectus. In the event of termination of this
agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the Adviser is and shall be an independent contractor and, unless otherwise expressly provided herein or otherwise authorized in writing, shall have no authority to act for or represent the Trust or the Fund in any way or otherwise be deemed to be an agent of the Trust or the Fund. If any occasion should arise in which the Adviser gives any advice to its clients concerning the shares of the Fund, the Adviser will act solely as investment counsel for such clients and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in section 2(a)(4) of the 1940 Act); provided that such termination shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
This Agreement shall become effective as of the date executed and shall remain in full force and effect continually thereafter, subject to renewal as provided in Section 12(c) and unless terminated automatically as set forth in Section 11 hereof or until terminated as follows:
(a) The Trust may cause this Agreement to terminate either (i) by vote of its Board or (ii) with respect to the Fund, upon the affirmative vote of a majority of the outstanding voting securities of the Fund; or
(b) The Adviser may at any time terminate this Agreement by not more than sixty (60) days' nor less than thirty (30) days' written notice delivered or mailed by registered mail, postage prepaid, to the Trust; or
(c) This Agreement shall automatically terminate two years from the date of its execution unless its renewal is specifically approved at least annually thereafter by (i) a majority vote of the Trustees, including a majority vote of such Trustees who are not interested persons of the Trust or the Adviser, at a meeting called for the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities of the Fund; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Adviser may continue to serve hereunder as to the Fund in a manner consistent with the 1940 Act and the rules and regulations thereunder; and
(d) Termination of this Agreement pursuant to this Section shall be without payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser shall, immediately upon notice of termination or on such later date as may be specified in such notice, cease all activity on behalf of the Fund and with respect to any of its assets, except as otherwise required by any fiduciary duties of the Adviser under applicable law. In addition, the Adviser shall deliver the Fund Books and Records to the Trust by such means and in accordance with such schedule as the Trust shall direct and shall otherwise cooperate, as reasonably directed by the Trust, in the transition of portfolio asset management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting securities of the Fund" shall have the meaning as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
(b) "Interested persons" and "Assignment" shall have their respective meanings as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
14. LIABILITY OF THE ADVISER.
(a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of statements in the Fund's Disclosure Documents.
(b) The Adviser shall be liable to the Fund for any loss (including transaction costs) incurred by the Fund as a result of any investment made by the Adviser in contravention of: (i) any investment policy, guideline or restriction set forth in the Registration Statement or as approved by the Board from time to time and provided to the Adviser; or (ii) applicable law, including but not limited to the 1940 Act and the Code (including but not limited to the Fund's failure to satisfy the diversification or source of income requirements of Subchapter M of the Code) (the investments described in this subsection (b) collectively are referred to as "Improper Investments").
(c) The Adviser shall indemnify and hold harmless the Trust, each
affiliated person of the Trust within the meaning of Section 2(a)(3) of the
1940 Act, and each person who controls the Trust within the meaning of
Section 15 of the 1933 Act (any such person, an "Indemnified Party")
against any and all losses, claims, damages, expenses or liabilities
(including the reasonable cost of investigating and defending any alleged
loss, claim, damage, expense or liability and reasonable counsel fees
incurred in connection therewith) to which any such person may become
subject under the 1933 Act, the 1934 Act, the 1940 Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages, expenses or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) a breach by the
Adviser
of this Agreement or of the representations and warranties made by the Adviser herein; (ii) any Improper Investment; (iii) any untrue statement or alleged untrue statement of a material fact contained in any Disclosure Document or the omission or alleged omission from a Disclosure Document of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) the Adviser's performance or non-performance of its duties hereunder; provided, however, that nothing herein shall be deemed to protect any Indemnified Party who is a Trustee or officer of the Trust against any liability to the Trust or to its shareholders to which such Indemnified Party would otherwise be subject by reason or willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office with the Trust.
15. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Certificate of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Certificate of Trust and the Trust's Agreement and Declaration of Trust describe in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
17. CHANGE IN THE ADVISER'S OWNERSHIP. The Adviser agrees that it shall notify the Trust of any anticipated or otherwise reasonably foreseeable change in the ownership of the Adviser within a reasonable time prior to such change being effected.
18. JURISDICTION. This Agreement shall be governed by and construed in accordance with the substantive laws of Commonwealth of Massachusetts and the Adviser consents to the jurisdiction of courts, both state or federal, in Massachusetts, with respect to any dispute under this Agreement.
19. PARAGRAPH HEADINGS. The headings of paragraphs contained in this Agreement are provided for convenience only, form no part of this Agreement and shall not affect its construction.
20. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed on their behalf by their duly authorized officers as of the date first above written.
THE ADVISORS' INNER CIRCLE FUND, on behalf of the Fund(s) listed on Schedule A
By:/s/ Mike Beattie ------------------- Name: Mike Beattie Title: President |
CBRE CLARION SECURITIES LLC
By:/s/ David J. Makowicz ------------------------------- Name: David J. Makowicz Title: Chief Operating Officer |
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
DATED DECEMBER 19, 2011 BETWEEN
THE ADVISORS' INNER CIRCLE FUND
AND
CBRE CLARION SECURITIES LLC
The Trust will pay to the Adviser as compensation for the Adviser's services rendered, a fee, computed daily at an annual rate based on the average daily net assets of the Fund in accordance the following fee schedule:
FUND RATE ---- ---- CBRE Clarion Long Short Fund .............................................1.25% |
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT (the "Agreement") made as of this the 3(rd) day of February, 2012 by and between THE ADVISORS' INNER CIRCLE FUND (the "Trust"), a Massachusetts voluntary association (commonly known as a business trust) registered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and Thomson, Horstmann & Bryant, Inc. (the "Adviser"), a Delaware corporation with its principal place of business at 501 Merritt 7, Norwalk, CT 06851.
W I T N E S S E T H
WHEREAS. the Board of Trustees (the "Board") of the Trust has selected the Adviser to act as investment adviser to the Trust on behalf of the series set forth on Schedule A to this Agreement (the "Fund"), as such Schedule may be amended from time to time upon mutual agreement of the parties, and to provide certain related services, as more fully set forth below, and to perform such services under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set forth herein, the Trust and the Adviser do hereby agree as follows:
1. THE ADVISER'S SERVICES.
(a) DISCRETIONARY INVESTMENT MANAGEMENT SERVICES. The Adviser shall act as investment adviser with respect to the Fund. In such capacity, the Adviser shall, subject to the supervision of the Board, regularly provide the Fund with investment research, advice and supervision and shall furnish continuously an investment program for the Fund, consistent with the investment objectives and policies of the Fund. The Adviser shall determine, from time to time, what securities shall be purchased for the Fund, what securities shall be held or sold by the Fund and what portion of the Fund's assets shall be held uninvested in cash, subject always to the provisions of the Trust's Agreement and Declaration of Trust, By-Laws and its registration statement on Form N-1A (the "Registration Statement") under the 1940 Act, and under the Securities Act of 1933, as amended (the "1933 Act"), covering Fund shares, as filed with the Securities and Exchange Commission (the "Commission"), and to the investment objectives, policies and restrictions of the Fund, as each of the same shall be from time to time in effect. To carry out such obligations, the Adviser shall exercise full discretion and act for the Fund in the same manner and with the same force and effect as the Fund itself might or could do with respect to purchases, sales or other transactions, as well as with respect to all other such things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. No reference in this Agreement to the Adviser having FULL discretionary authority over the Fund's investments shall in any way limit the right of the Board, in its sole discretion, to establish or revise policies in connection with the management of the Fund's assets or to otherwise exercise its right to control the overall management of the Fund.
(b) COMPLIANCE. The Adviser agrees to comply with the requirements of the 1940 Act, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act and the respective rules and regulations thereunder, as applicable, as well as with all other applicable federal and state laws, rules, regulations and case law that relate to the services and relationships described hereunder and to the conduct of its business as a registered investment adviser. The Adviser also agrees to comply with the objectives, policies and restrictions set forth in the Registration Statement, as amended or supplemented, of the Fund, and with any policies, guidelines, instructions and procedures approved by the Board and provided to the Adviser. In selecting the Fund's portfolio securities and performing the Adviser's obligations hereunder, the Adviser shall cause the Fund to comply with the diversification and source of income requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. The Adviser shall maintain compliance procedures that it reasonably believes are adequate to ensure its compliance with the foregoing. No supervisory activity undertaken by the Board shall limit the Adviser's full responsibility for any of the foregoing.
(C) PROXY VOTING. The Board has the authority to determine how proxies with respect to securities that are held by the Fund shall be voted, and the Board has initially determined to delegate the authority and responsibility to vote proxies for the Fund' s securities to the Adviser. So long as proxy voting authority for the Fund has been delegated to the Adviser, the Adviser shall exercise its proxy voting responsibilities. The Adviser shall carry out such responsibility in accordance with any instructions that the Board shall provide from time to time, and at all times in a manner consistent with Rule 206(4)-6 under the Advisers Act and its fiduciary responsibilities to the Trust. The Adviser shall provide periodic reports and keep records relating to proxy voting as the Board may reasonably request or as may be necessary for the Fund to comply with the 1940 Act and other applicable law. Any such delegation of proxy voting responsibility to the Adviser may be revoked or modified by the Board at any time.
The Adviser is authorized to instruct the Fund's custodian and/or broker(s) to forward promptly to the Adviser or designate service provider copies of all proxies and shareholder communications relating to securities held in the portfolio of a Fund (other than materials relating to legal proceedings against the Fund). The Adviser may also instruct the Fund's custodian and/or broker(s) to provide reports of holdings in the portfolio of the Fund. The Adviser has the authority to engage a service provided to assist with administrative functions related to voting Fund proxies. The Trust shall direct the Fund's custodian and/or broker(s) to provide any assistance requested by the Adviser in facilitating the use of a service provider. In no event shall the Adviser have any responsibility to vote proxies that are not received on a timely basis. The Trust acknowledges that the Adviser, consistent with the Adviser's written proxy voting policies and procedures, may refrain from voting a proxy if, in the Adviser's discretion, refraining from voting would be in the best interests of the Fund and its shareholders.
(D) RECORDKEEPING. The Adviser shall not be responsible for the provision of administrative, bookkeeping or accounting services to the Fund, except as otherwise
provided herein or as may be necessary for the Adviser to supply to the Trust or its Board the information required to be supplied under this Agreement.
The Adviser shall maintain separate books and detailed records of all matters pertaining to Fund assets advised by the Adviser required by Rule 31a-1 under the 1940 Act (other than those records being maintained by any administrator, custodian or transfer agent appointed by the Fund) relating to its responsibilities provided hereunder with respect to the Fund, and shall preserve such records for the periods and in a manner prescribed therefore by Rule 31a-2 under the 1940 Act (the "Fund Books and Records"). The Fund Books and Records shall be available to the Board at any time upon request, shall be delivered to the Trust upon the termination of this Agreement and shall be available without delay during any day the Trust is open for business.
(E) HOLDINGS INFORMATION AND PRICING. The Adviser shall provide regular reports regarding Fund holdings, and may, on its own initiative, furnish the Trust and its Board from time to time with whatever information the Adviser believes is appropriate for this purpose. The Adviser agrees to notify the Trust promptly if the Adviser reasonably believes that the value of any security held by the Fund may not reflect fair value. The Adviser agrees to provide upon request any pricing information of which the Adviser is aware to the Trust, its Board and/or any Fund pricing agent to assist in the determination of the fair value of any Fund holdings for which market quotations are not readily available or as otherwise required in accordance with the 1940 Act or the Trust's valuation procedures for the purpose of calculating the Fund net asset value in accordance with procedures and methods established by the Board.
(F) COOPERATION WITH AGENTS OF THE TRUST. The Adviser agrees to cooperate with and provide reasonable assistance to the Trust, any Trust custodian or foreign sub-custodians, any Trust pricing agents and all other agents and representatives of the Trust with respect to such information regarding the Fund as such entities may reasonably request from time to time in the performance of their obligations, provide prompt responses to reasonable requests made by such persons and establish appropriate interfaces with each so as to promote the efficient exchange of information and compliance with applicable laws and regulations.
2. CODE OF ETHICS. The Adviser has adopted a written code of ethics that it reasonably believes complies with the requirements of Rule 17j-1 under the 1940 Act, which it has provided to the Trust. The Adviser shall ensure that its Access Persons (as defined in the Adviser's Code of Ethics) comply in all material respects with the Adviser's Code of Ethics, as in effect from time to time. Upon request, the Adviser shall provide the Trust with a (i) copy of the Adviser's current Code of Ethics, as in effect from time to time, and (ii) certification that it has adopted procedures reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Adviser's Code of Ethics. Annually, the Adviser shall furnish a written report, which complies with the requirements of Rule 17j-1, concerning the Adviser's Code of Ethics to the Trust's Board. The Adviser shall respond to requests for information from the Trust as to violations of the Code by Access Persons and the sanctions imposed by the Adviser.
The Adviser shall immediately notify the Trust of any material violation of the Code, whether or not such violation relates to a security held by the Fund.
3. INFORMATION AND REPORTING. The Adviser shall provide the Trust and its officers with such periodic reports concerning the obligations the Adviser has assumed under this Agreement as the Trust may from time to time reasonably request.
(A) NOTIFICATION OF BREACH / COMPLIANCE REPORTS. The Adviser shall
notify the Trust's chief compliance officer immediately upon detection of
(i) any material failure to manage the Fund in accordance with its
investment objectives and policies or any applicable law; or (ii) any
material breach of any of the Fund's or the Adviser's policies, guidelines
or procedures. In addition, the Adviser shall provide a quarterly report
regarding the Fund's compliance with its investment objectives and
policies, applicable law, including, but not limited to the 1940 Act and
Subchapter M of the Code, and the Fund's policies, guidelines or procedures
as applicable to the Adviser's obligations under this Agreement. The
Adviser agrees to correct any such failure promptly and to take any action
that the Board may reasonably request in connection with any such breach.
Upon request, the Adviser shall also provide the officers of the Trust with
supporting certifications in connection with such certifications of Fund
financial statements and disclosure controls pursuant to the Sarbanes-Oxley
Act. The Adviser will promptly notify the Trust in the event (i) the
Adviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board, or body, involving the affairs of the Trust (excluding
class action suits in which the Fund is a member of the plaintiff class by
reason of the Fund's ownership of shares in the defendant) or the
compliance by the Adviser with the federal or state securities laws or (ii)
an actual change in control of the Adviser resulting in an "assignment" (as
defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(B) BOARD AND FILINGS INFORMATION. The Adviser will provide the Trust with any information reasonably requested regarding its management of the Fund required for any meeting of the Board, or for any shareholder report, Form N-CSR, Form N-Q, Form N-PX, Form N-SAR, amended registration statement, proxy statement, or prospectus supplement to be filed by the Trust with the Commission. The Adviser will make its officers and employees available to meet with THE Board from time to time on due notice to review its investment management services to the Fund in light of current and prospective economic and market conditions and shall furnish to the Board such information as may reasonably be necessary in order for the Board to evaluate this Agreement or any proposed amendments thereto.
(C) TRANSACTION INFORMATION. The Adviser shall furnish to the Trust such information concerning portfolio transactions as may be necessary to enable the Trust or its designated agent to perform such compliance testing on the Fund and the Adviser's services as the Trust may, in its sole discretion, determine to be appropriate. The provision of such information by the Adviser to the Trust or its designated agent in no way relieves the Adviser of its own responsibilities under this Agreement.
4. BROKERAGE.
(A) PRINCIPAL TRANSACTIONS. In connection with purchases or sales of securities for the account of the Fund, neither the Adviser nor any of its directors, officers or employees will act as a principal or agent or receive any commission except as permitted by the 1940 Act.
(B) PLACEMENT OF ORDERS. The Adviser shall arrange for the placing of all orders for the purchase and sale of securities for the Fund's account with brokers or dealers selected by the Adviser. In the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek for the Fund the most favorable execution and net price available under the circumstances. It is also understood that it is desirable for the Fund that the Adviser have access to brokerage and research services provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers, consistent with section 28(e) of the 1934 Act and any Commission staff interpretations thereof Therefore, the Adviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, subject to review by the Board from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Adviser in connection with its or its affiliates' services to other clients.
(C) AGGREGATED TRANSACTIONS. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients of the Adviser, the Adviser may, to the extent permitted by applicable law and regulations, aggregate the order for securities to be sold or purchased. In such event, the Adviser will allocate securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction, in the manner the Adviser reasonably considers to be equitable and consistent with its fiduciary obligations to the Fund and to such other clients under the circumstances.
(D) AFFILIATED BROKERS. The Adviser or any of its affiliates may act as broker in connection with the purchase or sale of securities or other investments for the Fund, subject to: (a) the requirement that the Adviser seek to obtain best execution and price within the policy guidelines determined by the Board and set forth in the Fund's current Registration Statement; (b) the provisions of the 1940 Act; (c) the provisions of the Advisers Act; (d) the provisions of the 1934 Act; and (e) other provisions of applicable law. These brokerage services are not within the scope of the duties of the Adviser under this Agreement. Subject to the requirements of applicable law and any procedures adopted by the Board, the Adviser or its affiliates may receive brokerage commissions, fees or other remuneration from the Fund for these services in addition to the Adviser's fees for services under this Agreement.
5. CUSTODY. Nothing in this Agreement shall permit the Adviser to take or receive physical possession of cash, securities or other investments of the Fund.
ALLOCATION OF CHARGES AND EXPENSES. The Adviser will bear its own costs of providing services hereunder. Other than as herein specifically indicated, the Adviser shall not be responsible for the Fund's expenses, including brokerage and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(A) PROPERLY REGISTERED. The Adviser is registered as an investment adviser under the Advisers Act, and will remain so registered for the duration of this Agreement. The Adviser is not prohibited by the Advisers Act or the 1940 Act from performing the services contemplated by this Agreement, and to the best knowledge of the Adviser, there is no proceeding or investigation that is reasonably likely to result in the Adviser being prohibited from performing the services contemplated by this Agreement. The Adviser agrees to promptly notify the Trust of the occurrence of any event that would disqualify the Adviser from serving as an investment adviser to an investment company. The Adviser is in compliance in all material respects with all applicable federal and state law in connection with its investment management operations.
(B) ADV DISCLOSURE. The Adviser has provided the Trust with a copy of its Form ADV Part I as most recently filed with the SEC and its current Part II and will, promptly after filing any amendment to its Form ADV with the SEC updating its Part II, furnish a copy of such amendments or updates to the Trust. The information contained in the Adviser's Form ADV is accurate and complete in all material respects and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
(C) FUND DISCLOSURE DOCUMENTS. The Adviser has reviewed, and will in the future review, the Registration Statement, summary prospectus, prospectus, statement of additional information, periodic reports to shareholders, reports and schedules filed with the Commission (including any amendment, supplement or sticker to any of the foregoing) and advertising and sales material relating to the Fund (collectively the "Disclosure Documents") and represents and warrants that such Disclosure Documents contain or WILL contain no untrue statement of any material fact and do not and will not omit any statement of material fact required to be stated therein or necessary to make the statements therein not misleading.
(D) USE OF THE NAME "THOMSON HORSTMANN & BRYANT". The Adviser has the right to use the name "Thomson Horstmann & Bryant" in connection with its services to the Trust and that, subject to the terms set forth in Section 8 of this Agreement, the Trust shall have the right to use the name "Thomson Horstmann & Bryant" in connection with the management and operation of the Fund. The Adviser is not aware of any threatened or existing actions, claims, litigation or proceedings that would adversely affect or prejudice the rights of THE Adviser or the Trust to use the name "Thomson Horstmann & Bryant."
(E) INSURANCE. The Adviser maintains errors and omissions insurance coverage in an appropriate amount and shall provide prior written notice to the Trust (i)
of any material changes in its insurance policies or insurance coverage; or
(ii) if any material claims will be made on its insurance policies.
Furthermore, the Adviser shall, upon reasonable request, provide the Trust
with any information it may reasonably require concerning the amount of or
scope of such insurance.
(F) NO DETRIMENTAL AGREEMENT. The Adviser represents and warrants that it has no arrangement or understanding with any party, other than the Trust, that would influence the decision of the Adviser with respect to its selection of securities for the Fund, and that all selections shall be done in accordance with what is in the best interest of the Fund.
(G) CONFLICTS. The Adviser shall act honestly, in good faith and in the best interests of the Trust including requiring any of its personnel with knowledge of Fund activities to place the interest of the Fund first, ahead of their own interests, in all personal trading scenarios that may involve a conflict of interest with the Fund, consistent with its fiduciary duties under applicable law.
(H) REPRESENTATIONS. The representations and warranties in this
Section 7 shall be deemed to be made on the date this Agreement is executed
and at the time of delivery of the quarterly compliance report required by
Section 3(a), whether or not specifically referenced in such report.
8. THE NAME "THOMSON HORSTMANN & BRYANT". The Adviser grants to the Trust a license to use the name "Thomson Horstmann & Bryant" (the "Name") as part of the name of the Fund. The foregoing authorization by the Adviser to the Trust to use the Name as part of the name of the Fund is not exclusive of the right of the Adviser itself to use, or to authorize others to use, the Name; the Trust acknowledges and agrees that, as between the Trust and the Adviser, the Adviser has the right to use, or authorize others to use, the Name. The Trust shall (1) only use the Name in a manner consistent with uses approved by the Adviser; (2) use its best efforts to maintain the quality of the services offered using the Name; (3) adhere to such other specific quality control standards as the Adviser may from time to time promulgate. At the request of the Adviser, the Trust will (a) submit to Adviser representative samples of any promotional materials using the Name; and (b) change the name of the Fund within three months of its receipt of the Adviser's request, or such other shorter time period as may be required under the terms of a settlement agreement or court order, so as to eliminate all reference to the Name and will not thereafter transact any business using the Name in the name of the Fund; provided, however, that the Trust may continue to use beyond such date any supplies of prospectuses, marketing materials and similar documents that the Trust had on the date of such name change in quantities not exceeding those historically produced and used in connection with such Fund.
9. ADVISER'S COMPENSATION. The Fund shall pay to the Adviser, as compensation for the Adviser's services hereunder, a fee, determined as described in Schedule A that is attached hereto and made a part hereof. Such fee shall be computed daily and paid not less than monthly in arrears by the Fund.
The method for determining net assets of the Fund for purposes hereof shall be the same as the method for determining net assets for purposes of establishing the offering and redemption
prices of Fund shares as described in the Fund's prospectus. In the event of termination of this Agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month.
10. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the Adviser is and shall be an independent contractor and, unless otherwise expressly provided herein or otherwise authorized in writing, shall have no authority to act for or represent the Trust or the Fund in any way or otherwise be deemed to be an agent of the Trust or the Fund. If any occasion should arise in which the Adviser gives any advice to its clients concerning the shares of the Fund, the Adviser will act solely as investment counsel for such clients and not in any way on behalf of the Fund.
11. ASSIGNMENT AND AMENDMENTS. This Agreement shall automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in section 2(a)(4) of the 1940 Act); provided that such termination shall not relieve the Adviser of any liability incurred hereunder.
This Agreement may not be added to or changed orally and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with the 1940 Act, when applicable.
12. DURATION AND TERMINATION.
This Agreement shall become effective as of the date executed and shall remain in fu] 1 force and effect continually thereafter, subject to renewal as provided in Section 12(c) and unless terminated automatically as set forth in Section 11 hereof or until terminated as follows:
(a) The Trust may cause this Agreement to terminate either (i) by vote of its Board or (ii) with respect to the Fund, upon the affirmative vote of a majority of the outstanding voting securities of the Fund; or
(b) The Adviser may at any time terminate this Agreement by not more than sixty (60) days' nor less than thirty (30) days' written notice delivered or mailed by registered mail, postage prepaid, to the Trust; or
(c) This Agreement shall automatically terminate two years from the date of its execution unless its renewal is specifically approved at least annually thereafter by (i) a majority vote of the Trustees, including a majority vote of such Trustees who are not interested persons of the Trust or the Adviser, at a meeting called for the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities of the Fund; provided, however, that if the continuance of this Agreement is submitted to the shareholders of the Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Adviser may continue to serve hereunder as to the Fund in a manner consistent with the 1940 Act and the rules and regulations thereunder; and
(d) Termination of this Agreement pursuant to this Section shall be without payment of any penalty.
In the event of termination of this Agreement for any reason, the Adviser shall, immediately upon notice of termination or on such later date as may be specified in such notice, cease all activity on behalf of the Fund and with respect to any of its assets, except as otherwise required by any fiduciary duties of the Adviser under applicable law. In addition, the Adviser shall deliver the Fund Books and Records to the Trust by such means and in accordance with such schedule as the Trust shall direct and shall otherwise cooperate, as reasonably directed by the Trust, in the transition of portfolio asset management to any successor of the Adviser.
13. CERTAIN DEFINITIONS. For the purposes of this Agreement:
(a) "Affirmative vote of a majority of the outstanding voting securities of the Fund" shall have the meaning as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff.
(b) "Interested persons" and "Assignment" shall have their respective meanings as set forth in the 1940 Act, subject, however, to such exemptions as may be granted by the Commission under the 1940 Act or any interpretations of the Commission staff
14. LIABILITY OF THE ADVISER.
(a) The Adviser shall have responsibility for the accuracy and completeness (and liability for THE lack thereof) of statements in the Fund's Disclosure Documents.
(b) The Adviser shall be liable to the Fund for any loss (including transaction costs) incurred by the Fund as a result of any investment made by the Adviser in contravention of: (1) any investment policy, guideline or restriction set forth in the Registration Statement or as approved by the Board from time to time and provided to the Adviser; or (ii) applicable law, including but not limited to the 1940 Act and the Code (including but not limited to the Fund's failure to satisfy the diversification or source of income requirements of Subchapter M of the Code) (the investments described in this subsection (b) collectively are referred to as "Improper Investments").
(c) The Adviser shall indemnify and hold harmless the Trust, each
affiliated person of the Trust within the meaning of Section 2(a)(3) of the
1940 Act, and each person who controls the Trust within the meaning of
Section 15 of the 1933 Act (any such person, an "Indemnified Party")
against any and all losses, claims, damages, expenses or liabilities
(including the reasonable cost of investigating and defending any alleged
loss, claim, damage, expense or liability and reasonable counsel fees
incurred in connection therewith) to which any such person may become
subject under the 1933 Act, the 1934 Act, the 1940 Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages. expenses or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) a breach by the
Adviser
of this Agreement or of the representations and warranties made by the Adviser herein; (ii) any Improper Investment; (iii) any untrue statement or alleged untrue statement of a material fact contained in any Disclosure Document or the omission or alleged omission from a Disclosure Document of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) the Adviser's performance or non-performance of its duties hereunder; provided, however, that nothing herein shall be deemed to protect any Indemnified Party who is a Trustee or officer of the Trust against any liability to the Trust or to its shareholders to which such Indemnified Party would otherwise be subject by reason or willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office with the Trust.
15. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of THIS Agreement in any other jurisdiction.
16. LIMITATION OF LIABILITY. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the affected Fund and that no Trustee:, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Certificate of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Certificate of Trust and the Trust's Agreement and Declaration of Trust describe in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
17. CHANGE IN THE ADVISER'S OWNERSHIP. The Adviser agrees that it shall notify the Trust of any anticipated or otherwise reasonably foreseeable change in the ownership of the Adviser within a reasonable time prior to such change being effected.
18. JURISDICTION. This Agreement shall be governed by and construed in accordance with the substantive laws of Commonwealth of Massachusetts and the Adviser consents to the jurisdiction of courts, both state or federal, in Massachusetts, with respect to any dispute under this Agreement.
19. PARAGRAPH HEADINGS. The headings of paragraphs contained in this Agreement are provided for convenience only, form no part of this Agreement and shall not affect its construction.
20. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed on their behalf by their duly authorized officers as of the date first above written.
THE ADVISORS' INNER CIRCLE FUND,
on behalf of the Fund(s) listed on Schedule A
By: /s/ Michael Beattie ----------------------- Name: Michael Beattie Title: President |
THOMSON HORSTMANN & BRYANT, INC.
By: /s/ James Kennedy --------------------- Name: James Kennedy Title: Chief Operating Officer |
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
DATED FEBRUARY 3, 2012 BETWEEN
THE ADVISORS' INNER CIRCLE FUND
AND
THOMSON HORSTMANN & BRYANT, INC.
The Trust will pay to the Adviser as compensation for the Adviser's services rendered, a fee, computed daily at an annual rate based on the average daily net assets of the Fund in accordance the following fee schedule:
FUND RATE ---- ---- Thomson Horstmann & Bryant MicroCap Fund ..............................1.25% |
EXPENSE LIMITATION AGREEMENT
EXPENSE LIMITATION AGREEMENT, effective as of March 28, 2012 by and between Thomson Horstmann & Bryant, Inc. (the "Adviser") and THE Advisors' Inner Circle Fund (the "Trust") (the "Agreement"), on behalf of the series of the Trust set forth in Schedule A attached hereto (the "Fund").
WHEREAS, the Trust is a Massachusetts voluntary association (commonly known as a business trust) organized under an Agreement and Declaration of Trust, dated July 24, 1992, as amended and restated as of February 18, 2004 (the "Declaration of Trust"), and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and the Fund is a series of the Trust;
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory Agreement dated March 28, 2012 (the "Advisory Agreement"), pursuant to which the Adviser provides investment advisory services to the Fund for compensation based on the value of the average daily net assets of the Fund;
WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to maintain the expenses of the Fund at a level at or below the level to which the Fund would normally be subject in order to maintain the Fund's expense ratio at the Maximum Annual Operating Expense Limit (as hereinafter defined) specified for such Fund in Schedule A hereto;
NOW THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1. APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses of every character incurred by the Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser (but excluding 12b-1 fees, shareholder servicing fees, interest, taxes, brokerage commissions and other costs and expenses relating to the securities that are purchased and sold by the Fund, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of such Fund's business) and expenses of the Fund for which payment has been made through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by that Fund ("Fund Operating Expenses"), exceed the Maximum Annual Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser.
1.2. MAXIMUM ANNUAL OPERATING EXPENSE LIMIT. The Maximum Annual Operating Expense Limit with respect to the Fund shall be the amount specified in Schedule A based on a percentage of the average daily net assets of the Fund. The Maximum Annual Operating Expense Limit for the Fund contemplates that certain expenses for the Fund may be paid through the use of all or a portion of brokerage commissions (or markups or markdowns) generated by the Fund.
1.3. METHOD OF COMPUTATION. To determine the Adviser's liability with respect to the Excess Amount, each month the Fund Operating Expenses for the Fund shall be annualized as cf the last day of the month. If the annualized Fund Operating Expenses for any month of the Fund exceed the Maximum Annual Operating Expense Limit of such Fund, the Adviser shall first waive or reduce its investment advisory fee for such month by an amount sufficient to reduce the annualized Fund Operating Expenses to an amount no higher than the Maximum Annual Operating Expense Limit. If the amount of the waived or reduced investment advisory fee for any such month is insufficient to pay the Excess Amount, the Adviser may also remit to the Fund an amount that, together with the waived or reduced investment advisory fee, is sufficient to pa:y such Excess Amount.
1.4. YEAR-END ADIUSTMENT. If necessary, on or before the last day of the first month of each fiscal year (or the termination of this Agreement if sooner), an adjustment payment shall be made by the appropriate party in order that the amount of the investment advisory fees waived or reduced and other payments remitted by the Adviser to the Fund with respect to the previous fiscal year shall equal the Excess Amount for such fiscal year.
2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1. REIMBURSEMENT. If in any year in which the Advisory Agreement is still in effect and the estimated aggregate Fund Operating Expenses of such Fund for the fiscal year are less than the Maximum Annual Operating Expense Limit for that year, the Adviser shall be entitled to reimbursement by such Fund, in whole or in part as provided below, of the investment advisory fees waived or reduced and other payments remitted by the Adviser to such Fund pursuant to Section 1 hereof. The total amount of reimbursement to which the Adviser may be entitled ("Reimbursement Amount") shall equal, at any time, the sum of all investment advisory fees previously waived or reduced by the Adviser and all other payments remitted by the Adviser to the Fund, pursuant to Section 1 hereof, during any of the previous three (3) fiscal years, less any reimbursement previously paid by such Fund to the Adviser, pursuant to this Section 2, with respect to such waivers, reductions, and payments. The Reimbursement Amount shall not include any additional charges or fees whatsoever, including, e.g., interest accruable on the Reimbursement Amount.
2.2. BOARD NOTIFICATION. The Fund shall provide to the Board a quarterly report of any reimbursements paid to the Adviser pursuant to this agreement.
2.3. METHOD OF COMPUTATION. To determine the Fund's accrual, if any, to reimburse the Adviser for the Reimbursement Amount, each month the Fund Operating Expenses of the Fund shall be annualized as of the last day of the month. If the annualized Fund Operating Expenses of the Fund for any month are less than the Maximum Annual Operating Expense Limit of such Fund, such Fund shall accrue into its net asset value an amount payable to the Adviser sufficient to increase the annualized Fund Operating Expenses of that Fund to an amount no greater than the Maximum Annual Operating Expense Limit of that Fund, provided that such amount paid to the Adviser will in no event exceed the total Reimbursement Amount. For accounting purposes, amounts accrued pursuant to this Section 2 shall be a liability of the Fund for purposes of determining the Fund's net asset value.
2.4. PAYMENT AND YEAR-END ADJUSTMENT. Amounts accrued pursuant to this Agreement shall be payable to the Adviser as of the last day of each month. If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the actual Fund Operating Expenses of the Fund for the prior fiscal year (including any reimbursement payments hereunder with respect to such fiscal year) do not exceed the Maximum Annual Operating Expense Limit for such fiscal year.
3. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall continue in effect with respect to the Fund until the date indicated on Schedule A ("Initial Term End Date") and shall thereafter continue in effect from year to year for successive one-year periods, provided that this Agreement may be terminated, without payment of any penalty, with respect to the Fund:
(i) by the Trust, for any reason and at any time;
(ii) by the Adviser, for any reason, upon ninety (90) days' prior written notice to the Trust at its principal place of business, such termination to be effective as of the close of business on the last day of the then-current one-year period; or at such earlier time provided that such termination is approved by majority vote of the Trustees and the Independent Trustees voting separately.
(iii) by either party effective upon the effective date of the termination of the Advisory Agreement for any reason.
4. MISCELLANEOUS.
4.1. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
4.2. INTERPRETATION. Nothing herein contained shall be deemed to require the Trust or the Fund to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Fund. The parties to this Agreement acknowledge and agree that all litigation arising hereunder, whether direct or indirect, and of any and every nature whatsoever shall be satisfied solely out of the assets of the Fund and that no Trustee, officer or holder of shares of beneficial interest of the Fund shall be personally liable for any of the foregoing liabilities. The Trust's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes in detail the respective responsibilities and limitations on liability of the Trustees, officers, and holders of shares of beneficial interest.
4.3. DEFINITIONS. Any question of interpretation of any term or provision of this Agreement. including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and
provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act.
4.4. ENFORCEABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.
4.5 JURISDICTION. This Agreement shall be governed by and construed in accordance with the substantive laws of Commonwealth of Massachusetts and the Adviser consents to the jurisdiction of courts, both state or federal, in Massachusetts, with respect to any dispute under this Agreement.
4.6 AMENDMENT. This Agreement may not be added to or changed orally and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with the 1940 Act, when applicable.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the day and year first above written.
THE ADVISORS INNER CIRCLE FUND,
on behalf of each series of tle Trust set forth in Schedule A
/s/ Dianne M. Sulzbach ---------------------- Dianne M. Sulzbach Vice President and Secretary |
THOMSON HORSTMANN & BRYANT, INC.
/s/ James Kennedy ----------------- James Kennedy Principal |
SCHEDULE A
MAXIMUM ANNUAL OPERATING EXPENSE LIMITS
This Agreement relates to the following Fund of the Trust:
----------------------------------------------------------------------------------------------
NAME OF FUND SHARE CLASS MAXIMUM ANNUAL INITIAL TERM END DATE
OPERATING EXPENSE
LIMIT
----------------------------------------------------------------------------------------------
Thomson Horstmann & Institutional 1.25% March 29, 2013
Bryant MicroCap Fund
----------------------------------------------------------------------------------------------
Thomson Horstmann & Investor 1.75% March 29, 2013
Bryant MicroCap Fund
----------------------------------------------------------------------------------------------
|
ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of this 14th day of November, 1991, as amended and restated as of November 12, 2002, by and between The Advisors' Inner Circle Fund (the "Trust"), a Massachusetts business trust, and SEI Investments Global Funds Services (the "Administrator"), a Delaware business trust.
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), consisting of several series portfolios; ("Portfolios"), each of which may consist of one or more classes of shares of beneficial interest ("Shares"); and
WHEREAS, the Trust desires the Administrator to provide, and the Administrator is willing to provide, administrative and accounting services to such Portfolios of the Trust on the terms and condition s hereinafter set forth herein;
NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, Trust and the Administrator hereby agree as follows:
ARTICLE 1. RETENTION OF THE ADMINISTRATOR. Trust hereby retains the Administrator to furnish the Portfolios with accounting and administrative services as set forth in this Agreement, and the Administrator hereby accepts such employment. The Administrator shall be deemed to be an independent contractor for all purposes herein.
ARTICLE 2. ADMINISTRATIVE AND ACCOUNTING SERVICES. The Administrator shall perform or supervise the performance by others of the accounting and administrative services set forth in Schedule A hereto. The Administrator shall provide the Trust with all necessary office space, equipment, personnel, facilities (including facilities for Shareholders' and Trustees' meetings) and compensation for providing such services. The Administrator may sub-contract with third parties to perform certain of the services to be performed by the Administrator hereunder; provided, however, that the Administrator shall remain principally responsible to Trust for the acts and omissions of such other entities. In meeting its duties hereunder, Administrator shall have the general authority to do all acts deemed in the Administrator's good faith belief to be necessary and proper to perform its obligations under this Agreement.
ARTICLE 3. ALLOCATION OF CHARGES AND EXPENSES.
(A) THE ADMINISTRATOR. The Administrator shall furnish at its own expense the executive, supervisory and clerical personnel necessary to perform its obligations under this Agreement. The Administrator shall also pay all compensation, if any, of officers of the Trust as well as all Trustees of the Trust who are affiliated persons of the Administrator or any affiliated corporation of the Administrator; provided, however, that unless otherwise specifically provided, the Administrator shall not be obligated to pay the compensation of any employee of the Trust retained by the Trustees of the Trust to perform services on behalf of the Trust.
(13) FUND EXPENSES. The Trust assumes and shall pay or cause to be paid all other expenses of the Trust not otherwise allocated in this Agreement, including, without limitation, organizational costs, taxes, expenses for legal and auditing services, the expenses of preparing (including typesetting), printing and mailing reports, prospectuses, statements of additional information, proxy solicitation material and notices to existing shareholders, all expenses incurred in connection with issuing and redeeming Shares, the costs of pricing services, the costs of custodial services, the cost of initial and ongoing registration of the Shares under Federal and state securities laws, fees and out-of-pocket expenses of Trustees who are not affiliated persons of the Administrator or any affiliated corporation of the Administrator, the costs of Trustees' meetings, insurance, interest, brokerage costs, litigation and other extraordinary or nonrecurring expenses, and all fees at 0:1 charges of service providers to the Trust. Trust shall reimburse the Administrator for its reasonable out-of-pocket expenses, including all reasonable charges for SAS 70 audit charges, and reasonable copying, postage, telephone, and fax charges incurred by the Administrator in the performance of its duties.
ARTICLE 4. COMPENSATION OF THE ADMINISTRATOR. Trust shall pay to the
Administrator compensation at the annual rate specified in the schedules
attached hereto until this Agreement is terminated in accordance with Article
6. Such compensation shall be calculated and accrued daily, and paid to the
Administrator monthly. If this Agreement becomes effective subsequent to the
first day of a month or terminates before the last day of a month, the
Administrator's compensation for that part of the month in which this Agreement
is in effect shall be prorated in a manner consistent with the calculation of
the fees as set forth above. Payment of the Administrator's compensation for
the preceding month shall be made promptly.
ARTICLE 5. LIMITATION OF LIABILITY OF THE ADMINISTRATOR. The duties of the Administrator shall be confined to those expressly set forth herein, and no implied duties are assumed by or may be asserted against the Administrator hereunder. The Administrator shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in carrying out its duties hereunder, except a loss resulting from willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder. (As used in this Article 5, the term "Administrator" shall include Trustees, officers, employees and other agents of the Administrator as well as that entity itself.) Under no circumstances shall the Administrator be liable to Trust for consequential, indirect or punitive damages.
So long as the Administrator, or its agents, acts without willful misfeasance, bad faith or gross negligence in the performance of its duties, and without reckless disregard of its obligations and duties hereunder, Trust assumes full responsibility and shall indemnify the Administrator and hold it harmless from and against any and all actions, suits and claims, whether groundless or otherwise, and from and against any and all losses, damages, costs, charges, reasonable counsel fees and disbursements, payments, expenses and liabilities (including reasonable investigation expenses) arising directly or indirectly out of any act or omission of Administrator in carrying out its duties hereunder, The indemnity and defense provisions set forth herein shall indefinitely survive the termination of this Agreement.
The indemnification rights hereunder shall include the right to reasonable advances of defense expenses in the event of any pending or threatened litigation with respect to which indemnification hereunder may ultimately be merited. If in any case the Trust may be asked to indemnify or hold the Administrator harmless, the Administrator shall promptly advise the Trust of the pertinent facts concerning the situation in question, and the Administrator will use all reasonable care to identify and notify the Trust promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification, but failure to do so shall not affect the rights hereunder.
Trust shall be entitled to participate at its own expense or, if it so elects, to assume the defense of any suit brought to enforce any claims subject to this indemnity provision. If Trust elects to assume the defense of any such claim, the defense shall be conducted by counsel chosen by Trust and satisfactory to the Administrator, whose approval shall not be unreasonably withheld. In the event that Trust elects to assume the defense of any suit and retain counsel, the Administrator shall bear the fees and expenses of any additional counsel retained by it. If Trust does not elect to assume the defense of a suit, it will reimburse the Administrator for the fees and expenses of any counsel retained by the Administrator.
The Administrator may apply to Trust at any time for instructions and may consult counsel for Trust or its own counsel and with accountants and other experts with respect to any matter arising in connection with the Administrator's duties, and the Administrator shall not be liable or accountable for any action taken or omitted by it in good faith in accordance with such instruction or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document which it reasonably believes 10 be genuine and to have been signed or presented by the proper person or persons. Nor shall the Administrator be held to have notice of any change of authority of any officers, employee or agent of Trust until receipt of written notice thereof from Trust.
Nothing herein shall make Administrator liable for the performance or omissions of unaffiliated third parties not under Administrator's reasonable control such as, by way of example and not limitation, transfer agents, custodians, investment advisers or sub-advisers, postal or delivery services, telecommunications providers and processing and settlement services.
ARTICLE 6. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement shall become effective on the date set forth in the schedules attached hereto and shall remain in effect for the full duration of the Initial Term and each Renewal Term, each as set forth in the schedules attached hereto, unless terminated in accordance with the provisions of this Article 6. This Agreement may be terminated only: (a) by either party at the end of the Initial Term or the end of any Renewal Term on 90 day;' prior written notice; (b) by either party hereto on such date as is specified in written notice given by the terminating party, in the event of a material breach of this Agreement by the other party, provided the terminating party has notified the other party of such material breach at least 45 th tys prior to the specified date of termination and the breaching party has not remedied such breach by the specified date; or (c) as to any Portfolio or the Trust, effective upon the liquidation of such Portfolio or the Trust, as the case may be. For purposes of this paragraph, the
term "liquidation" shall mean a transaction in which the assets of the Trust or a Portfolio are sold or otherwise; disposed of and proceeds therefrom are distributed in cash to the shareholders in complete liquidation of the interests of such shareholders in the entity.
ARTICLE 7. ACTIVITIES OF THE ADMINISTRATOR. The services of the Administrator rendered to Trust re not to be deemed to be exclusive. The Administrator is free to render such services to others and to have other businesses and interests.
ARTICLE 8. CONFIDENTIALITY. The Administrator agrees on behalf of itself and its employees to treat confidentially all records and other information relative to the Trust and its shareholders received by the Administrator in connection with this Agreement, including any nonpublic personal information as defined in Regulation S-P, and that it shall not use or disclose any such information except for the purpose of carrying out the terms of this Agreement; provided, however, that Administrator may disclose such information as required by law or after prior notification to and approval in writing by Trust, which approval may not be withheld where the Administrator may be exposed to civil or criminal contempt proceedings or penalties for failure to comply.
ARTICLE 9. CERTAIN RECORDS. The Administrator shall maintain customary records in connection with its duties as specified in this Agreement. Any records required to be maintained and preserved pursuant to Rules 31a-1 and 31a-2 under the 1940 Act which are prepared or maintain d by the Administrator on behalf of the Trust shall be prepared and maintained at the expense of the Administrator, but shall be the property of the Trust and will be made available to or surrender d promptly to the Trust on request.
In case of any request or demand for the inspection of such records by another party, the Administrator shall notify Trust and follow Trust's instructions as to permitting or refusing such inspection; provided that the Administrator may exhibit such records to any person in any case where it advised by its counsel that it may be held liable for failure to do so, unless (in cases involving potential exposure only to civil liability) Trust has agreed to indemnify the Administrator against such liability.
ARTICLE 10. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. The Administrator undertake; to comply in all material respects with applicable requirements of the Securities Act of 1933, the Securities Exchange Act of 1934, the 1940 Act, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by the Administrator hereunder.
ARTICLE 11. INTERNET ACCESS. Data and information may be made electronically accessible to the Trust and its adviser and/or sub-adviser through Internet access to one or more links provided by the Administrator ("Web Link"). All rights in Web Link (including text and "look and feel" attributes) are owned by Administrator. Any commercial use of the content or any other aspect of Web Link requires the written permission of Administrator. Use of the Web Link by T rust or its agents will be subject to any terms of use set forth on the web site. A Web Link and the information (including text, graphics and functionality) in the Web Link is
presented. "As Is" and "As Available" without express or implied warranties including, but not limited t(1, implied warranties of non-infringement, merchantability and fitness for a particular purpose. Administrator neither warrants that the Web Link will be uninterrupted or error free, nor guarantee s the accessibility, reliability, performance, timeliness, sequence, or completeness of information provided on the Web Link.
ARTICLE 12. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement, draft or proposal with respect to the subject matter hereof. This Agreement or any part hereof may be changed or waived only by an instrument in writing signed by the party against which enforcement of such change or waiver is sought.
ARTICLE 13. ASSIGNMENT. This Agreement shall not be assignable by either party without tide prior written consent of the other party.
ARTICLE 14. WAIVER. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by written instrument executed by such party. No failure of either party hereto to exercise any power or right granted hereunder, or to insist upon strict compliance with any obligation hereunder, and no custom or practice of the parties with regard to the terms of performance hereof, will constitute a waiver of the rights of such party to demand full and exact compliance with the terms of this Agreement.
ARTICLE 15. NOTICE. Any notice required or permitted to be given by either party to the other shall be deemed sufficient if sent by registered or certified mail, federal express (or substantially similar delivery service), postage prepaid, addressed by the party giving notice to the other parte at the last address furnished by the other party to the party giving notice: if to Trust, at One Freedom Valley Drive, Oaks, Pennsylvania, 19456; and if to the Administrator at One Freedom Valley Drive, Oaks, Pennsylvania, 19456.
ARTICLE 16. FORCE MAJEURE. No breach of any obligation of a party to this Agreement will constitute an event of default or breach to the extent it arises out of a cause, existing or future, the It is beyond the control and without negligence of the party otherwise chargeable with breach or default, including without limitation: work action or strike; lockout or other labor dispute; flood; war; riot; theft; earthquake or natural disaster. Either party desiring to rely upon any of the foregoing as an excuse for default or breach will, when the cause arises, give to the other party prompt notice of the facts which constitute such cause; and, when the cause ceases to exist, give prompt notice thereof to the other party.
ARTICLE 17. EQUIPMENT FAILURES. In the event of equipment failures beyond the Administrator's control, the Administrator shall take reasonable and prompt steps to minimize service interruptions but shall have no liability with respect thereto. The Administrator shall develop and maintain a plan for recovery from equipment failures which may include contractual arrangements with appropriate parties making reasonable provision for emergency use of electronic data processing equipment to the extent appropriate equipment is available.
ARTICLE 18. DEFINITIONS OF CERTAIN TERMS. The term "affiliated person," when used in this Agreement, shall have the meaning specified in the 1940 Act and the rules and regulations thereunder, subject to such exemptions as may be granted by the Securities and Exchange Commission.
ARTICLE 19. HEADINGS. All Article headings contained in this Agreement are for convene: ice of reference only, do not form a part of this Agreement and will not affect in any way the r leaning or interpretation of this Agreement. Words used herein, regardless of the number a ad gender specifically used, will be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine, or neuter, as the contract requires.
ARTICLE 20. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts and the applicable provisions of the 1940 Act. To the extent that the applicable laws of the Commonwealth of Massachusetts, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control.
ARTICLE 21. LIMITATION OF LIABILITY. Notice is hereby given that this Agreement is executed xi behalf of the Trustees of the Trust as trustees and not individually, and that all obligationS of this Agreement are not binding upon any of the trustees, officers, agents or shareholders of any of the Portfolios or the Trust individually, but binding only upon the assets and property of the Portfolios or the Trust. No Portfolio shall be liable for any claims against any other Portfolio.
ARTICLE 22. MULTIPLE ORIGINALS. This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.
ARTICLE 23. BINDING AGREEMENT. This Agreement, and the rights and obligations of the parties hereunder, shall be binding on, and inure to the benefit of, the parties and their respective successors and assigns.
ARTICLE 24. SEVERABILITY. If any part, term or provision of this Agreement is held to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.
THE ADVISORS' INNER CIRCLE FUND
By: /s/ William E. Zitelli --------------------------- Name: William E. Zitelli Title: Vice President |
SEI INVESTMENTS GLOBAL FUNDS SERVICES
By: /s/ John Munch -------------------- Name: John Munch Title: Vice President |
SCHEDULE A
TO THE ADMINISTRATION AGREEMENT
DATED AS OF NOVEMBER 14, 1991
AS AMENDED AND RESTATED ON NOVEMBER 12, 2002
BETWEEN
THE ADVISORS' INNER CIRCLE FUND
AND
SEI INVESTMENTS GLOBAL FUNDS SERVICES
Administrator shall provide the following services to the Trust:
(a) Maintain the Trust's accounting books and records;
(b) Obtain portfolio security valuations from appropriate sources consistent with the Trust's pricing and valuation policies, and calculate net asset value of each portfolio and class;
(c) Compute yields, total return, expense ratios, portfolio turnover rate and average dollar- weighted portfolio maturity, as appropriate;
(d) Track and validate income and expense accruals, analyze and modify expense accrual changes periodically, and process expense disbursements to vendors and service providers;
(e) Perform cash processing such as recording paid-in capital activity, perform necessary reconciliations with the transfer agent and the custodian, and provide cash availability data to the adviser, if requested;
(f) Calculate required ordinary income and capital gains distributions, coordinate estimated cash payments, and perform necessary reconciliations with the transfer agent;
(g) Provide standardized performance reporting data to the Trust and its adviser;
(h) Provide performance, financial and expense information for registration statements and proxies;
(i) Communicate net asset value, yield, total return or other financial data to appropriate third party reporting agencies, and assist in resolution of errors reported by such third party agencies;
(j) Prepare Trust's financial statements for review by fund management and independent auditors, manage annual and semi-annual report preparation process, prepare Forms N- SAR and 24f-2, provide fund performance data for annual report, coordinate printing and
delivery of annual and semi-annual reports to shareholders, and file Form N-SAR, Form 24f-2 and annual/semi-annual reports via EDGAR;
(k) Monitor each Portfolio's compliance with the requirements of Subchapter M of the Internal Revenue Code with respect to status as a regulated investment company;
(1) Prepare and file federal and state tax returns for the Trust, and provide data for year-end 1099's and supplemental tax letters;
(m) Provide such fund accounting and financial reports in connection with quarterly meetings of the Board of Trustees as are required or as the Board may reasonably request;
(n) Manage the proxy process, including evaluating proxy distribution channels, coordinating with outside service provider to distribute proxies, track shareholder responses and tabulate voting results, and managing the proxy solicitation vendor if necessary;
(o) Provide individuals to serve as officers of the Trust, as requested;
(p) Coordinate with Trust's counsel on drafting, review and filing of registration statements aid proxies, and coordinate printing and delivery of prospectuses and proxies;
(q) Coordinate the Trust's Board of Trustees' schedule, agenda and production of Board meeting materials, and attend Board meetings (if requested);
(r) Provide consultation to the Trust and its adviser on regulatory matters relating to the operation of the Trust, and update the Trust and its adviser on significant regulatory and legislative developments which may affect the Trust;
(s) Develop or assist legal counsel to the Trust in the development of policies and procedures relating to the operation of the Trust;
(t) Act as liaison to legal counsel to the Trust and, where applicable, to legal counsel to the Trust's independent Trustees;
(u) Coordinate with Trust counsel in the preparation, review and execution of contracts between the Trust and third parties, such as the Trust's investment adviser, transfer agent, and custodian, and record-keepers or shareholder service providers;
(v) Assist the Trust in handling and responding to routine regulatory examinations with respect to records retained or services provided by the Administrator, and coordinate with Trust's legal counsel in responding to any non-routine regulatory matters with respect to such matters;
(w) Provide consulting with respect to the ongoing design, development and operation of the Trust, including new portfolios or share classes and/or load structures and financing, as well as changes to investment objectives and policies for existing portfolios;
(x) Coordinate as necessary the registration or qualification of shares of the Trust with appropriate state securities authorities.
[END OF SCHEDULE A]
1701 Market Street Morgan, Lewis Philadelphia, PA 19103-2921 & Bockius LLP Tel.: 215-963-5000 Counselors at Law Fax: 215-963-5001
February 28, 2013
The Advisors' Inner Circle Fund
101 Federal Street
Boston, MA 02110
Ladies and Gentlemen:
We have acted as counsel to The Advisors' Inner Circle Fund (the "Trust"), a Massachusetts voluntary association (commonly known as a business trust), in connection with the above-referenced registration statement (as amended, the "Registration Statement"), which relates to the Trust's units of beneficial interest, with no par value per share (collectively, the "Shares") of the following portfolios of the Trust: the Acadian Family of Funds, AIG Money Market Fund, AlphaOne Family of Funds, CBRE Clarion Long/Short Fund, Cornerstone Family of Funds, Edgewood Growth Fund, FMC Family of Funds, Haverford Quality Growth Stock Fund, ICM Small Company Portfolio, Loomis Sayles Full Discretion Institutional Securitized Fund, LSV Family of Funds, McKee International Equity Portfolio, Rice Hall James Family of Funds, Sands Capital Global Growth Fund, TS&W Family of Funds, Thomson Horstmann & Bryant MicroCap Fund, UA S&P 500 Index Fund and Westwood Family of Funds (the "Funds"). This opinion is being delivered to you in connection with the Trust's filing of Post-Effective Amendment No. 206 to the Registration Statement (the "Amendment") to be filed with the U.S. Securities and Exchange Commission pursuant to Rule 485(b) under the Securities Act of 1933, as amended (the "1933 Act"). With your permission, all assumptions and statements of reliance herein have been made without any independent investigation or verification on our part except to the extent otherwise expressly stated, and we express no opinion with respect to the subject matter or accuracy of such assumptions or items relied upon.
In connection with this opinion, we have reviewed, among other things, executed copies of the following documents:
(a) a certificate of the Commonwealth of Massachusetts certifying that the Trust is validly existing under the laws of the Commonwealth of Massachusetts;
(b) the Amended and Restated Agreement and Declaration of Trust for the Trust and all amendments and supplements thereto (the "Declaration of Trust") and the Second Amended and Restated By-Laws (the "By-Laws");
(c) a certificate executed by Dianne M. Sulzbach, the Secretary of the Trust, certifying as to, and attaching copies of, the Trust's Declaration of Trust and By- Laws, and certain resolutions adopted by the Board of Trustees of the Trust authorizing the issuance of the Shares of the Funds; and
(d) a printer's proof of the Amendment.
In our capacity as counsel to the Trust, we have examined the originals, or certified, conformed or reproduced copies, of all records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinion hereinafter expressed. In all such examinations, we have assumed the legal capacity of all natural persons executing documents, the genuineness of all signatures, the authenticity of all original or certified copies, and the conformity to original or certified copies of all copies submitted to us as conformed or reproduced copies. As to various questions of fact relevant to such opinion, we have relied upon, and assume the accuracy of, certificates and oral or written statements of public officials and officers and representatives of the Trust. We have assumed that the Amendment, as filed with the U.S. Securities and Exchange Commission, will be in substantially the form of the printer's proof referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of the opinion that the Shares, when issued and sold in accordance with the Declaration of Trust and By-Laws, and for the consideration described in the Registration Statement, will be legally issued, fully paid and non-assessable under the laws of the Commonwealth of Massachusetts.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not concede that we are in the category of persons whose consent is required under Section 7 of the 1933 Act.
Very truly yours,
/S/ MORGAN, LEWIS & BOCKIUS --------------------------- |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the references to our firm under the captions "Financial Highlights" in the Prospectuses and "Independent Registered Public Accounting Firm" in the Statements of Additional Information of the AlphaOne Micro Cap Equity Fund, AlphaOne U.S. Equity Long Short Fund, CBRE Clarion Long/Short Fund, Edgewood Growth Fund, FMC Select Fund, FMC Strategic Value Fund, Haverford Quality Growth Stock Fund, LSV Value Equity Fund, LSV Conservative Value Equity Fund, LSV Conservative Core Equity Fund, Sands Capital Global Growth Fund, Thomson Horstmann & Bryant MicroCap Fund, Westwood LargeCap Value Fund, Westwood SMidCap Fund, Westwood SmallCap Value Fund, Westwood Income Opportunity Fund, Westwood Dividend Growth Fund, Westwood SMidcap Plus Fund and Westwood Short Duration High Yield Fund and to the incorporation by reference in this Registration Statement (Form N-1A) (Post-Effective Amendment No. 206 to File No. 033-42484; Amendment No. 207 to File No. 811-06400) of The Advisors' Inner Circle Fund of our reports dated December 27, 2012, included in the respective 2012 Annual Reports to shareholders.
/s/ ERNST & YOUNG, LLP
Philadelphia, Pennsylvania
February 28, 2013
|
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the Acadian Emerging Markets Portfolio and Acadian Emerging Markets Debt Fund (two of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the AIG Money Market Fund (one of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the ICM Small Company Portfolio (one of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the Loomis Sayles Full Discretion Institutional Securitized Fund (one of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the McKee International Equity Portfolio (one of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the Rice Hall James Micro Cap Portfolio, Rice Hall James Small Cap Portfolio and Rice Hall James Mid Cap Portfolio (three of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the TS&W Fixed Income Portfolio and TS&W Equity Portfolio (two of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
<!--$$/page=-->
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 21, 2012, relating to the financial statements and financial highlights which appear in the October 31, 2012 Annual Report of the United Association S&P 500 Index Fund (one of the funds constituting Advisors' Inner Circle Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Independent Registered Public Accounting Firm", "Financial Highlights" and "Statement of Additional Information" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
<!--$$/page=-->
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Post-Effective Amendment Nos. 206 and 207 to Registration Statement Nos. 033-42484 and 811-06400 on Form N-1A of our report dated December 26, 2012, relating to the financial statements and financial highlights of Cornerstone Advisors Global Public Equity Fund, Cornerstone Advisors Income Opportunities Fund, Cornerstone Advisors Public Alternatives Fund and Cornerstone Advisors Real Assets Fund (collectively, the "Cornerstone Funds") four of the forty-five portfolios constituting The Advisors' Inner Circle Fund (the "Trust"), appearing in the Annual Report on Form N-CSR of the Cornerstone Funds for the period ended October 31, 2012 and the reference to us under the heading "Independent Registered Public Accounting Firm" in the Statement of Additional Information, and "Financial Highlights" in the Prospectus, which are part of such Registration Statement.
/s/ Deloitte & Touche LLP Philadelphia, Pennsylvania February 28, 2013 |
CODE OF ETHICS
OF
THOMPSON, SIEGEL & WALMSLEY LLC
I. PREAMBLE
This Code of Ethics is adopted in compliance with requirements adopted by the United States Securities and Exchange Commission (the "SEC") under Rule 17j-1 of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and Section 204A and Rules 204-2 and 204A-1 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), to effectuate the purposes and objectives of the provisions contained therein. Rule 17j-1 of the Investment Company Act requires that investment advisers to mutual funds adopt written codes of ethics; Section 204A of the Advisers Act requires the establishment and enforcement of policies and procedures reasonably designed to prevent the misuse of material nonpublic information by investment advisers; Rule 204-2 of the Advisers Act imposes recordkeeping requirements with respect to Personal Securities Transactions of Advisory Representatives (Capitalized terms are generally defined in Section IX); and Rule 204A-1 requires SEC registered investment advisers to adopt codes of ethics prescribing ethical standards under which they operate and also imposes recording and recordkeeping requirements with respect to Personal Securities Transactions of Access Persons. This Code of Ethics of Thompson, Siegel & Walmsley LLC (the "Firm") is designed to:
o Protect the Firm's clients by deterring misconduct;
o Educate Supervised Persons regarding the Firm's expectations and the laws governing their conduct;
o Remind Supervised Persons that they are in a position of trust and must act with complete propriety at all times;
o Protect the reputation of the Firm;
o Guard against violation of the Federal Securities laws; and
o Establish procedures for Supervised Persons to follow so that the Firm may determine whether Supervised Persons are complying with its ethical principles.
II. STANDARDS OF BUSINESS CONDUCT
The Board of Managers of the Firm has adopted the Code of Ethics which sets forth standards of business conduct and fiduciary obligations that the Firm requires of its Supervised Persons. Supervised Persons must maintain the highest ethical standards in carrying out the Firm's business activities. The Firm's reputation is one of its most important assets and maintaining the trust and confidence of clients is a vital responsibility. This section sets forth the Firm's business conduct standards.
GENERAL PRINCIPLES
Our principles and philosophy regarding ethics stress the Firm's fiduciary duty to its clients and the obligation of Firm personnel to uphold that fundamental duty. In recognition of the trust and confidence placed in the Firm by its clients and to give effect to the belief that the Firm's operations should be directed to benefit its clients, the Firm has adopted the following general principles to guide the actions of its Supervised Persons:
1. The interests of clients are paramount. All Supervised Persons must conduct themselves and their operations to give maximum effect to this belief by at all times placing the interests of clients before their own.
2. All personal transactions in Securities by Supervised Persons must be accomplished so as to avoid even the appearance of a conflict of interest on the part of such Supervised Persons with the interests of any client.
3. All Supervised Persons must avoid actions or activities that allow (or appear to allow) a Person to profit or benefit from his or her position with respect to a client, or that otherwise bring into question the Supervised Person's independence or judgment.
4. All information concerning the specific Security holdings and financial circumstances of any client is strictly confidential. Supervised Persons are expected to maintain such confidentiality, secure such information and disclose it only to other Supervised Persons with a need to know that information.
5. All Supervised Persons will conduct themselves honestly, with integrity and in a professional manner to preserve and protect the Firm's reputation.
Supervised Persons must comply with applicable Federal Securities laws and are prohibited from the following:
1. To employ a device, scheme or artifice to defraud a client or prospective client;
2. To make to a client or prospective client any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they are made, not misleading;
3. To engage in any act, practice or course of conduct which operates or would operate as a fraud or deceit upon a client or prospective client;
4. To act as principal for his/her own account, knowingly to sell any Security to or purchase any Security from a client, or acting as a broker for a Person other than such client, knowingly to effect any sale or purchase of any Security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he/she is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a bank, broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; or
5. To engage in any act, practice or course of business which is fraudulent, deceptive or manipulative, including with respect to Securities (i.e., price manipulation).
6. No employee of TS&W shall originate or circulate, except as permitted below, in any manner a false or misleading rumor about a security or its issuer for the purpose of influencing the market price of the security. Where a legitimate business reason exists for discussing a rumor, for example, where a client is seeking an explanation for an erratic share price movement which could be explained by the rumor, care should be taken to ensure that the rumor is communicated in a manner that:
o Sources the origin of the information (where possible);
o Gives it no additional credibility or embellishment;
o Makes clear that the information is a rumor; and
o Makes clear that the information has not been verified.
This formulation has the benefit of allowing discussions of a rumor for legitimate purposes while including some safeguards against enhancing the rumor's credibility and effect on the market. These guidelines would permit, for example, a money manager to call an analyst or trader at another firm to report a rumor that the manager thinks is untrue and to ask if the analyst or trader has heard the rumor and has any relevant information. These conversations must be conducted with care, in a professional manner and without exaggeration.
This Code of Ethics contains provisions reasonably necessary to prevent Supervised Persons of the Firm from engaging in acts in violation of the above standards and procedures reasonably necessary to prevent violations of the Code of Ethics.
Federal law requires that this Code of Ethics not only be adopted but that it must also be enforced with reasonable diligence. Failure to comply with the Code of Ethics may result in disciplinary action, including termination of employment. Noncompliance with the Code of Ethics has severe ramifications, including enforcement actions by regulatory authorities, criminal fines, civil injunctions and penalties, disgorgement of profits and sanctions on your ability to be employed in an investment advisory business or in a related capacity. This Code of Ethics is based upon the principle that the Supervised Persons of the Firm, and certain Affiliated Persons of the Firm, owe a fiduciary duty to, among others, the clients of the Firm to conduct their affairs, including their Personal Securities Transactions, in such a manner as to avoid (i) serving their own personal interests ahead of clients; (ii) taking inappropriate advantage of their position with the Firm; and (iii) any actual or potential conflicts of interest or any abuse of their position of trust and responsibility. This fiduciary duty includes the duty of the Review Officer of the Firm to report violations of this Code of Ethics to the Firm's Board of Managers and to the Board of Directors of any U.S. registered investment company client advised or subadvised by the Firm and of the actions taken as a result of such violations.
III. POLICY STATEMENT ON INSIDER TRADING
The Firm forbids any Supervised Person from trading, either personally or on behalf of others, including accounts managed by the Firm, on material nonpublic information or communicating material nonpublic information to others in violation of the law. This conduct is frequently referred to as "insider trading." The Firm's policy applies to every Supervised Person and extends to activities within and outside their duties at the Firm. Any questions regarding the Firm's policy and procedures should be referred to the Review Officer. Trading Securities while in possession of material nonpublic information or improperly communicating that information to others may expose you to severe penalties. Criminal sanctions may include a fine of up to $1,000,000 and/or ten years' imprisonment. The SEC can recover the profits gained or losses avoided through violative trading, impose a penalty of up to three times the illicit windfall and can permanently bar you from the Securities industry. You may also be sued by
those seeking to recover damages for insider trading violations. Regardless of whether a government inquiry occurs, the Firm views seriously any violation of its insider trading policies, and such violations constitute grounds for disciplinary sanctions, including immediate dismissal.
The term "material nonpublic information" relates not only to issuers but also the Firm's Securities recommendations and client Securities holdings and transactions. The term "insider trading" is not defined in the Federal Securities laws, but generally is used to refer to the use of material nonpublic information to trade in Securities (whether or not one is an "insider") or to communications of material nonpublic information to others. Information about a significant order to purchase or sell Securities may, in some contexts, be deemed material. Similarly, prepublication information regarding reports in the financial press also may be deemed material.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
1. trading by an insider while in possession of material nonpublic information;
2. trading by a non-insider, while in possession of material nonpublic information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated; or
3. communicating material nonpublic information to others.
The concept of "insider" is broad. It includes officers, directors and associated persons of a company. In addition, a Person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. A temporary insider can include, among others, a company's attorneys, accountants, consultants, bank lending officers and the associated persons of such organizations. The Firm's Review Officer will make the determination if a Person is to be deemed a "temporary insider." In addition, the Firm may become a temporary insider of a company it advises or for which it performs other services. For that to occur the company must expect the Firm to keep the disclosed nonpublic information confidential and the relationship must at least imply such a duty before the Firm will be considered an insider.
Trading on inside information is not a basis for liability unless the
information is material. "Material information" generally is defined as
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions,
or information that is reasonably certain to have a substantial effect on the
price of a company's Securities. Information that officers, directors and
associated persons should consider material includes, but is not limited to:
dividend changes, earnings estimates, changes in previously released earnings
estimates, significant merger or acquisition proposals or agreements, major
litigation, liquidation problems, and extraordinary management developments.
Information is nonpublic until it has been effectively communicated to the marketplace. Tangible evidence of such dissemination is the best indication that the information is public. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the SEC or some other governmental agency, appearing in DOW JONES PUBLICATIONS, REUTERS, THE WALL STREET JOURNAL, and other publications of general circulation, media broadcasts, over public internet websites and after sufficient time has passed so that the information has been disseminated widely would be considered public.
Before trading for yourself or others in the Securities of a company about which you may have potential inside information, ask yourself the following questions:
1. Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially affect the market price of the Securities if generally disclosed?
2. Is the information nonpublic? To whom has this information been provided? Has the information been effectively communicated to the marketplace?
If, after consideration of the above, you believe that the information is material and nonpublic, or if you have questions as to whether the information is material and nonpublic, you should take the following steps.
1. Report the matter immediately to the Firm's Review Officer.
2. Do not purchase or sell the Securities on behalf of yourself or others, including clients.
3. Do not communicate the information inside or outside the Firm, other than to the Firm's Review Officer.
4. After the Firm's Review Officer has reviewed the issue, you will be instructed to continue the prohibitions against trading and communication, or you will be allowed to trade and communicate the information.
Information in your possession that you identify as material and nonpublic may not be communicated to anyone, including Supervised Persons within the Firm, except as provided above. In addition, care should be taken so that such information is secure. For example, files containing material nonpublic information should be sealed, access to computer files containing material nonpublic information should be restricted and conversations containing or related to such information, if appropriate at all, should be conducted in private to avoid potential interception.
The role of the Firm's Review Officer is critical to the implementation and maintenance of the Firm's policy and procedures against insider trading. The Firm enforces prevention of insider trading and detection of insider trading.
To prevent insider trading, the Firm will:
1. provide, an educational program to familiarize Supervised Persons with the Firm's policy and procedures, and
2. when it has been determined that a Supervised Person of the Firm has material nonpublic information, the Firm will:
[LOGO OMITTED] THOMPSON, SIEGEL & WALMSLEY LLC
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INVESTMENT MANAGEMENT
a. implement measures to prevent dissemination of such information,
and
b. if necessary, restrict Supervised Persons from trading the
Securities.
|
To detect insider trading, the Review Officer will:
1. review the trading activity reports filed by each Supervised Persons, and
2. review the trading activity of accounts managed by the Firm.
IV. POLICY STATEMENT ON THE PAY-TO-PLAY RULE
TS&W REQUIRES PRE-APPROVAL BY COMPLIANCE OF ALL POLITICAL CONTRIBUTIONS, POLITICAL FUNDRAISING ACTIVITIES, AND POLITICAL VOLUNTEER ACTIVITIES BY ALL FIRM EMPLOYEES. HOWEVER, MANY SUCH ACTIVITIES MAY BE APPROVED IF THEY ARE ALLOWABLE OR REPRESENT EXEMPTIONS UNDER THE PAY-TO-PLAY RULE AS DESCRIBED BELOW. THIS POLICY IS NECESSARY TO PREVENT THE RESULT OF THE FIRM NOT BEING COMPENSATED FOR CERTAIN INVESTMENT ADVISORY SERVICES FOR TWO YEARS IF SUCH RULES ARE VIOLATED. SEE APPENDIX FOR DEFINITIONS AND FURTHER CLARIFICATIONS UNDER THE PAY-TO-PLAY RULE.
NOTWITHSTANDING THIS POLICY, IT IS NEVER PERMITTED FOR TS&W AND ITS EMPLOYEES TO MAKE, OR DIRECT OR SOLICIT ANY OTHER PERSON TO MAKE, ANY POLITICAL CONTRIBUTION OR PROVIDE ANYTHING ELSE OF VALUE FOR THE PURPOSE OF INFLUENCING OR INDUCING THE OBTAINING OR RETAINING OF INVESTMENT ADVISORY SERVICES BUSINESS.
TS&W has adopted various procedures and internal controls to review, monitor and ensure the Firm's Solicitor Arrangements and Pay-to-Play policies are observed, implemented properly and amended or updated, as appropriate, which include the following:
1. Political Contributions or Contributions: All employees are required to obtain approval from Compliance prior to making any Political Contribution of any value. Contributions to candidates for federal office are not covered unless they happen to be state or local officials at the time of the Contribution.
Employees may obtain such pre-approval from Compliance by completing and submitting a "Political Contribution Request Form". Compliance will review and evaluate each completed and submitted form to determine whether the Contribution is permissible based upon the requirements of Rule 206(4)-5 and Firm policy. Employees and their immediate supervisor(s) will be notified in writing of Compliance's final determination.
2. Coordinating or Soliciting Political Contributions, and Political Fundraising: In addition, all employees must obtain approval from Compliance prior to engaging in Coordinating or Soliciting Political Contributions, or engaging in any other political fundraising efforts. Employees must also use the Political Contribution Request Form to request pre-approval for such activities. Coordinating or Soliciting Political Contributions, or political fundraising, may even include, for example, merely having one's name appear in the letterhead or any other portion of a political fundraising letter.
3. Indirect Political Contributions: Please note that state and local pay-to-play laws may directly cover spouses and dependent children of employees. As a result, employees must seek pre-approval for Political Contributions or Solicitations of Contributions made by their spouse or dependent children as well.
4. Annual Political Contributions Certification Form: At the end of each year, Compliance will distribute to all Firm employees an Annual Political Contributions Certification Form. This Form is intended to capture information regarding any Political Contribution made by each such employee, including spouses and dependent children, during that calendar year.
Employees must return the forms either (1) acknowledging that no Political Contributions were made, or (2) disclosing all Political Contributions made, including Contributions for which the employee received pre-clearance. In order to protect the privacy of employees, the records shall be treated as confidential and may only be accessed and/or reviewed by person(s) with a "need to know" or for purposes of making necessary disclosures to the SEC, if required.
In addition, a question has been added to the quarterly reporting forms as well to be certain all such contributions and fundraising efforts are properly pre-cleared and reported.
Please consult the Solicitor Arrangements and Pay-to-Play Rule Policy for definitions or more details on this issue.
V. PROHIBITED TRANSACTIONS AND ACTIVITIES
The following prohibitions apply to all Access Persons, unless indicated otherwise and unless exempted under Section VI. In addition to these prohibitions, the Review Officer may prohibit transactions other than those specifically indicated below if they determine that a proposed transaction presents a potential for a conflict of interest.
1. Access Persons are prohibited from directly or indirectly using any act, device, scheme, artifice, practice or course of conduct to defraud, mislead or manipulate a client in connection with the Purchase or Sale of a Security held or to be acquired by the client. Access Persons are also prohibited from making any untrue statement of material fact to a client and from omitting to state a material fact necessary in order to make the statement made to the client, under the circumstances, not misleading.
2. Access Persons are prohibited from purchasing or selling, directly or indirectly, any Security in which he/she has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership and which to his/her ACTUAL KNOWLEDGE at the time of such purchase or sale:
o is on the Restricted List;
o is being purchased or sold by any Portfolio (Firm accounts), with the exception of Maintenance Trades;
o was purchased or sold by any Portfolio during the previous trading day or the day following, with the exception of Maintenance Trades; or
o is less than $3.0 billion in market capitalization and held in a TS&W Primary Product (all equity products utilizing the four-factor model in its process).
3. Unless exempted under Section VI, Access Persons are prohibited from purchasing or selling a Reportable Security without prior approval from the Review Officer.
4. Access Persons are prohibited from acquiring a beneficial interest in any Securities in a Limited Offering commonly referred to as a private placement, without prior written approval of the Review Officer of the Firm and a Manager of the Firm. The Review Officer must maintain a record of any decision, and the reasons supporting the decision to approve the Access Person's acquisition of a private placement, for at least five years after the end of the fiscal year in which the approval was granted.
Before granting such approval, the Review Officer should carefully evaluate such investment to determine that the investment could create no material conflict between the Access Person and any Portfolio. The Review Officer may make such determination by looking at, among other things, the nature of the offering and the particular facts surrounding the purchase. For example, the Review Officer may consider approving the transaction if he or she can determine that: (i) the investment did not result from directing Portfolio or Firm business to the underwriter or issuer of the Security; (ii) the Access Person is not misappropriating an opportunity that should have been offered to any Portfolio; and (iii) the Access Person's investment decisions for a Portfolio would not be unduly influenced by his or her personal holdings, and investment decisions are based solely on the best interests of that Portfolio. Any Person authorized to purchase Securities in a private placement shall disclose that investment when they play a part in a Portfolio's subsequent consideration of an investment in that issuer. In such circumstances, a Portfolio's decision to purchase Securities of the issuer shall be subject to independent review by Investment Personnel with no personal interest in the issuer.
5. Access Persons are prohibited from acquiring Beneficial Ownership of a Security, excluding tax-exempt Securities or corporate bonds, as part of an Initial Public Offering.
6. Access Persons and their family members are discouraged from accepting or giving any gift, favor, service, special accommodation or other thing of more than de minimis material value from or to any Person or entity that does business with or seeks to do business with or on behalf of the Firm. Such gifts may be prohibited where they could be viewed as overly generous or reasonably could be expected to compromise an Access Person's or another's independence and objectivity. For purposes of this Code of Ethics, "de minimis" shall be considered to be the annual receipt/provision of gifts from the same source valued at $100 or less per individual recipient/source, when the gifts are in relation to the Firm's business. Gifts do not include business entertainment; however, entertainment, and the pre-clearance process for gifts and business entertainment, is addressed in more detail below in the next section. Any exceptions to this policy must be approved by the Firm's Review Officer or a Board Member. Access Persons will acknowledge, quarterly, the receipt or gift of any business related gifts, services or other things of material value on Exhibit C, Page 2. In addition, a gift log for all gifts, even those of de minimis value, will be maintained by the Review Officer or their designee. Finally, Political Contributions, discussed separately, are not considered gifts.
EXCEPTION: PROMOTIONAL GIFTS OF LITTLE INTRINSIC VALUE SUCH AS COFFEE MUGS, CALENDARS, PLAQUES, TROPHIES OR SIMILAR ITEMS SOLELY FOR THE PURPOSE OF PRESENTATION AND DISPLAY OF A COMPANY'S LOGO, WHERE THE ESTIMATED VALUE OF THE ITEM IS UNDER $10, ARE NOT REQUIRED TO BE LOGGED OR REPORTED QUARTERLY, AS SUCH ITEMS ARE NOT INCLUDED IN THE CALCULATION OF THE AGGREGATE VALUE OF GIFTS REQUIRED TO BE REPORTED BY THE DOL. That said, this exception does not cover a gift that clearly has a value in excess of $10--for example, a $400 golf club embossed with a company logo would likely be prohibited, but should be pre-cleared and reported; a pen valued at $75 and embossed with a company logo is not prohibited, but should be reported.
For accounts related to ERISA plans (involving increased fiduciary responsibility) or Taft-Hartley plans (involving union officials or labor unions) or for gifts to elected officials, any gifts considered at all value levels must be pre-approved, logged and reported. Access persons should bear in mind that for Taft-Hartley plans, the DOL has established a $250 per person annual aggregate limit which should not be exceeded. This limit will be applied to ERISA plans as well due to the increased fiduciary responsibility.
7. Access Persons may provide or accept a business entertainment event of reasonable value, such as a dinner or sporting event where the purpose of the event is to conduct business. Such business entertainment may be prohibited where it could be viewed as overly generous or reasonably could be expected to compromise an Access Person's or another's independence and objectivity. Access Persons should seek prior approval or pre-clearance from the Firm's Review Officer or a Board Member in cases where they are unsure of whether the entertainment (or a gift as described above) may be viewed as overly generous, or in any case where a proposed gift is over $100 or business entertainment is over $250 in estimated value. What may constitute "overly generous" gifts or entertainment may be determined on a case-by-case basis by the Review Officer or a Board Member.
It is acknowledged that such pre-clearances (as described above) will
only be submitted and reviewed in cases where the entertainment event
or gift is prospective in nature, quantifiable, and can be properly
analyzed. In other cases, an approval may be obtained and reported
after the gift is received or the event has taken place. EXCEPTION:
WHERE AN ENTERTAINMENT EVENT OR GIFT IS INCLUDED AS PART OF AN
EDUCATIONAL CONFERENCE, SEMINAR, RESEARCH CONFERENCE OR SIMILAR EVENT
WHICH MAY ENTAIL MULTIPLE MEALS AND ENTERTAINMENT EVENTS-- IN SUCH
CASES, THE EMPLOYEE WILL LOG THE EVENT AND IT MUST ALWAYS BE APPROVED,
BUT ON THE LOG AND APPROVAL FORM, IT IS NOT NECESSARY TO INCLUDE THE
VALUE OR ESTIMATED COST--JUST A DESCRIPTION OF THE EVENT AND OTHER
DETAILS.
EXCEPTION: BUSINESS ENTERTAINMENT OF LITTLE INTRINSIC VALUE, SUCH AS GROUP LUNCHES WHERE THE ESTIMATED VALUE OF THE EXPENSE IS UNDER $10 PER PERSON, IS NOT REQUIRED TO BE LOGGED OR REPORTED QUARTERLY. HOWEVER, THIS EXCEPTION DOES NOT APPLY IN CASES INVOLVING ERISA PLANS OR TAFT- HARTLEY PLANS WHERE ANY GIFTS OR ENTERTAINMENT PROVIDED AT ALL VALUE LEVELS MUST BE PRE-APPROVED, LOGGED AND REPORTED.
Except for the exemptions described above, all business entertainment events (either given or received by Access Persons) will be acknowledged and reported, quarterly, on Exhibit C, Page 2. Finally, an entertainment log for all business entertainment events (either given or received) will also be maintained by the Review Officer or their designee.
For accounts related to ERISA plans (involving increased fiduciary responsibility) or Taft-Hartley plans (involving union officials or labor unions) or for business entertainment provided to elected officials, any entertainment considered at all value levels must be pre-approved, logged and reported. Access persons should bear in mind that for Taft-Hartley plans, the DOL has established a $250 per person annual aggregate limit which should not be exceeded. This limit will be applied to ERISA plans as well due to the increased fiduciary responsibility.
8. Access Persons are prohibited from profiting in the purchase and sale, or sale and purchase, of the same (or equivalent) Reportable Securities, including Firm Managed Funds, within 30 calendar days. Trades made in violation of this prohibition should be unwound, if possible.
EXCEPTION: The Review Officer may allow exceptions to this policy on a case-by-case basis when the abusive practices that the policy is designed to prevent, such as front running or conflicts of interest, are not present and the equity of the situation strongly supports an exemption. An example is the involuntary sale of Securities due to unforeseen corporate activity such as a merger. The ban on short-term trading profits is specifically designed to deter potential conflicts of interest and front running transactions, which typically involve a quick trading pattern to capitalize on a short-lived market impact of a trade by one of the Portfolios. The Review Officer shall consider the policy reasons for the ban on short-term trades, as stated herein, in determining when an exception to the prohibition is permissible. The Review Officer may consider granting an exception to this prohibition if the Securities involved in the transaction are not being considered for purchase or sale by a Portfolio. In order for a proposed transaction to be considered for exemption from the short-term trading prohibitions, the Access Person must complete, sign and submit to the Review Officer a completed Securities Transactions Report Relating to Short-Term Trading (EXHIBIT D), certifying that the proposed transaction is in compliance with this Code of Ethics. The Review Officer shall retain a record of exceptions granted and the reasons supporting the decision.
9. Access Persons are prohibited from serving on the Board of Directors of any publicly traded company without prior authorization of the Review Officer of the Firm. Any such authorization shall be based upon a determination that the board service would be consistent with the interests of the Firm and any Portfolios. Authorization of board service shall be subject to the implementation by the Firm of "Chinese Wall" or other procedures to isolate such Access Persons from making decisions about trading in that company's Securities.
VI. EXEMPTED TRANSACTIONS
Prohibited transactions described in Section V above, which appear upon reasonable inquiry and investigation to present no reasonable likelihood of harm to a Portfolio may be permitted within the discretion of the Review Officer on a case-by-case basis. Such exempted transactions may include:
1. Purchases or sales of securities which are not held by a Portfolio and which are not related economically to Reportable Securities held by a Portfolio.
2. Purchases or sales of a de minimis amount of Securities. A de minimis amount of Securities shall be defined in this section of the Code of Ethics as:
(a) up to an aggregate $25,000 principal amount of a fixed income Security within any three-consecutive month period; and
(b) up to an aggregate 99 shares of an equity Security within any three-consecutive month period.
3. Other exemptions:
a) purchase or sale that is non-volitional on the part of the Access Person, including (i) a purchase or sale upon the exercise of puts or calls written by the Access Person, (ii) sales from a margin account, pursuant to a bona fide margin call and (iii) a purchase or sale performed by an independent financial professional acting with sole discretion and performed pursuant to an arrangement previously approved by the Review Officer;
b) purchase that is part of an automatic dividend reinvestment plan or other similar program, including any sale through a systematic withdrawal plan;
c) purchase effected upon the exercise of rights issued by an issuer pro rata to all holders of the Security, to the extent such rights were acquired from the issuer, and sales of such rights so acquired;
d) an acquisition of a Security through a gift or bequest;
e) a disposition of Security through gift.
VII. COMPLIANCE PROCEDURES
A. PRE-CLEARANCE PROCEDURES FOR PERSONAL TRADING
All Access Persons must receive prior written approval from the Firm's Review Officer before purchasing or selling Reportable Securities in an account that such Access Person has Beneficial Ownership. The Access Person should request pre-clearance by completing, signing and submitting a Personal Securities Transactions Pre-Clearance Form (EXHIBIT E) to the Review Officer.
Pre-clearance approval will expire at the close of business on the trading date on which authorization is received. If the trade is not completed before such pre-clearance expires, the Access Person is required to again obtain pre-clearance for the trade. No Review Officer may pre-clear their own trades. In addition, if an Access Person becomes aware of any additional information with respect to a transaction that was pre-cleared, such Person is obligated to disclose such information to the Review Officer prior to executing the pre-cleared transaction.
Access Persons are excluded from pre-clearing Reportable Securities purchased, sold, acquired or disposed in the following transactions:
1. purchase or sale that is non-volitional on the part of the Access Person, including (i) a purchase or sale upon the exercise of puts or calls written by the Access Person, (ii) sales from a margin account, pursuant to a bona fide margin call and (iii) a purchase or sale performed by an independent financial professional acting with sole discretion and performed pursuant to an arrangement previously approved by the Review Officer;
2. purchase that is part of an automatic dividend reinvestment plan or other similar program, including any sale through a systematic withdrawal plan;
3. purchase effected upon the exercise of rights issued by an issuer pro rata to all holders of the Reportable Security, to the extent such rights were acquired from the issuer, and sales of such rights so acquired;
4. an acquisition of a Reportable Security through a gift or bequest;
5. a disposition of Reportable Security through a gift;
6. Exchange Traded Funds (ETFs), options on ETFs, indexes, commodities and currencies;
7. futures contracts on ETFs, indexes, commodities and currencies;
8. tax-exempt and corporate bonds;
9. shares of foreign unit trusts and foreign mutual funds;
10. shares of open and closed-end funds except Firm Managed Funds; and
11. purchases or sales of a de minimis amount of Reportable Securities. A de minimis amount of Reportable Securities shall be defined in this section of the Code of Ethics as:
a) up to an aggregate $25,000 principal amount of a fixed income Security within any three-consecutive month period; and
b) up to an aggregate 99 shares of an equity Security within any three-consecutive month period.
B. PRE-CLEARANCE PROCEDURES FOR POLITICAL CONTRIBUTIONS, FUNDRAISING EFFORTS, AND OTHER SIMILAR ACTIONS
Political Contributions or Contributions: All employees are required to obtain approval from Compliance prior to making any Political Contribution of any value. Contributions to candidates for federal office are not covered unless they happen to be state or local officials at the time of the Contribution.
Employees may obtain such pre-approval from Compliance by completing and submitting a "Political Contribution Request Form". Compliance will review and evaluate each completed and submitted form to determine whether the Contribution is permissible based upon the requirements of Rule 206(4)-5 and Firm policy. Employees and their immediate supervisor(s) will be notified in writing of Compliance's final determination.
C. LOGGING AND PRE-CLEARANCE PROCEDURES FOR GIFTS AND ENTERTAINMENT
All employees are required to obtain approval from the Firm's Review Officer or a Board Member prior to giving or receiving a gift valued at more than $100 or business entertainment valued at more than $250 per person (unless it is exempted from approval or reporting as described above). Employees may obtain such pre-approval by completing and submitting a "Gift and Entertainment Pre-Clearance/Approval Request Form". Employees and their immediate supervisor(s) will be notified in writing of the Review Officer or Board Member's final determination.
All employees are required to log all gifts (except those described as promotional gifts under $10 as described above) and all business entertainment (except that which is exempted as described above), either given or received.
D. EXCESSIVE TRADING/MARKET TIMING
The Firm understands that it is appropriate for Access Persons to participate in the public Securities markets as part of their overall personal investment programs. As in other areas, however, this should be done in a way that creates no potential conflicts with the interests of any Portfolio. Further, it is important to recognize that otherwise appropriate trading, if excessive (measured in terms of frequency, complexity of trading programs, numbers of trades or other measures, as deemed appropriate by the Review Officer or senior management at the Firm, may compromise the best interests of any Portfolios if such excessive trading is conducted during work-time or using Portfolio resources. Accordingly, if personal trading rises to such dimension as to create an environment that is not consistent with the Code of Ethics, such personal transactions may not be approved or may be limited by the Review Officer of the Firm.
Each Firm Managed Fund is intended for long-term investment purposes only and does not permit "market timing" or other types of excessive short-term trading by Access Persons and other shareholders. Excessive short-term trading into and out of the Firm Managed Funds can disrupt Portfolio investment strategies and may increase fund expenses for all shareholders, including long-term shareholders who do not generate these costs. Each Firm Managed Fund reserves the right to reject any purchase request (including purchases by exchange) by any investor or group of investors for any reason without prior notice, including, in particular, if the fund reasonably believes that the trading activity would be disruptive to the fund. Access Persons shall not be permitted to make a "round trip" trade in any Firm Managed Fund within 30 calendar days without the direct approval of the Review Officer of the Firm.
E. CONFLICTS OF INTEREST
Every Supervised Person shall notify the Review Officer of the Firm of any personal conflict of interest relationship which may involve a Portfolio, such as the existence of any economic relationship between their transactions and Securities held or to be acquired by any Portfolio. Such notification shall occur in the pre-clearance process.
VIII. REPORTING REQUIREMENTS
A. DISCLOSURE OF PERSONAL HOLDINGS UPON EMPLOYMENT
All Access Persons shall submit to the Review Officer:
A holdings report that includes: (1) information regarding all holdings in Reportable Securities in which Access Persons have Beneficial Ownership; and (2) the name of any broker, dealer, bank or other entity for any Reportable Account. New employees should submit these reports within 10 days of employment with the Firm. Information contained in the initial reports should be current as of a date not more than 45 days before the employee became an Access Person or prior to the date the report is submitted for annual reports.
In addition to reporting securities holdings, every Access Person shall certify in their initial report that:
1. They have received, read and understand the Code of Ethics and recognize that they are subject thereto;
2. They have no knowledge of the existence of any personal conflict of interest relationship which may involve a Portfolio, such as any economic relationship between their transactions and Securities held or to be acquired by a Portfolio; and
3. They do not serve on the Board of Directors of any publicly traded company.
The initial report shall be made on the form attached as Initial Report of Access Person (EXHIBIT A) and shall be delivered to the Review Officer.
B. QUARTERLY REPORTING REQUIREMENTS
All Access Persons shall disclose to the Review Officer all transactions in Reportable Securities conducted during the period as of the calendar quarter ended within 30 calendar days after quarter-end. Access Persons do not need to pre-clear Personal Securities Transactions affected in any account over which the Access Person has no direct or indirect influence or Control; however, custodian statements in any such accounts must be sent to the Review Officer not less than quarterly.
In addition, on a quarterly basis, with respect to all Reportable Accounts, the Access Person must provide:
1. not less than quarterly, a custodian statement disclosing the transactions;
2. the name of the broker, dealer, bank or other entity that acts as custodian;
3. if a new account, the date the account was established; and
4. the date the report is submitted by the Access Person.
This quarterly report shall be made on the form attached as Securities Transactions for the Calendar Quarter Ended (EXHIBIT C) and shall be delivered to the Review Officer. In lieu of manually filling out all of the information required by the form, Access Persons may attach confirms and/or provide account statements with a signed form. This form also includes a section for Pay-to-Play Rule reporting and Gifts and Entertainment.
C. ANNUAL REPORT CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS
All Access Persons shall disclose to the Review Officer all holdings in Reportable Securities as of the calendar year ended within 30 calendar days after year end. In addition to reporting Reportable Securities holdings, every Access Person shall certify annually that:
1. they have read and understand the Code of Ethics and recognize that they are subject thereto;
2. they have complied with the requirements of the Code of Ethics and that they have reported all Personal Securities Transactions required to be reported pursuant to the requirements of the Code of Ethics;
3. they do not serve on the Board of Directors of any publicly traded company;
4. they have not disclosed pending "buy" or "sell" orders for a Portfolio to any associate of any other Management Company, except where the disclosure occurred subsequent to the execution or withdrawal of an order;
5. they have disclosed all Reportable Accounts;
6. they have no knowledge of the existence of any personal conflict of interest relationship which may involve any Portfolio, such as any economic relationship between their transactions and Securities held or to be acquired by a Portfolio;
7. they have not received any gift or other thing valued at more than $100 (de minimis amount) in relation to the Firm's business and have disclosed all gifts and entertainment both given and received via the Firm's Gift and Entertainment Log; and
8. they have or have not made or previously pre-cleared any political contributions or fundraising activities.
Except for item 8, this annual report shall be made on the form attached as Annual Report of Access Persons (EXHIBIT B) and shall be delivered to the Review Officer. The Pay-to-Play Rule has its own annual certification form.
D. CONFIDENTIALITY OF REPORTS
Reports submitted pursuant to this Code of Ethics shall be confidential and shall be provided only to those Supervised Persons of the Firm with a need to know and, upon appropriate request, Compliance Departments of Old Mutual (US) Holdings Inc. and any registered investment company the Firm advises or sub-advises, counsel, and/or regulatory authorities.
E. ACKNOWLEDGEMENT OF RECEIPT OF CODE OF ETHICS
Each Supervised Person shall be provided with a copy of this Code of Ethics, and any amendments, and Supervised Persons shall submit a written acknowledgment of their receipt of this Code and any amendments to this Code of Ethics. Written acknowledgement of the Code may be made via the Initial Report (EXHIBIT A), an Acknowledgement by a Supervised Person Form (EXHIBIT F) or other means (e.g. e-mail).
F. REVIEW OF REPORTS
The Review Officer shall review reports submitted under this Code of Ethics. The Review Officer shall not review his/her own reports.
G. DUPLICATE CONFIRMATION AND STATEMENTS
The Review Officer of the Firm may require Access Persons to provide duplicate copies of confirmation of each disclosable transaction in their accounts and will require duplicate copies of account statements.
H. REPORTING OF VIOLATIONS TO THE BOARD OF DIRECTORS AND SANCTIONS
Supervised Persons are required to report any violations of this Code of Ethics promptly to the Review Officer. The Review Officer of the Firm shall promptly report to the Board of Managers of the Firm violations of this Code of Ethics and the reporting requirements hereunder. The Board of Managers of the Firm, and outside counsel, if deemed appropriate, shall consider reports made to it and shall determine whether or not there has been a violation of the Firm's Code of Ethics and what sanctions, if any, should be imposed, including, among other things, a letter of censure or suspension, fines, or termination of the employment of the violator.
I. ANNUAL REPORTING TO THE BOARD OF DIRECTORS
The Review Officer of the Firm shall prepare an annual report relating to this Code of Ethics to the Board of Managers of the Firm and of any U.S. registered investment company client advised or subadvised by the Firm that request such reporting. Such annual report shall:
1. summarize existing procedures concerning personal investing and any changes in the procedures made during the past year;
2. identify any violations during the past year;
3. identify any recommended changes in the existing restrictions or procedures based upon the Firm's experience under its Code of Ethics, evolving industry practices or developments in applicable laws or regulations; and
4. state that the Firm had adopted procedures reasonably necessary to prevent Access Persons from violating the Code of Ethics.
J. RETENTION OF RECORDS
The Firm shall maintain the following records as required under Rule 17j-1 under the Investment Company Act and Rule 204A-1 under the Advisers Act:
1. a copy of any Code of Ethics in effect within the most recent five years;
2. a list of all Supervised Persons required to make reports hereunder within the most recent five years and a list of all Supervised Persons who were responsible for reviewing the reports, as shall be updated by the Review Officer of the Firm;
3. a copy of each report made by an Access Person hereunder and submitted to the Firm's Review Officer for a period of five years from the end of the fiscal year in which it was made;
4. each memorandum made by the Review Officer of the Firm hereunder for a period of five years from the end of the fiscal year in which it was made;
5. a record of any violation under the Code of Ethics and any action taken as a result of such violation for a period of five years following the end of the fiscal year in which the violation occurred;
6. a record of all written acknowledgements as required by Rule 204A-1(a)(5) for each Person who is currently, or in the past five years was, a Supervised Person of the Firm;
7. a record of any decision, and the reasons supporting the decision, to approve the acquisition of securities by Access Persons under Rule 204A-1(c), for at least five years after the end of the fiscal year in which the approval is granted; and a copy of every report provided to the Firm's Board of Managers or a fund's Board which describes any issues arising under the Code of Ethics and certifies that the Firm has adopted procedures reasonably necessary to prevent Access Persons from violating the Code of Ethics.
IX. DEFINITIONS
1. "ACCESS PERSON" means any Manager, officer, general partner or Advisory Representative of the Firm. As the nature and philosophy of the Firm tends to expose a large range of Supervised Persons to client information, all Supervised Persons are treated as Access Persons. Supervised Persons that are subject to another code of ethics that has been reviewed and approved by the Review Officer are not subject to the Access Person requirements of this Code.
2. "ADVISORY REPRESENTATIVE" means any Supervised Person, who in connection with his or her regular functions or duties, normally makes, participates in, or otherwise obtains current information regarding the Purchase or Sale of a Security by the Firm, or whose functions relate to the making of any recommendations with respect to such purchases or sales, and any natural Person in a Control relationship to the Firm who obtains information concerning recommendations made concerning a Purchase or Sale of a Security. This definition includes but is not limited to the following: partner, officer, Manager, investment person, Portfolio Manager and any other Supervised Person of the Firm designated as an "Advisory Representative" from time to time by the Review Officer.
3. "AFFILIATED PERSON" of another Person means (a) any Person directly or indirectly owning, Controlling, or holding with power to vote, five percent (5%) or more of the outstanding voting securities of such other person; (b) any Person five percent (5%) or more of whose outstanding voting securities are directly or indirectly owned, Controlled, or held with power to vote, by such other person; (c) any Person directly or indirectly Controlling, Controlled by, or under common Control with, such other person; (d) any officer, director, partner, copartner, or associate of such other person; (e) if such other Person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (f) if such other Person is an unincorporated investment company not having a board of directors, the depositor thereof.
4. "AFFILIATED FUND" MEANS ANY INVESTMENT VEHICLE REGISTERED UNDER THE INVESTMENT COMPANY ACT WHICH THE FIRM OR AN AFFILIATED PERSON ACTS AS MANAGER, ADVISER OR SUBADVISER.
5. "BENEFICIAL OWNERSHIP" SHALL BE INTERPRETED IN THE SAME MANNER AS IT WOULD BE UNDER RULE 16A-1(A)(2) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "1934 ACT"), IN DETERMINING WHETHER A PERSON IS THE BENEFICIAL OWNER OF A SECURITY FOR PURPOSES OF SECTION 16 OF THE 1934 ACT AND THE RULES AND REGULATIONS THEREUNDER, THAT, GENERALLY SPEAKING, ENCOMPASSES THOSE SITUATIONS WHERE THE BENEFICIAL OWNER HAS THE RIGHT TO ENJOY A DIRECT OR INDIRECT ECONOMIC BENEFIT FROM THE OWNERSHIP OF THE SECURITY. A PERSON IS NORMALLY REGARDED AS THE BENEFICIAL OWNER OF SECURITIES HELD IN (I) THE NAME OF HIS OR HER SPOUSE, DOMESTIC PARTNER, MINOR CHILDREN, OR OTHER RELATIVES LIVING IN HIS OR HER HOUSEHOLD; (II) A TRUST, ESTATE OR OTHER ACCOUNT IN WHICH HE/SHE HAS A PRESENT OR FUTURE INTEREST IN THE INCOME, PRINCIPAL OR RIGHT TO OBTAIN TITLE TO THE SECURITIES; OR (III) THE NAME OF ANOTHER PERSON OR ENTITY BY REASON OF ANY CONTRACT, UNDERSTANDING, RELATIONSHIP, AGREEMENT OR OTHER ARRANGEMENT WHEREBY HE OR SHE OBTAINS BENEFITS SUBSTANTIALLY EQUIVALENT TO THOSE OF OWNERSHIP.
6. "CONTROL" MEANS THE POWER TO EXERCISE A CONTROLLING INFLUENCE OVER THE MANAGEMENT OR POLICIES OF A COMPANY, UNLESS SUCH POWER IS SOLELY THE RESULT OF AN OFFICIAL POSITION WITH SUCH COMPANY. ANY PERSON WHO OWNS BENEFICIALLY, EITHER DIRECTLY OR THROUGH ONE OR MORE CONTROLLED COMPANIES, MORE THAN TWENTY- FIVE PERCENT (25%) OF THE VOTING SECURITIES OF A COMPANY SHALL BE PRESUMED TO CONTROL SUCH COMPANY. ANY PERSON WHO DOES NOT SO OWN MORE THAN TWENTY- FIVE PERCENT (25%) OF THE VOTING SECURITIES OF ANY COMPANY SHALL BE PRESUMED NOT TO CONTROL SUCH COMPANY. A NATURAL PERSON SHALL BE PRESUMED NOT TO BE A CONTROL PERSON.
7. "EXCHANGE TRADED FUND (ETF)" MEANS A PORTFOLIO OF SECURITIES THAT TRADES THROUGHOUT THE DAY ON AN EXCHANGE. A CLOSED-END FUND IS NOT AN ETF.
8. "FIRM" MEANS the investment adviser registered with the SEC under the Advisers Act, subject to this Code of Ethics.
9. "FIRM MANAGED FUND" MEANS ANY INVESTMENT COMPANY REGISTERED UNDER THE INVESTMENT COMPANY ACT FOR WHICH THE FIRM ACTS AS INVESTMENT ADVISER OR SUBADVISER.
10. "INITIAL PUBLIC OFFERING" MEANS AN OFFERING OF SECURITIES REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT'), THE ISSUER OF WHICH, IMMEDIATELY BEFORE THE REGISTRATION, WAS NOT SUBJECT TO THE REPORTING REQUIREMENTS OF SECTIONS 13 OR 15(D) OF THE 1934 ACT.
11. "INVESTMENT PERSONNEL" MEANS (A) ANY PORTFOLIO MANAGER OF THE FIRM; (B) ANY ASSOCIATE OF THE FIRM (OR OF ANY COMPANY IN A CONTROL RELATIONSHIP TO A FUND OR THE FIRM) WHO, IN CONNECTION WITH HIS REGULAR FUNCTIONS OR DUTIES, MAKES OR PARTICIPATES IN MAKING RECOMMENDATIONS REGARDING THE PURCHASE OR SALE OF SECURITIES BY THE FIRM, INCLUDING SECURITIES ANALYSTS, TRADERS AND MARKETING SUPERVISED PERSONS; OR (C) ANY PERSON WHO CONTROLS A FUND OR THE FIRM AND WHO OBTAINS INFORMATION CONCERNING RECOMMENDATIONS MADE TO ANY PORTFOLIO REGARDING THE PURCHASE OR SALE OF SECURITIES BY THE PORTFOLIO.
12. "LIMITED OFFERING" MEANS AN OFFERING THAT IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT PURSUANT TO SECTION 4(2) OR SECTION 4(6) OR RULES 504, 505 OR 506 UNDER THE SECURITIES ACT. LIMITED OFFERINGS ARE COMMONLY REFERRED TO AS PRIVATE PLACEMENTS.
13. "MAINTENANCE TRADES" REFER TO ANY TRADES AFFECTED BY PORTFOLIO MANAGERS FOR SPECIFIC ACCOUNTS INCLUDING THOSE IN "SMA" ACCOUNTS. MAINTENANCE TRADES TYPICALLY OCCUR TO GET PORTFOLIOS IN LINE WITH GUIDELINES, RAISE CASH FOR SPECIFIC PURPOSES, ETC. THESE ARE NOT TO BE CONFUSED WITH FIRM-WIDE BLOCK TRADES WHICH EFFECT LARGE NUMBERS OF ACCOUNTS AT ONE TIME.
14. "MANAGEMENT COMPANY" REFERS TO INVESTMENT ADVISERS THAT ARE SUBSIDIARIES OF OR ORGANIZATIONS OTHERWISE AFFILIATED WITH OLD MUTUAL (US) HOLDINGS INC.
15. "MANAGER" REFERS TO INDIVIDUAL MEMBER OF THE BOARD OF MANAGERS.
16. "PERSON" MEANS A NATURAL PERSON OR A COMPANY.
17. "PERSONAL SECURITIES TRANSACTIONS" MEANS ANY TRANSACTION IN A SECURITY PURSUANT TO WHICH AN ACCESS PERSON WOULD HAVE A BENEFICIAL OWNERSHIP INTEREST WITH THE EXCEPTION OF OBLIGATIONS OF THE U.S. GOVERNMENT, BANKERS' ACCEPTANCES, BANK CERTIFICATES OF DEPOSIT, MONEY MARKET FUND SHARES, COMMERCIAL PAPER, HIGH QUALITY SHORT-TERM DEBT INSTRUMENTS AND REGISTERED OPEN AND CLOSED-END INVESTMENT COMPANIES, NONE OF WHICH ARE FUNDS ADVISED OR SUBADVISED BY THE FIRM.
18. "PORTFOLIO" MEANS ANY ACCOUNT, TRUST OR OTHER INVESTMENT VEHICLE OVER WHICH THE FIRM HAS INVESTMENT MANAGEMENT DISCRETION.
19. "PORTFOLIO MANAGER" MEANS AN ASSOCIATE OF THE FIRM ENTRUSTED WITH THE DIRECT RESPONSIBILITY AND AUTHORITY TO MAKE INVESTMENT DECISIONS AFFECTING THE PORTFOLIOS OR FIRM MANAGED FUNDS.
20. "PURCHASE OR SALE OF A SECURITY" INCLUDES, AMONG OTHER THINGS, THE WRITING OF AN OPTION TO PURCHASE OR SELL A SECURITY.
21. "REPORTABLE ACCOUNT" MEANS ANY ACCOUNT HELD AT A BROKER, DEALER OR
BANK WITH WHICH AN ACCESS PERSON MAINTAINS BENEFICIAL OWNERSHIP IN ANY
SECURITY AND FOR ANY ACCOUNT HELD AT A BROKER, DEALER, BANK OR OTHER
ENTITY FOR WHICH AN ACCESS PERSON HAS THE ABILITY to obtain Beneficial
Ownership of any Reportable Security.
22. "REPORTABLE SECURITY" SHALL HAVE THE MEANING SET FORTH IN SECTION
202(A)(18) OF THE ADVISERS ACT AND SECTION 2(A)(36) OF THE INVESTMENT
COMPANY ACT. FURTHER, FOR PURPOSES OF THIS CODE OF ETHICS, "REPORTABLE
SECURITY" SHALL INCLUDE ANY FIRM MANAGED FUND AND COMMODITIES
CONTRACTS AS DEFINED IN SECTION 2(A)(1)(A) OF THE COMMODITY EXCHANGE
ACT. THIS DEFINITION INCLUDES BUT IS NOT LIMITED TO FUTURES CONTRACTS
ON EQUITY INDICES.
"REPORTABLE SECURITY" means any stock, bond, future, investment contract or any other instrument that is considered a "Reportable Security" under the Advisers Act. The term "Reportable Security" is very broad and includes items you might not ordinarily think of as "Reportable Securities," including:
o Options on securities, on indexes and on currencies (options on securities defined as one option contract covering 100 shares of stock);
o All kinds of limited partnerships;
[LOGO OMITTED] THOMPSON, SIEGEL & WALMSLEY LLC
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INVESTMENT MANAGEMENT
o Foreign unit trusts and foreign mutual funds; and
o Private investment funds, hedge funds, and investment clubs
o ETF's, iShares and unit investment trusts
o Closed-end Funds
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"REPORTABLE SECURITY" specifically does not include:
o Direct obligations of the U.S. Government;
o Bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt obligations, including repurchase agreements;
o Shares issued by money market funds;
o Shares of open-end funds, none of which are Affiliated Funds; and Shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are Affiliated Funds.
Any question as to whether a particular investment constitutes a "Reportable Security" should be referred to the Review Officer.
23. "RESTRICTED LIST" IS AN ACTIVELY MONITORED LIST OF SECURITIES BEING CONSIDERED FOR PURCHASE OR SALE BY ANY EQUITY AND/OR INTERNATIONAL PORTFOLIOS OR FUNDS.
24. "REVIEW OFFICER" REFERS TO THE CHIEF COMPLIANCE OFFICER, APPOINTED BY THE MANAGEMENT COMMITTEE AND APPROVED BY THE FIRM'S BOARD OF MANAGERS TO OVERSEE ITS CODE OF ETHICS OR A DESIGNEE APPOINTED BY THE CHIEF COMPLIANCE OFFICER.
25. "SECURITY" MEANS A SECURITY AS DEFINED IN SECTION 202(A)(18) OF THE INVESTMENT ADVISERS ACT OF 1940 AND INCLUDES NOTES, STOCKS, BONDS, TRANSFERABLE SHARES, CERTIFICATES OF DEPOSIT FOR A SECURITY, RIGHTS, WARRANTS, OPTIONS (ON SECURITIES, INDEXES AND CURRENCIES) OR ANY OTHER INTEREST COMMONLY KNOWN AS A "SECURITY" SUCH INSTRUMENTS AS STOCKS, OPTIONS, MUNICIPAL BONDS, MOST CORPORATE BONDS, AFFILIATED FUNDS AND EXCHANGE TRADED FUNDS. IT DOES NOT INCLUDE TRANSACTIONS AND HOLDINGS IN DIRECT OBLIGATIONS OF THE U.S. GOVERNMENT, BANKERS' ACCEPTANCES, BANK CERTIFICATES OF DEPOSIT, COMMERCIAL PAPER, HIGH QUALITY SHORT-TERM DEBT INSTRUMENTS, REPURCHASE AGREEMENTS, UNIT INVESTMENT TRUSTS (UNLESS THE UNIT INVESTMENT TRUST IS INVESTED IN AFFILIATED FUNDS), SHARES OF MONEY MARKET FUNDS OR SHARES OF NON-AFFILIATED MUTUAL FUNDS.
26. "SUPERVISED PERSON" means:
o Any Manager or officer of the Firm (or other Person occupying a similar status or performing a similar function);
o Any other associate of the Firm;
o Any other Person who provides advice on behalf of the Firm and is subject to the Firm's supervision and Control; and
o Any temporary worker, consultant, independent contractor, certain Supervised Persons of affiliates of the Firm or any particular Person designated by the Review Officer.
Amended December 2011
CODE OF ETHICS
INITIAL REPORT OF ACCESS PERSON
1. I hereby acknowledge that (i) I received of a copy of the Code of Ethics (the "Code") for Thompson, Siegel & Walmsley LLC (the "Firm"); (ii) I have read and understand the Code; (iii) and I recognize that I am subject to the Code as an Access Person of the Firm.
2. I do not serve on the Board of Directors of any publicly traded company unless listed. Yes [ ] Company: ___________________________________________
3. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or a Portfolio, such as any economic relationship between my transactions and Securities held or to be acquired by the Firm or a Portfolio.
4. As of the date below I had a direct or indirect Beneficial Ownership in the following or ATTACHED Reportable Securities (as defined in the Code of Ethics). You do not need to report holdings in obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, money market fund shares, commercial paper, high quality short-term debt instruments and registered open-end investment companies, EXCEPT FIRM MANAGED FUNDS OR AFFILIATED FUNDS.
PLEASE CHECK THIS BOX IF AN ADDENDUM IS ATTACHED LISTING SECURITIES (CUSTODY STATEMENT IS ACCEPTABLE) [ ]
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SECURITY BROKER, DEALER OR
(include title, type, and TICKER OR CUSIP # # OF SHARES PRICE PER SHARE PRINCIPAL AMOUNT BANK THROUGH
interest rate and maturity date, WHOM EFFECTED
if applicable)
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EXHIBIT A
5. As of the date below I am disclosing all Reportable Accounts with the brokers, dealers or banks listed below that hold or may trade Securities for my direct or indirect benefit.
Signature: ____________________________ Signature: ____________________________
Access Person Review Officer
Name: _________________________________ Name: _________________________________
Date: _________________________________ Date: _________________________________
(No later than 10 calendar days after
becoming an Access Person.)
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EXHIBIT B
CODE OF ETHICS
ANNUAL REPORT OF ACCESS PERSONS
1. I hereby acknowledge that I have read and understand the Code of Ethics (the "Code") for Thompson, Siegel & Walmsley LLC (the "Firm") and recognize that I am subject, thereto in the capacity of an Access Person of the Firm.
2. I hereby certify that, during the year ended December 31, ________, I have logged all gifts and business entertainment, and I have not given or accepted any gift, service or other thing valued at more than $100 (de minimis amount) per recipient/source or any entertainment event valued at more than $250 per person, in relation to the Firm's business, unless otherwise approved or indicated on an attached sheet.
3. I do not serve on the Board of Directors of any publicly traded company unless listed. Company:
4. I hereby certify that, during the year ended December 31, ________ I have complied with the requirements of the Code and I have reported all Personal Securities Transactions required to be reported pursuant to the Code.
5. I hereby certify that I have not disclosed pending "buy" or "sell" orders for a Portfolio to any Person, except for business purposes.
6. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve any Portfolio, such as any economic relationship between my Personal Securities Transactions and Securities held or to be acquired by any Portfolio.
7. As of December 31, ________, I had a direct or indirect Beneficial Ownership in the following or attached Reportable Securities (as defined in the Code of Ethics). You do not need to report holdings in obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, money market fund shares, commercial paper, high quality short- term debt instruments and registered open-end investment companies, EXCEPT FIRM MANAGED FUNDS OR AFFILIATED FUNDS.
PLEASE CHECK THIS BOX IF AN ADDENDUM IS ATTACHED LISTING SECURITIES (CUSTODY STATEMENT IS ACCEPTABLE). [ ]
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SECURITY BROKER, DEALER OR
(include title, type, and TICKER OR CUSIP # # OF SHARES PRICE PER SHARE PRINCIPAL AMOUNT BANK THROUGH
interest rate and maturity date, WHOM EFFECTED
if applicable)
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EXHIBIT B
CODE OF ETHICS
ANNUAL REPORT OF ACCESS PERSONS
As of the date below I am disclosing all Reportable Accounts with banks, brokers or dealers listed below that hold or may trade Securities for my direct or indirect benefit.
PLEASE CHECK THIS BOX IF AN ADDENDUM IS ATTACHED LISTING ADDITIONAL ACCOUNTS. [ ]
Signature: _______________________________ Signature: ________________________________________
Access Person Review Officer
Name: ____________________________________ Name: Jessica L. Thompson, Chief Compliance Officer
_____________________________________________
Date: ____________________________________ Date: _____________________________________________
(No later than 30 calendar
days after year-end)
|
EXHIBIT C
CODE OF ETHICS
SECURITIES TRANSACTIONS REPORT FOR THE CALENDAR QUARTER ENDED __________________
During the quarter referred to above, the following transactions were effected in Reportable Securities (as defined in the Code of Ethics) of which I had, or by reason of such transaction acquired, direct or indirect Beneficial Ownership. You do not need to report transactions in obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, money market fund shares, commercial paper, high quality short-term debt instruments and registered open-end investment companies, EXCEPT FIRM MANAGED FUNDS AND AFFILIATED FUNDS.
PLEASE CHECK THIS BOX IF AN ADDENDUM IS ATTACHED LISTING ADDITIONAL SECURITIES. [ ]
IF YOU HAD NO TRANSACTIONS, WRITE "NONE".
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SECURITY DATE OF # OF SHARES PRICE PER PRINCIPAL NATURE OF BROKER, DEALER OR BANK
(include interest rate and TRADE SHARE AMOUNT TRANSACTION THROUGH WHOM EFFECTED
maturity date, if applicable) (Purchase, Sale, Other)
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This report excludes transactions with respect to which I had no direct or indirect influence or Control.
During the quarter referred to above, I established on the dates indicated the following accounts in which Securities were held during the quarter for my direct or indirect benefit.
---------------------------------------------------------------------------------------------------------------------------------- BROKER, DEALER OR BANKTHROUGH WHOM EFFECTED BENEFICIAL OWNER OF ACCOUNT ACCOUNT NUMBER DATE ACCOUNT OPENED ---------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- |
PLEASE CHECK THIS BOX IF AN ADDENDUM IS ATTACHED LISTING ADDITIONAL ACCOUNTS. [ ] IF NONE WERE OPENED, WRITE "NONE".
EXHIBIT C
Access Persons and their family members may not accept or give any gift, favor, service, special accommodation or other thing, excluding business entertainment, of more than a de minimis value ($100) from/to the same source/recipient. In addition, no Access Person may provide to or accept overly generous business entertainment from a client, prospective client or any Person or entity that does or seeks to do business with or on behalf of the Firm. Access Persons must properly log all gifts and business entertainment unless exempted under the Firm's policy. During the quarter, I received or gave the following gifts, services, or business entertainment (as recorded on the attached addendum) from/to any Person or entity that does business with or on behalf of TS&W. If none, indicate here by checking box:
NONE PROVIDED OR RECEIVED: [ ]
Except as noted below under the comments section, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or a Portfolio, such as the existence of any economic relationship between my transactions and Securities held or to be acquired by the Firm or a Portfolio.
I do not serve on the Board of Directors of any publicly traded company unless listed here and further explained in Comments below. Company: __________________
I certify that during the quarter referred to above, I have not made any political contribution for the purpose of influencing or inducing the obtaining or retaining of investment advisory services business. Furthermore, I have not directed, suggested or solicited any other person to make any political contribution, or coordinated any political contributions, for the purpose of influencing or inducing the obtaining or retaining of investment advisory services business.
Except as noted below under the comments section, I have not made (or directed to be made), coordinated or solicited a political contribution on behalf of a state or local official or candidate for state or local office, or a state or local political party. If contributions have been made or other political fundraising actions have been taken and noted below, please also note the date of your pre-clearance in the comments below.
COMMENTS SECTION (PLEASE NOTE DATE OF PRE-CLEARANCE IF APPLICABLE):
Signature: _______________________________________ Signature: _______________________________________
Access Person Review Officer
Name: ____________________________________________ Name: Jessica L. Thompson, Chief Compliance Officer
_____________________________________________
Date: ____________________________________________ Date: ______________________________________________
(No later than 30 calendar days after year-end)
|
EXHIBIT D
SECURITIES TRANSACTIONS REPORT RELATING TO SHORT-TERM TRADING
FOR THE THIRTY DAY PERIOD FROM _______________________
During the 30 calendar day period referred to above, the following purchases and sales, or sales and purchases, of the same (or equivalent) Reportable Securities (as defined in the Code of Ethics) were effected or are proposed to be effected in Securities of which I have, or by reason of such transaction acquired, direct or indirect Beneficial Ownership. You do not need to report transactions in obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, money market fund shares, commercial paper, high quality short-term debt instruments and registered open and closed-end investment companies, except Firm MANAGED FUNDS AND AFFILIATED FUNDS.
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Date of Transaction (or # of Dollar Amount of Name of Transaction Price (or Broker/Dealer or Bank
Security Proposed Transactions) Shares Transaction (Purchase, Sale, Other) Proposed Price) Through Whom Effected
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This report excludes transactions with respect to which I had no direct or indirect influence or Control.
Review Officer's Comments: _____________________________________________________
I hereby certify that:
(a) I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or any Portfolio, such as front running transactions or the existence of any economic relationship between my transactions and Securities held or to be acquired by any Portfolio;
(b) such Securities, including Securities that are economically related to such Securities, involved in the transaction are not (i) being considered for purchase or sale by any Portfolio, or (ii) being purchased or sold by any Portfolio; and
(c) such transactions are in compliance with the Code of Ethics of the Firm.
Signature: ____________________________ Signature: _______________________
Access Person Review Officer
Name: _________________________________ Name: Thomas W. Coleman, Jr.
____________________________
Date: _________________________________ Date: ____________________________
|
INVESTMENT MANAGEMENT
EXHIBIT E
CODE OF ETHICS
PERSONAL SECURITIES TRANSACTIONS PRE-CLEARANCE FORM
I hereby request pre-clearance of the Securities listed below. SEE SECTION
VII.A. OF THE CODE OF ETHICS FOR EXCEPTIONS TO PRE-CLEARANCE REQUIREMENTS.
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AUTHORIZED
BY
SECURITY NATURE OF BROKER/ COMPLIANCE
(include interest TRANSACTION DEALER OR OFFICER
rate and maturity PRICE PER SHARE PRINCIPAL (Purchase, Sale, BANK THROUGH -----------
date, if applicable) MARKET CAP # OF SHARES (or proposed price) AMOUNT Other) WHOM EFFECTED YES NO
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Is any proposed transaction described above within 30 calendar days of a prior transaction in the same or equivalent Security? Yes: [ ] No: [ ]
If yes, the Access Person must submit a Securities Transactions Report Relating to Short Term Trading (Exhibit D) for pre-approval by the Review Officer.
Is any proposed transaction described above considered a Private Placement? Yes: [ ] No: [ ]
Signature:____________________________ Signature: _____________________________
Access Person Review Officer
Name: ________________________________ Name: __________________________________
Date: ________________________________ Date: __________________________________
|
THIS PRE-CLEARANCE WILL EXPIRE AT THE CLOSE OF BUSINESS ON THE TRADING DAY PRE-CLEARANCE WAS APPROVED. THE ACCESS PERSON IS REQUIRED TO OBTAIN ADDITIONAL PRE-CLEARANCE IF THE TRADE IS NOT COMPLETED BEFORE THIS AUTHORITY EXPIRES.
CODE OF ETHICS
ACKNOWLEDGEMENT BY SUPERVISED PERSONS
As a Supervised Person of Thompson, Siegel & Walmsley LLC (the "Firm"), I hereby acknowledge:
1. I received of a copy of the Firm's Code of Ethics (the "Code"); and
2. I read the Code and understand the provisions of the Code that apply to me as a Supervised Person
Signature: ________________________ Signature: ___________________________
Access Person Review Officer
Name: _____________________________ Name: ________________________________
Date: _____________________________ Date: ________________________________
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EXHIBIT G
CODE OF ETHICS
GIFT AND ENTERTAINMENT
PRE-CLEARANCE/APPROVAL REQUEST FORM
All employees are required to obtain approval from the Firm's Review Officer or a Board Member prior to giving or after receiving a gift valued at more than $100 or business entertainment valued at more than $250 per person (unless exempted as described in the Code of Ethics). Employees may obtain such approval by completing and submitting a "Gift and Entertainment Pre- Clearance/Approval Request Form". Employees and their immediate supervisor(s) will be notified in writing via email of the Review Officer or Board Member's final determination.
All employees are required to log all gifts (except those described as promotional gifts under $10) and all business entertainment (except that described as de minimis under $10 per person--or as otherwise exempted (a conference for example)), either given or received.
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The Drexel Morgan Companies
POLITICAL CONTRIBUTION GUIDELINES, INSIDER TRADING GUIDELINES AND
CODE OF ETHICS
TABLE OF CONTENTS
PAGE
2 Definitions
3 Code of Ethics
4 Insider Trading
4 Policy Against Trading While in Possession of Inside Information
5 Implementation of the Insider Trading Policy / Code of Ethics
6 Confidentiality of Information
6 Procedures for Personal Securities Accounts
7 Blackout Listed Securities
8 Initial Public Offerings
8 Reporting Procedures
9 Political Contributions
11 Gifts and Entertainment
11 Annual Certification Procedure
11 Additional Procedures
12 Consultation
12 Exceptions to the Insider Trading Policy / Code of Ethics
12 Miscellaneous
13 New Employee Report of Personal Brokerage Accounts
14 Certification
DEFINITIONS:
For purposes of these Guidelines and Code of Ethics:
ACCESS PERSON: is defined as any "supervised person" who has access to nonpublic information regarding clients' purchases or sales of securities, is involved in making investment recommendations to clients, or has access to such investment recommendations that are non-public. Access persons may include directors, officers, portfolio managers, and other employees, including administrative, technical and clerical personnel who have access to inside information. All officers and employees will be considered Access Persons unless exempted, in writing, by the Firm's Chief Compliance Officer.
COMPANY OR DM COMPANY: includes Drexel Morgan & Co. ("DM"), The Haverford Trust Company ("HTC"), Haverford Trust Securities, Inc. ("HTSec"), and Haverford Financial Services, Inc. ("HFS") and McCabe Capital Managers, LTD ("MCM").
COMPLIANCE OFFICER DESIGNEE: for purposes of duplicate statements and confirmations for personal transaction reporting, the Compliance Officer's Designee is Compliance11, 1120 Avenue of the Americas, Suite 4141 | New York NY 10036. Phone number: 312-676-2038. Web: www.compliance11.com
DIRECTOR: is defined as any appointed or elected member of the board of directors of a DM Company who, with other directors, has the responsibility for determining and implementing the Company's policy.
DISINTERESTED DIRECTOR: Pursuant to the definition of Access Person provided in Rule 204A-1(e)(1)(ii) of the Investment Advisers Act of 1940, as the primary business of Drexel Morgan & Co. is not providing investment advice, any director on the Drexel Morgan & Co. Board who does not otherwise meet the definition of an Access Person will be deemed a Disinterested Director.
For purposes of the Company's insider trading and personal transaction reporting policies only, a Director who attends an Investment Selection Committee meeting, thereby possessing inside information will be subject to the insider trading and transaction reporting policies discussed below. If a director does not attend the Investment Selection Committee meetings, the director shall be exempt from insider trade reporting. This definition does not apply to Directors of DM, HFS or MCM. In compliance with Rule 204A-1(e)(1)(ii) of the Investment Advisers Act of 1940:
o as providing investment advice is not the primary business of DM, Directors who do not meet the definition of "Access Person" need not report personal trades. These individuals are considered Disinterested Directors;
o as providing investment advice is the primary business of HFS and MCM, individuals who met the definition of "Access Person," INCLUDING ALL DIRECTORS, are required to report personal trades.
FEDERAL SECURITIES LAWS: include, but are not necessarily limited to, the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940,
the Investment Advisers Act of 1940, title V of the Gramm-Leach-Bliley Act, any rules adopted by the Commission under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted thereunder by the Commission or the Department of the Treasury.
FIRM CHIEF COMPLIANCE OFFICER ("FIRM CCO"): the Chief Compliance Officer of the company which the individual has his/her primary relationship with, as follows:
Drexel Morgan & Co.: MarieElena Ness Haverford Financial Services, Inc.: MarieElena Ness Haverford Trust Securities, Inc.: MarieElena Ness The Haverford Trust Company: MarieElena Ness McCabe Capital Managers, LTD: Adrea Scaramucci |
FIRM PRESIDENT the President of the company which the individual has his/her primary relationship with, as follows:
Drexel Morgan & Co.: George Connell Haverford Financial Services, Inc.: Joseph McLaughlin Haverford Trust Securities, Inc.: Binney Wietlisbach The Haverford Trust Company: Binney Wietlisbach McCabe Capital Managers, LTD: James McCabe |
HOUSEHOLD MEMBER: is defined as a member of an Access Person's immediate family living in the same household as the Access Person, including, but not limited to, the Access Person's spouse, children, parents and siblings.
POLITICAL CONTRIBUTION: includes any gift, subscription, loan, advance or deposit of money or anything of value made for the purpose of influencing the outcome of an election. This includes, but is not limited to, money provided for the benefit of incumbents and candidates for office, as well as to political parties and other entities involved in supporting candidates and influencing the public on issues of public policy.
CODE OF ETHICS
The Code is predicated on the principle that we owe a fiduciary duty to our
clients. The Company expects that every officer, director and employee will
conduct his or her personal investment activities in accordance with (i) the
duty to place the interests of the Company's clients first at all times, (ii)
the requirement that all personal securities transactions be conducted
consistent with this Insider Trading Policy/Code of Ethics and in such a manner
as to avoid any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility, (iii) the fundamental
ethical standard that an officer, director or employee should not take
inappropriate advantage of his or her position, and (iv) applicable Federal
Securities Laws.
In view of the foregoing, the Company has adopted this Insider Trading Policy/Code of Ethics to specify a code of conduct for certain types of securities transaction which might involve violation of Federal Securities Laws, conflicts of interest or an appearance of impropriety, and to establish reporting requirements and enforcement procedures. Any person who violates these policies is subject to disciplinary action by the Company, which may include immediate termination.
INSIDER TRADING
The purchase or sale of securities, whether for a person's own account or for
the accounts of others (including clients), or the recommendation to others of
the purchase or sale of securities by an officer, director or employee of the
Company who possesses material "inside information" is unlawful under the
Federal Securities Laws. A person in possession of material inside information
must, before effecting transactions in the affected security, disclose to the
public such information or, if unable to do so (E.G., in order to protect a
corporate confidence), must abstain from trading in or recommending such
securities until the information is disclosed to the public. Similarly, using
material inside information for, or divulging material inside information only
to one's clients, who then act on the basis of the information, violates the
federal securities law.
The Company may have exposure to liability or penalties under Federal Securities Laws for insider trading or other improper use of information by its officers, directors or employees. Trading in the securities of a publicly-owned company while in possession of inside information may give rise to private damage lawsuits against the officer, director or employee and the Company. Disclosure of material inside information to a spouse or other relative, business or social acquaintance or other person who purchases or sells securities based on such inside information may also result in liability on the part of both the person providing the information (the "Tipper") and the person receiving the information (the "Tippee"), regardless of whether the Tipper personally benefited economically from the use of such information.
POLICY AGAINST TRADING WHILE IN POSSESSION OF INSIDE INFORMATION No officer, director, or employee may purchase or sell securities for his or her personal portfolio or for the portfolio of others, or recommend to others the purchase or sale of securities, while in possession of material inside information. This policy applies to every officer, director and employee and extends to activities within and outside their duties at the Company.
The term "insider trading" is not specifically defined in the Federal Securities Laws, but generally is used to refer to the use of material nonpublic information to trade in securities (whether or not one is an "insider") or to the communication of material nonpublic information to others.
WHO IS AN INSIDER?
The concept of an "insider" is extremely broad. It includes officers, directors
and employees of a company. In addition, a person can be a "temporary insider"
if he or she enters into a special confidential relationship in the conduct of
a company's affairs and as a result is given access to information solely for
the company's purposes. A temporary insider can include, among others, a
company's attorneys, accountants, consultants, bank lending officers, and the
employees of such organizations.
WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is material. Generally "material information" is defined as (i)
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decision
to purchase, sell or hold a security, or (ii) information that is reasonably
certain to have a substantial effect on the market price of a company's
securities. Information that officers, directors and employees should consider
material includes, but is not limited to:
o dividend changes (or a company's intent to declare a dividend)
o earnings estimates
o changes in previously released earnings estimates
o significant merger or acquisition proposals or agreements
o major litigation o liquidity problems
o extraordinary management developments.
The list above is not intended to be complete and many items of information become material when taken together with other disclosed or undisclosed information. If there is any reasonable question about whether or not any particular material is material, the following rule should be observed: if there is any doubt that the information is material, the information should be treated as being material.
In addition, the knowledge that the Company or its affiliates is considering purchasing or selling a security, or recommending the purchase or sale of a security to clients, should ordinarily be considered inside information. The only exemption is certain Exempt Securities (as defined below), which, by their nature, are unlikely to be affected by such trades or recommendations.
WHAT IS NONPUBLIC INFORMATION?
Information is nonpublic until it has been effectively communicated to the
marketplace. One must be able to point to some fact to show that the
information is generally public. For example, information found in a report
filed with the Securities and Exchange Commission, or appearing in THE WALL
STREET JOURNAL or other publications of general circulation would be considered
public.
PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material nonpublic information are
severe, both for individuals involved in such unlawful conduct and for their
employers. A person may be subject to some or all of the penalties below, even
if he or she does not personally benefit from the violation. Penalties include:
o civil injunctions
o disgorgement of profits
o jail sentences
o fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited
o fines for the employer or other controlling person of up to the greater of $l,000,000 or three times the amount of the profit gained or loss avoided
IMPLEMENTATION OF THE INSIDER TRADING POLICY/CODE OF ETHICS
The following procedures have been established to aid the officers, directors
and employees of the Company in avoiding insider trading and certain other
transactions which might involve a conflict of interest or an appearance of
impropriety. The procedures have also been designed to aid the Company in
preventing, detecting and imposing sanctions against persons who engage in
insider trading and certain other transactions which might involve a conflict
of interest or an appearance of impropriety. Every officer, director and
employee of the Company must be provided with a copy of this Document, as well
as any amendments, and must acknowledge receipt of same in writing.
Additionally, every officer, director, and employee of the Company must follow
these procedures or risk serious sanctions, including dismissal, substantial
personal liability and criminal penalties. If you have any questions about
these procedures, you should consult the Firm CCO.
IDENTIFYING INSIDER INFORMATION
Before trading in the securities of a company about which you may have
potential inside information (for yourself or for others), you should ask
yourself the following two questions:
1. Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that could substantially affect the market price of the securities if generally disclosed?
2. Is the information nonpublic? To whom has this information been provided? Has the information been effectively communicated to the marketplace by being published in THE WALL STREET JOURNAL or other publication of general circulation?
REPORTING SUSPECTED INSIDER INFORMATION
If after considering the above, you believe that the information is material
and nonpublic, or if you have questions as to whether the information is
material and nonpublic, you should follow the following procedures:
1. Report the matter immediately to the Firm CCO or Firm President.
2. Do not purchase or sell the securities on behalf of yourself or others, including private accounts managed by the Company, without prior written authorization of the Firm CCO or Firm President.
3. Do not communicate the information to any person (whether inside or outside the Company), other than to the Firm CCO or Firm President.
4. Upon a determination by the Firm CCO or Firm President that the information is material and nonpublic, instructions will be issued promptly to:
(a) halt temporarily all trading by the Company in the security or securities of the pertinent issuer and all recommendations of such security or securities;
(b) ascertain the validity and nonpublic nature of the information with the issuer of the securities; and
(c) request the issuer or other appropriate parties to disseminate the information promptly to the public, if the information is valid and nonpublic.
5. In the event the information is not publicly disseminated, the Company will consult its counsel and request advice as to what further steps should be taken, including possible publication by the Company of the information, before transactions or recommendations in the securities are resumed.
6. Upon a determination by the Firm CCO or Firm President that the information is not material or public, you will be allowed to trade and communicate the information.
RESTRICTING ACCESS TO MATERIAL NONPUBLIC INFORMATION
Information in your possession that has been identified (by you or the Firm
CCO) as material and nonpublic may not be communicated to anyone, including
persons within the Company, except as provided in this Section. Files
containing material nonpublic information should be kept locked and access to
computer files containing material nonpublic information should be restricted.
CONFIDENTIALITY OF INFORMATION
Investment decisions made by the Company, may not be disclosed to anyone
including a spouse, other relative, or a social or business acquaintance.
PROCEDURES FOR PERSONAL SECURITIES ACCOUNTS
Access Persons must notify the Firm CCO of any brokerage accounts in which the
individual has, or acquires, any direct or indirect beneficial ownership. An
Access Person is presumed to be a beneficial owner of securities that are held
by his or her immediate family members including a spouse, minor children or
adults living in the same household as the Access Person (collectively, a
"Household Member"). Such notice must be given to the Compliance Officer not
later than ten (10) days after the establishment of such brokerage account on
the form attached hereto (see page 12). In addition, duplicate confirms,
quarterly statements and all transactions effected for one's own account or for
the account of a Household Member must be reported in accordance with the
"Reporting Procedures" set forth below. As previously noted, Disinterested
Directors of DM are not required to provide transaction reporting.
For purposes of the Company's Insider Trading Policy, the following securities are exempt securities ("Exempt Securities"):
1. Securities issued by the Government of the United States (I.E., U.S. Treasury securities), short-term debt securities which are "government securities" within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 (which includes securities of the U.S. Government and its instrumentalities, including Fannie Mae and Freddie Mac), bankers' acceptances, bank certificates of deposit, commercial paper, and shares of unaffiliated registered open-end investment companies.
2. Securities purchased or sold in any account over which the officer, director or employee has no direct or indirect influence or control (for example, managed accounts).
3. Securities purchased or sold in a transaction which is non-volitional on the part of the officer, director or employee or Household Member, as applicable.
4. Securities acquired as a part of an automatic dividend reinvestment plan, including shares of affiliated mutual funds.
5. Securities acquired upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired.
While Access Persons are permitted to maintain personal brokerage accounts with a firm of their choosing, accounts opened/maintained at one of the following firms are not subject to a reporting fee of $50/account which is assessed by the Compliance Officer's Designee and will be passed along to the employee who owns the effected account:
o Charles Schwab
o E*Trade
o Haverford Trust Securities, Inc.
o Merrill Lynch
o Morgan Stanley Smith Barney
o Smith Barney
o TD Ameritrade
o The Haverford Trust Company
o UBS
o Wachovia/Wells Fargo
Accounts of current employees which have previously been reported are grandfathered and therefore not subject to the $50/account fee.
BLACKOUT LISTED SECURITIES
The Firm CCO, or her designee, maintains a list of securities in which the
Company is currently trading for clients and/or a list of securities currently
being considered by the Investment Selection Committee for purchase or sale for
clients (the "Blackout List"). The list is circulated to all employees of the
Company after each Investment Selection Committee meeting and other times as
may be appropriate. The list for a given meeting will also be circulated to any
non-employee director who attended such Investment Selection Committee meeting.
No employee may buy or sell any security on the Blackout List for his or her
personal portfolio or the portfolio of a Householder Member until such security
has been removed from the Blackout List. Similarly, no non-employee director
who attends an Investment Selection Committee meeting may buy or sell any
security on the Blackout List for his or her personal portfolio or
the portfolio of a Householder Member until the such security has been removed from the Blackout List or, if earlier, the holding of the next Investment Selection Committee meeting which such non-employee director does not attend.
INITIAL PUBLIC OFFERINGS AND PRIVATE OFFERINGS
Purchases of securities in initial public offerings ("IPOs") and private
offerings (those made without registration under the securities laws under an
exemption) are treated differently than securities purchased in the open
market. Participation in IPOs or private offerings is often speculative, and
may not be consistent with the Company's overall policy for standards to be
maintained by employees. In addition, in some cases an IPO or private offering
may be a suitable investment for a particular account, and the participation
therein by officers and employees may hinder the ability of such account to
participate in such offering. Accordingly, regardless of whether or not the
security is on the Blackout List, no employee or officer, nor any non-employee
director, may purchase any security in an IPO or a private offering without
first obtaining the written consent of the Firm CCO and/or the Firm President.
REPORTING PROCEDURES
As stated above, Access Persons must report all securities transactions by way
of duplicate confirms and quarterly holding reports (whether effected through
an account maintained at Haverford Trust Securities or otherwise) to the Firm
CCO or the her designee. This includes securities transactions by a Household
Member.
The reporting procedures set forth below have been adopted in order to provide the Company with sufficient information to enable it to determine with reasonable assurance whether the provisions of this Insider Trading Policy/Code of Ethics are being observed by its employees, officers and directors.
INITIAL HOLDINGS REPORT
All officers, directors and employees must submit an initial holdings report
listing all securities owned, as well as all brokerage or other securities
accounts, to the Firm CCO within 10 days of first becoming subject to the
Insider Trading Policy / Code of Ethics' reporting requirements. The initial
holdings report, which must be current as of a date no more than 45 days prior
to the date the individual becomes an Access Person, should include all
securities owned or securities accounts held by a Household Member and contain
the following:
o the date the initial holding report is submitted to the Firm CCO
o name and type of security
o ticker symbol or cusip number
o number of shares
o principal amount of each security owned
o custodian of the securities
DUPLICATE CONFIRMS AND QUARTERLY STATEMENTS
Each employee who is an Access Person shall submit duplicate confirms and
quarterly statements to the Firm CCO showing all securities transactions, even
if he or she does not attend meetings of the Investment Selection Committee.
All duplicate confirms and statements will be sent automatically to the Compliance Officer Designee from the various brokerage firms.
Confirms and statements shall include the name of the security, date and nature of the transaction (i.e., purchase, sale or other), quantity, price, and broker-dealer through which the transaction was effected.
If an officer, director or employee has no brokerage accounts with any other firms, they must provide the Firm CCO with a signed statement stating such. All persons are personally responsible for notifying the Firm CCO of any new accounts (for such person or other household members) that would require reporting under the Code of Ethics.
AUTOMATIC REINVESTMENT PLANS
Trades in unaffiliated mutual funds do not need to be reported. Officers,
directors and employees who invest in affiliated mutual funds must report
transactions, unless an automatic reinvestment plan is in effect or duplicate
confirms and statements are sent to the Compliance designee.
POLITICAL CONTRIBUTIONS
Except for HTC and HTSec, each DM Company is a registered investment adviser
under the Investment Advisers Act of 1940 (the "Act"). The SEC has recently
adopted Rule 206(4)-5 (the "SEC Rule") under the Act. The SEC Rule imposes
record keeping and other requirements in connection with political
contributions made by certain persons in an effort to reduce the influence of
political contributions on the management of public assets. In addition,
numerous governmental bodies (including, for example, the Commonwealth of
Pennsylvania and the City of Philadelphia) have their own regulations and
standards regarding political contributions. These rules contain both
disqualification rules and reporting requirements. In order to address the
requirements of the SEC Rule as well as requirements imposed by governmental
bodies for which any DM company may seek to provide services, each DM Company
is adopting the following Policy:
1. Beginning January 1, 2011, all political contributions made by any person described below must be reported to the Firm CCO of the primary employing company of the individual.
2. Reporting of all political contributions will be required by any Covered Person. A Covered Person is any individual who is:
a. an employee of any DM Company;
b. a registered representative of HTSec;
c. an associated person listed on the Form ADV and for whom a U-4 is currently effective with respect to any one of the DM companies;
d. a director of any DM Company; and
e. an employee, officer, consultant or director of any DM Company who is not otherwise included in the above if such person has as part of his or her duties the solicitation of business.
3. As indicated above, this Policy applies to almost every person who is an employee of or otherwise affiliated with any DM Company.
a. Note that any attempt to circumvent the Policy by doing indirectly what you are prohibited from doing directly under this Policy (e.g. funneling contributions through spouses or affiliated companies, soliciting or coordinating any Political Contribution, whether in cash or in kind, with the intent or for the purpose of influencing the obtaining or retaining of Municipal, State or Federal business for any DM affiliated companies) will be a violation of the Policy by the person orchestrating such contribution.
4. All Covered Persons are required to report all political contributions to the appropriate Firm CCO.
a. All contributions in any amount must be reported to the appropriate Firm CCO BEFORE the contribution is made, and cannot be made unless and until the Firm CCO, or her designee, grants written permission.
b. In order to comply with SEC's on contributions limits, please note the following:
1. A Covered Person may contribute up to $350 to an official per election (with primary and general elections counting separately) if the Covered Person was entitled to vote for the official at the time of the contribution; and
2. A covered person may contribute up to $150 to an official per election (with primary and general elections counting separately) if the Covered Person was NOT entitled to vote for the official at the time of the contribution.
c. Any fundraising or bundling efforts on behalf of candidates for, or incumbents in, any election must be discussed with the Firm CCO before being made and cannot be made without written authorization. Any funds you raise from others for such persons are attributable to you and, in turn, the Company. To the extent allowed by law, permission will be given to all such efforts.
5. This Policy requires reporting of all political contributions, even those made to political parties and to Political Action Committees.
6. Any Covered Person required by this Policy to report political contributions must submit the following information either electronically via e-mail, or in writing delivered to the appropriate Firm CCO:
a. the name and title of the person who is proposing to make the contribution;
b. the exact person or entity to whom the contribution will be made;
c. the amount and anticipated date of the contribution;
d. the amount of any other contributions made by the donor to the same donee in the same campaign;
e. whether the donor is legally entitled to vote for the candidate at the time the donation is made; and
f. whether you know of any connection between the candidate/incumbent and any governmental business that any DM Company currently has or is seeking to obtain.
7. Reports are encouraged to be filed as early as possible so that the Firm CCO can review the facts and prohibit any particular proposed contribution if the facts warrant such action.
8. The Drexel Morgan & Co. CCO will maintain a database of all contribution reports filed by all persons regardless of the DM Company the reporting individual is affiliated with.
9. Failure by any person to report as required, or any attempt by any person to cause contributions to be made in a manner that would circumvent the reporting process, will be considered a breach of this Policy and the Code of Conduct applicable to all employees, and will be grounds for sanctions against such person, including dismissal.
GIFTS AND ENTERTAINMENT
Officers and Employees of The Haverford Trust Company should refer to that
Firm's Procedures for additional information regarding the giving or receiving
of Gifts and Entertainment.
ACCEPTING GIFTS AND ENTERTAINMENT
It is the policy of the Company that no officer or employee may accept any
gifts from a present or prospective client or supplier, regardless of value.
The only exception will be where, with knowledge and approval of the CEO or
President, the rejection of the gift will prove damaging to the Company, the
gift is of nominal value and there is no corrupt intent as proscribed by
federal law. In addition, only entertainment offered by clients or suppliers
which is incidental to business meetings and that is customary, modest and
occasional and does not have a corrupt intent may be accepted by an officer or
employee.
CLIENT ENTERTAINMENT OR GIFTS
The above standards for the acceptance of gifts or entertainment do not apply
to entertaining present or prospective clients or suppliers and to giving
corporate gifts, etc. Normal business entertainment is appropriate, such as
lunches, dinners, the theater, sporting events and the like. Excessive
entertaining must be avoided, however, and it should be very clear that an
individual representing the Company is not to provide directly or indirectly
any money or other gratuity or the like to any individual, company, or
government unit in return for doing business with the Company. Under no
circumstances should any benefit or gift provided to any present or prospective
client or supplier be of more than nominal value.
ANNUAL CERTIFICATION PROCEDURE
Each officer, director and employee is required to certify annually that he or
she has read and understands this Insider Trading Policy/Code of Ethics, will
abide by its terms and understands that he or she is legally bound by its
terms. Each officer, director or employee is further required to certify that
he or she has disclosed or reported all personal securities transactions by way
of duplicate confirms and quarterly statements under the Insider Trading
Policy/Code of Ethics.
ADDITIONAL PROCEDURES
The Compliance Officer or his or her designee shall review the reports received
for personal transaction reporting and report to a Committee comprised of at
least three members of the appropriate Company's Board of Directors:
1. any transaction that appears to evidence a violation of this Insider Trading Policy/Code of Ethics; and
2. apparent violations of the reporting requirement stated herein.
The Committee shall consider reports made to it hereunder and shall determine whether the policies established herein have been violated, and what sanctions, if any, shall be imposed on the violator including, but not limited to, a letter of censure, suspension or termination of employment of the violator, or the unwinding of the transaction and the disgorgement of any profits.
CONSULTATION
Any question which an officer, director or employee of the Company may have as
to the applicability or interpretation of these policies in a particular case
should be promptly submitted to the Firm CCO for determination. Any violation
of the Firm's Insider Trading Policy and/or Code of Ethics must be promptly
reported to the Firm CCO.
EXCEPTIONS TO THE INSIDER TRADING POLICY/CODE OF ETHICS
The Firm CCO may make exceptions on a case-by-case basis of this Insider
Trading Policy/Code of Ethics upon a determination that the conduct at issue
involves a negligible opportunity for abuse or otherwise merits an exemption
from the Insider Trading Policy/Code of Ethics. All such exemptions must be
received in writing by the person requesting the exemption before becoming
effective.
MISCELLANEOUS
This policy is not intended to be a statement of applicable law. It is not
intended to create legal duties to anyone other than the Company. Its purpose
is solely to provide guidance.
NEW EMPLOYEES
REPORT OF PERSONAL BROKERAGE ACCOUNTS
Complete Section I or II, as appropriate, and return to Mimi Ness or Adrea Scaramucci within 10 calendar days of your date of employment.
[ ] I. NO HOLDINGS TO REPORT
Neither I, nor any Household Member of mine, as defined in the Code of Ethics, currently have any brokerage accounts or securities holding to report in compliance with the Code of Ethics. I understand that if this changes, I must notify the Firm Chief Compliance Officer within ten (10) days of such change.
[ ] II. HOLDINGS TO BE REPORTED
I, or a Household Member of mine, as defined in the Code of Ethics, currently have brokerage accounts or securities holdings to report in compliance with the Firm's Code of Ethics.
[ ] I have attached a list of holdings, dated within 45 days of my employment of the Firm.
[ ] I have attached a list of all accounts and included the following information for each account:
o Account Number
o Full Account Title
o Full Name of Account Custodian
_______________________ _____________________________________
Date Printed Name
_____________________________________
Signature
|
CERTIFICATION
Pursuant to the requirements of the Political Contribution Policy, Insider Trading Policy and Code of Ethics of The Drexel Morgan Companies (The Company), which includes Drexel Morgan & Co., The Haverford Trust Company, Haverford Trust Securities, Inc., Haverford Financial Services, Inc. and McCabe Capital Managers, LTD, the undersigned hereby certifies as follows:
1. I have read and understand The Company's Political Contribution Policy, Insider Trading Policy, and Code of Ethics.
2. I will abide by the Political Contribution Policy, Insider Trading Policy and Code of Ethics.
3. I intend to be legally bound hereby.
___________________________________________ __________________ Print Name Date ___________________________________________ Signature |
CODE OF ETHICS
Amended: December 2012
GENERAL
The Code of Ethics is predicated on the principle that RHJ owes a fiduciary duty to its clients. Accordingly, RHJ's Employees must avoid activities, interests and relationships that run contrary (or appear to run contrary) to the best interests of clients. At all times, RHJ must:
o PLACE CLIENT INTERESTS AHEAD OF RHJ'S -- As a fiduciary, RHJ must serve in its clients' best interests. In other words, RHJ Employees may not benefit at the expense of advisory clients. This concept is particularly relevant when Employees are making personal investments in securities traded by advisory clients.
o ENGAGE IN PERSONAL INVESTING THAT IS IN FULL COMPLIANCE WITH RHJ'S CODE OF ETHICS -- Employees must review and abide by RHJ's Personal Securities Transaction and Insider Trading Policies.
o AVOID TAKING ADVANTAGE OF YOUR POSITION -- Employees must not accept investment opportunities, gifts or other gratuities from individuals seeking to conduct business with RHJ, or on behalf of an advisory client.
o MAINTAIN FULL COMPLIANCE WITH THE FEDERAL SECURITIES LAWS(1) -- Employees must abide by the standards set forth in Rule 204A-1 under the Advisers Act.
Any questions with respect to RHJ's Code of Ethics should be directed to Janine Marquez RHJ's Chief Compliance Officer (CCO) and/or President, Thao Buuhoan. As discussed in greater detail below, Employees must promptly report any violations of the Code of Ethics to the CCO. All reported Code of Ethics violations will be treated as being made on an anonymous basis.
GUIDING PRINCIPLES & STANDARDS OF CONDUCT
All Employees of RHJ, and consultants closely associated with the Company, will act with competence, dignity and integrity, in an ethical manner, when dealing with clients, the public, prospects, third-party service providers and fellow Employees. The following set of principles frame the professional and ethical conduct that RHJ expects from its Employees and consultants:
o Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, Employees, and colleagues in the investment profession;
o Place the interests of clients, and the interests of RHJ above one's own personal interests;
o Adhere to the fundamental standard that you should not take inappropriate advantage of your position;
o Avoid any actual or potential conflict of interest;
o Conduct all personal securities transactions in a manner consistent with this policy;
o Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities;
o Practice and encourage others to practice in a professional and ethical manner that will reflect favorably on you and the profession;
o Maintain and improve your professional competence and strive to maintain and improve the competence of other investment professionals.
o Comply with applicable provisions of the federal securities laws. (2)
1. PERSONAL SECURITY TRANSACTION POLICY
Employees may not purchase or sell any security in which the Employee has or may acquire beneficial ownership (as defined further below) unless the transaction occurs in an exempted security or the Employee has fully complied with the requirements of this Personal Security Transaction Policy, as set forth below.
The term "security" includes any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing.
A security would include, but not be limited to:
1. Common stock
2. Preferred stock
3. Closed-end mutual funds
4. Exchange Traded Funds (ETFs)
5. Corporate bonds
6. Municipal bonds
7. Options on stocks
The term "exempted security" includes:
o Direct obligations of the Government of the United States;
o Bankers' acceptances, bank certificates of deposit, commercial paper
and high quality short-term debt instruments, including repurchase
agreements;
o Shares issued by money market funds;
o Shares issued by open-end funds (excluding ETFs)), other than
reportable funds (3); and
o Shares issued by unit investment trusts that are invested exclusively
in one or more open-end funds, none of which are reportable funds.
o Commodities, futures and options traded on a commodities exchange,
including currency futures
A "Reportable Fund" means (a) any fund for which RHJ serves as the investment adviser as defined in section 2(a)(20) of the Investment Company Act of 1940 (I.E., in most cases RHJ would need to be approved by the fund's board of directors before you can serve); or (b) any fund whose investment adviser or principal underwriter controls RHJ, is controlled by RHJ, or is under common control with RHJ. Transaction in RHJ managed funds must be disclosed, but not pre-cleared.
PRE-CLEARANCE PROCEDURES
RHJ's Employees must obtain written clearance for all personal securities transactions before placing each transaction, with the exception of the following transactions:
1. A purchase or sale of an Exchange Traded Fund (ETFs);
2. A purchase or sale of any closed-end mutual fund;
3. A purchase or sale of 50 bonds or less per day of any corporate bond
or municipal bond (excluding new offerings); and
4. A purchase or sale of any exempted security;
RHJ reserves the right to disapprove any proposed transaction that may have the appearance of improper conduct. Generally, Employees shall complete RHJ's Pre-Clearance Form on Compliance11's Personal Trading Platform. All pre-clearance requests must be submitted to RHJ's CCO or someone so designated by the CCO. Currently, Tom McDowell, Tim Todaro or Gary Rice may also approve personal securities transactions. Once pre-clearance is granted to an Employee, such Employee may only transact in that security for the remainder of the day. If the Employee wishes to transact in that security on the following or any other day, they must again obtain pre-clearance. Unless otherwise noted, no pre-clearance is required for the exempted transactions noted below.
BLACK OUT PERIODS
No employee shall buy or sell any security within seven (7) calendar days before or after a trade in the same security for any client portfolio, including the affiliated mutual fund portfolios and the hedge fund portfolio. The CCO will review executed client trades upon an employee requesting pre-clearance to ensure that no trades have taken place within the last 7 days and will inquire with the portfolio managers to determine if any client trades may be placed in the next 7 days.
HOLDING PERIOD
All employees are required to hold securities, including options and futures, for a minimum of 30 days, to avoid short-term trading practices.
REPORTABLE SECURITIES
RHJ requires Employees to provide periodic reports (See REPORTING section below) regarding transactions and holdings in ANY SECURITY, except exempted securities.
BENEFICIAL OWNERSHIP
Employees are considered to have beneficial ownership of securities if they have or share a direct or indirect pecuniary interest in the securities. Employees have a pecuniary interest in securities if they have the ability to directly or indirectly profit from a securities transaction.
The following are examples of indirect pecuniary interests in securities:
o Securities held by members of Employees' immediate family sharing the same household. Immediate family means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law. Adoptive relationships are included;
o Employees' interests as a general partner in securities held by a
general or limited partnership; and
o Employees' interests as a manager/member in the securities held by a
limited liability company.
Employees do not have an indirect pecuniary interest in securities held by entities in which they hold an equity interest unless they are a controlling equity holder or they share investment control over the securities held by the entity.
The following circumstances constitute beneficial ownership by Employees of securities held by a trust:
o Ownership of securities as a trustee where either the Employee or
members of the Employees' immediate family have a vested interest in
the principal or income of the trust;
o Ownership of a vested beneficial interest in a trust; and
o An Employee's status as a settlor/grantor of a trust, unless the
consent of all of the beneficiaries is required in order for the
Employee to revoke the trust.
EXEMPT TRANSACTIONS
The following transactions are considered exempt transactions (not to be confused with exempt securities) and therefore do not require reporting under the Personal Security Transaction Policy:
o Any security transaction in an account over which the Employee does
not have any direct or indirect influence or control. For example,
presuming that such relatives do not reside in the same household as
the Employee, accounts of family members outside of the immediate
family would not be subject to review.
o Purchases that are part of an automatic investment plan. (4)
From time to time, the Compliance Officer may exempt certain transactions on a fully documented trade-by-trade basis.
INVESTMENTS IN LIMITED OFFERINGS AND INITIAL PUBLIC OFFERINGS ("IPOS")5
No Employee shall acquire, directly or indirectly, any Beneficial Ownership in any limited offering or IPO without first obtaining prior approval of the Compliance Officer in order to preclude any possibility of their profiting improperly from their positions on behalf of a client. The Compliance Officer shall (a) obtain from the Employee full details of the proposed transaction (including written certification that the investment opportunity did not arise by virtue of the Employee's activities on behalf of a client; and (b) conclude, after consultation with a Portfolio Manager (who has no personal interest in the issuer of the limited offering or IPO), that no clients have any foreseeable interest in purchasing such security. A record of such approval by the Compliance Officer and the reasons supporting those decisions shall be kept as required in the Records section of this Policy. Please refer to Compliance11 to complete the Limited Offering and IPO Request and Reporting Form.
(5)The term "limited offering" is defined as an offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to Rules 504,505, or 506 of Regulation D. The term "initial public offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
RESTRICTIONS ON NEW ISSUES OF EQUITY SECURITIES ("NEW ISSUES")(6)
No Employee shall acquire, directly or indirectly, any Beneficial Ownership in any New Issue (including new issues of municipal bonds) without first obtaining prior approval of the Compliance Officer in order to preclude any possibility of their profiting improperly from their positions on behalf of a client. The Compliance Officer shall (a) obtain from the Employee full details of the proposed transaction (including written certification that the investment opportunity did not arise by virtue of the Employee's activities on behalf of a client; and (b) conclude, after consultation with a Portfolio Manager (who has no personal interest in the issuer of the New Issue), that no clients have any foreseeable interest in purchasing such security. A record of such approval by the Compliance Officer and the reasons supporting those decisions shall be kept as required in the RECORDS section of this Policy.
FINRA Rule 5130 prohibits the sale of New Issues to any account in which a "restricted person" has a beneficial interest, except under certain situations. The term "restricted person" includes any person of an investment adviser who has the authority to buy or sell securities and an immediate family member of such a restricted person that materially supports, or receives materially support from, such person. Thus, all restricted persons of RHJ, including members of RHJ's investment personnel, are prohibited, in almost all circumstances except as noted in further detail below, from purchasing an NIES.
The prohibitions on the purchase and sale of New Issues with respect to Rule 5130 do not apply to: 1) ISSUER-DIRECTED SECURITIES, or those that are specifically directed by the issuer to persons that are restricted persons (i.e., directors), subject to certain conditions; 2) the account of a restricted person who is an existing equity owner of an issuer (ANTI-DILUTION PROVISIONS), subject to certain conditions; and 3) StandBy Purchasers, or those who purchase and sell securities pursuant to a stand-by agreement subject to certain conditions.
Employees are encouraged to review Rule 5130 and discuss such with the Compliance Officer prior to the purchase and/or sale of any New Issues.
REPORTING
In order to provide RHJ with information to enable it to determine with reasonable assurance any indications of "scalping", "front-running" or the appearance of a conflict of interest with the trading by RHJ clients, each Employee of RHJ shall submit the following reports in Compliance11 showing all transactions, except for exempt transactions listed above, in securities, except for exempt securities listed above, in which the person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership.
QUARTERLY TRANSACTION REPORTS
Employees need to authenticate personal trading accounts using Compliance11. If an Employee's trades are not available electronically or transactions do not occur through a broker-dealer (i.e., purchase of a private investment fund), such transactions shall be manually inputted by the employee on the
Compliance11 platform, at a minimum no later than thirty (30) days after the end of each calendar quarter. The quarterly transaction reports shall contain at least the following information for each transaction in a Reportable Security in which the Employee had, or as a result of the transaction acquired, any direct or indirect beneficial ownership(7): (a) the date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Reportable Security involved; (b) the nature of the transaction (I.E., purchase, sale or any other type of acquisition or disposition); (c) the price of the Reportable Security at which the transaction was effected; (d) the name of the broker, dealer or bank with or through which the transaction was effected; and (e) the date that the report is submitted.
Employees who do not maintain brokerage accounts for their own personal trading will be required at a minimum to confirm in writing that they do not have personal securities transactions to report. This acknowledgement can be documented on the quarterly personal securities transaction report in Compliance11.
INITIAL AND ANNUAL HOLDINGS REPORTS
New RHJ Employees are required to report all of their personal securities
holdings no later than 10 days after the commencement of their employment (SEE
COMPLIANCE11'S WELCOME PACKAGE QUESTIONNAIRE).
The initial holdings report must be current as of a date not more than 45 days
prior to the date the person becomes an Employee.
Existing Employees are required to provide RHJ with a complete list of
securities holdings on an annual basis, or on or before February 14(th) (as
determined by RHJ) of each year. The report shall be current as of December
31(st) , which is a date no more than 45 days from the final date the report is
due to be submitted.
(SEE COMPLIANCE11'S ANNUAL QUESTIONNAIRE).
Each holdings report (both the initial and annual) must contain, at a minimum:
(a) the title and type of security, and as applicable the exchange ticker
symbol or CUSIP number, number of shares, and principal amount of each
reportable security in which the access person has any direct or indirect
beneficial ownership; (b) the name of any broker, dealer or bank with which the
access person maintains an account
in which any securities are held for the access person's direct or indirect benefit; and (c) the date the access person submits the report.
Employees who do not have any securities holdings or maintain brokerage accounts for their own personal trading will be required at a minimum to confirm such in writing. This acknowledgement can be documented on the initial and annual holdings report through Compliance11.
TRADING AND REVIEW
Though not prohibited by this Personal Security Transaction Policy, RHJ does not expect its Employees to engage in frequent short-term (60 days) trading. In addition, except for limited circumstances and subject to pre-clearance approval, RHJ forbids its Employees to trade opposite of the Company's recommendations. RHJ strictly forbids "front-running" client accounts, which is a practice generally understood to be Employees personally trading ahead of client accounts. The CCO will closely monitor Employees' investment patterns to detect these abuses. Thao Buuhoan, President and Chief Operating Officer (COO) will monitor the CCO's personal securities transactions for compliance with the Personal Security Transaction Policy.
The CCO shall also conduct a post-trade review of RHJ Employees' personal
trading. All Employee trades must be reported in Compliance11 within thirty
(30) days after the end of each calendar quarter. The CCO will review all
transaction and reporting to determine no violations have occurred.
The reason for the development of a post transaction review process is to
ensure that RHJ has developed procedures to supervise the activities of its
Employees. The comparison of Employee trades to those of advisory clients will
identify potential conflicts of interest or the appearance of a potential
conflict.
If RHJ discovers that an Employee is personally trading contrary to the policies set forth above, the Employee shall meet with the Compliance Officer and President to review the facts surrounding the transactions. This meeting shall help RHJ to determine the appropriate course of action. The CCO may grant written exceptions to the provisions of the Code based on equitable (e.g., rapid markets, hardship, satisfaction of a court order, etc.) or other considerations. The exceptions may be granted to individuals or classes of individuals, provided that no exception will be granted where the exceptions would result in a violation of Rule 204A-1 of the Advisers Act or any other federal securities laws.
REPORTING VIOLATIONS AND REMEDIAL ACTIONS
RHJ takes the potential for conflicts of interest caused by personal investing very seriously. As such, RHJ requires its Employees to promptly report any violations of the Code of Ethics to the CCO. RHJ's management is aware of the potential matters that may arise as a result of this requirement, and shall take action against any Employee that seeks retaliation against another for reporting violations of the Code of Ethics.
If any violation of RHJ's Personal Security Transaction Policy is determined to have occurred, the CCO may impose sanctions and take such other actions as he deems appropriate, including, without limitation, requiring that the trades in question be reversed, requiring the disgorgement of profits, issuing a letter of caution or warning, issuing a suspension of personal trading rights or suspension of employment (with or without compensation), imposing a fine, making a civil referral to the SEC, making a criminal referral, and/or terminating employment for cause or any combination of the foregoing. All sanctions and other actions taken shall be in accordance with applicable employment laws and regulations. Any profits forfeited shall be paid to the applicable client(s), if any, or given to a charity, as the CCO shall determine is appropriate.
No person shall participate in a determination of whether he or she has committed a violation of this Policy or in the imposition of any sanction against himself or herself.
DISCLOSURE
RHJ shall describe its Code of Ethics to clients in Part 2 of Form ADV and, upon request, furnish clients with a copy of the Code of Ethics. All client requests for RHJ's Code of Ethics shall be directed to the Compliance Officer.
RECORDKEEPING
RHJ shall maintain records in the manner and to the extent set forth below, which records shall be available for appropriate examination by representatives of the Securities and Exchange Commission or RHJ's management.
o A copy of this Policy and any other code which is, or at any time
within the past five years has been, in effect shall be preserved in
an easily accessible place;
o A record of any violation of this Policy and of any action taken as a
result of such violation shall be preserved in an easily accessible
place for a period of not less than five years following the end of
the fiscal year in which the violation occurs;
o A record of all written acknowledgements (annual certifications) as
required by this Policy for each person who is currently, or with the
past five years was, an Employee of RHJ.
o A copy of each report made pursuant to this Policy by an Employee,
including any information provided in lieu of reports, shall be
preserved by the Company for at least five years after the end of the
fiscal year in which the report is made or the information is
provided, the first two years in an easily accessible place;
o A list of all persons who are, or within the past five years have
been, required to make reports pursuant to this Policy, or who are or
were responsible for reviewing these reports, shall be maintained in
an easily accessible place;
o A record of all pre-clearance requests, including the decisions made;
and
o The Company shall preserve a record of any decision, and the reasons
supporting the decision, to approve the acquisition of any limited
offering or IPO by Employees for at least five years after the end of
the fiscal year in which the approval is granted, the first two years
in an easily accessible place.
RESPONSIBILITY
The Compliance Officer will be responsible for administering the Personal
Security Transaction Policy.
All questions regarding the policy should be directed to the Compliance
Officer.
2. INSIDER TRADING POLICY
Section 204A of the Advisers Act requires every investment adviser to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser's business, to prevent the misuse of material, non-public information by such investment adviser or any person associated with such investment adviser. In accordance with Section 204A, RHJ has instituted procedures to prevent the misuse of non-public information.
Although "insider trading" is not defined in securities laws, it is generally thought to be described as trading either personally or on behalf of others on the basis of material non-public information or communicating material non-public information to others in violation of the law. In the past, securities laws have been interpreted to prohibit the following activities:
o Trading by an insider while in possession of material non-public
information; or
o Trading by a non-insider while in possession of material non-public
information, where the information was disclosed to the non-insider in
violation of an insider's duty to keep it confidential; or
o Communicating material non-public information to others in breach of
a fiduciary duty.
o RHJ's Insider Trading Policy applies to all of its Employees. Any
questions should be directed to the Compliance Officer and/or MP.
WHOM DOES THE POLICY COVER?
This policy covers all of RHJ's Employees as well as any transactions in any securities participated in by family members, trusts or corporations directly or indirectly controlled by such persons. In addition, the policy applies to transactions engaged in by corporations in which the Employee is an officer, director or 10% or greater stockholder and a partnership of which the Employee is a partner unless the Employee has no direct or indirect control over the partnership.
WHAT INFORMATION IS MATERIAL?
Individuals may not be held liable for trading on inside information unless the information is material. "Material information" is generally defined as information for which there is a substantial likelihood that an investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities.
Advance knowledge of the following types of information is generally regarded as "material":
o Dividend or earnings announcements
o Write-downs or write-offs of assets
o Additions to reserves for bad debts or contingent liabilities
o Expansion or curtailment of company or major division operations
o Merger, joint venture announcements
o New product/service announcements
o Discovery or research developments
o Criminal, civil and government investigations and indictments
o Pending labor disputes
o Debt service or liquidity problems
o Bankruptcy or insolvency problems
o Tender offers, stock repurchase plans, etc.
o Recapitalization
Information provided by a company could be material because of its expected effect on a particular class of a company's securities, all of the company's securities, the securities of another company, or the securities of several companies. The misuse of material non-public information applies to all types of securities, including equity, debt, commercial paper, government securities and options.
Material information does not have to relate to a company's business. For example, material information about the contents of an upcoming newspaper column may affect the price of a security, and therefore be considered material.
WHAT INFORMATION IS NON-PUBLIC?
In order for issues concerning insider trading to arise, information must not only be material, but also non-public. "Non-public" information generally means information that has not been available to the investing public.
Once material, non-public information has been effectively distributed to the investing public, it is no longer classified as material, non-public information. However, the distribution of non-public information must occur through commonly recognized channels for the classification to change. In addition, the information must not only be publicly disclosed, there must be adequate time for the public to receive and digest the information. Lastly, non-public information does not change to public information solely by selective dissemination.
RHJ's Employees must be aware that even where there is no expectation of confidentiality, a person may become an insider upon receiving material, non-public information. Whether the "tip" made to the Employee makes him/her a "tippee" depends on whether the corporate insider expects to benefit personally, either directly or indirectly, from the disclosure.
The "benefit" is not limited to a present or future monetary gain; it could be a reputational benefit or an expectation of a quid pro quo from the recipient by a gift of the information. Employees may also become insiders or tippees if they obtain material, non-public information by happenstance, at social gatherings, by overhearing conversations, etc.
PENALTIES FOR TRADING ON INSIDER INFORMATION
Severe penalties exist for firms and individuals that engage in the act of insider trading, including civil injunctions, treble damages, disgorgement of profits and jail sentences. Further, fines for individuals and firms found guilty of insider trading are levied in amounts up to three times the profit gained or loss avoided, and up to the greater of $1,000,000 or three times the profit gained or loss avoided, respectively.
PROCEDURES TO FOLLOW IF AN EMPLOYEE BELIEVES THAT HE/SHE POSSESSES MATERIAL, NON-PUBLIC INFORMATION
If an Employee has questions as to whether they are in possession of material, non-public information, they must inform the Compliance Officer and President, CEO or Managing Member as soon as possible. From this point, the Employee, Compliance Officer and Managing Members will conduct research to determine if the information is likely to be considered important to investors in making investment decisions, and whether the information has been publicly disseminated.
Given the severe penalties imposed on individuals and firms engaging in insider trading, Employees:
o Shall not trade the securities of any company in which they are
deemed insiders who may possess material, non-public information about
the company.
o Shall not engage in securities or derivatives transactions of any
company, except in accordance with RHJ's Personal Security Transaction
Policy and the securities laws.
o Shall submit personal security trading reports in accordance with the
Personal Security Transaction Policy.
o Shall not discuss any potentially material, non-public information
with colleagues, except as specifically required by their position.
o Shall immediately report the potential receipt of non-public
information to the CCO and President or CEO.
o Shall not proceed with any research, trading, etc. until the CCO and
President or CEO informs the Employee of the appropriate course of
action.
3. SERVING AS OFFICERS, TRUSTEES AND/OR DIRECTORS OF OUTSIDE ORGANIZATIONS
Employees may, under certain circumstances, be granted permission to serve as directors, trustees or officers of outside organizations by completing the Request for Approval of Outside Business Activity Form in Compliance11. These organizations can include public or private corporations, partnerships, charitable foundations and other not-for-profit institutions. Employees may also receive compensation for such activities.
At certain times, RHJ may determine that it is in its clients' best interests for an Employee(s) to serve as an officer or on the board of directors of an outside organization. For example, a company held in clients' portfolios may be undergoing a reorganization that may affect the value of the company's outstanding securities and the future direction of the company. Service with organizations outside of RHJ can, however, raise serious regulatory issues and concerns, including conflicts of interests and access to material non-public information.
As an outside board member or officer, an Employee may come into possession of material non-public information about the outside company, or other public companies. It is critical that a proper information barrier be in place between RHJ and the outside organization, and that the Employee does not communicate such information to other RHJ Employees in violation of the information barrier.
Similarly, RHJ may have a business relationship with the outside organization or may seek a relationship in the future. In those circumstances, the Employee must not be involved in the decision to retain or hire RHJ.
RHJ Employees are prohibited from engaging in such outside activities without the prior written approval from the Compliance Officer. Approval will be granted on a case by case basis, subject to proper resolution of potential conflicts of interest. Outside activities will be approved only if any conflict of interest issues can be satisfactorily resolved and all of the necessary disclosures are made on Part 2 of Form ADV.
4. GIFT POLICY
Employees may not accept investment opportunities, gifts or other gratuities from individuals seeking to conduct business with RHJ, or on behalf of an advisory client. However, Employees may accept gifts from a single giver in aggregate amounts not exceeding $100 and may attend business meals, sporting
events and other entertainment events at the expense of a giver, as long as the expense is reasonable and both the giver(s) and the Employee(s) are present. All gifts received must be reported to the CCO, including the name of the giver of the gift, the reason for the gift, a description of the gift and the date the gift was received.
Employees may also give any gift to anyone who does business with the firm, not in excess of $100. However, business meals, sporting events and other entertainment events may be given so long as the expense is reasonable and the employee giving the gift is present. All gifts given must be reported to the CCO, including the name of the employee giving the gift, the reason for giving the gift, a description of the gift being given and the date the gift was given.
5. POLITICAL CONTRIBUTIONS
RHJ or any RHJ employee that is considered a "Covered Associate" (as defined below) may not make Political Contributions (as defined below) to any one candidate or official, per election that in the aggregate would exceed $150.00 if the Covered Associate could not vote for the candidate or official, or $350.00 if the Covered Associate could vote for the candidate or official. All RHJ employees must report their political contribution to the CCO using the Reporting of Political or Charitable Contribution Form on Compliance11, within 10 days after the contribution has been made. The report must include the name of the employee, the name of the office holder or candidate that received the contribution, the office the recipient is running for, the amount of the contribution, whether or not the contributing employee is eligible to vote for the recipient and whether or not the official or candidate has an existing or potential relationship with the Firm and/or the contributing employee.
COVERED ASSOCIATE of RHJ means:
(i) Any general partner, managing member or executive officer, or other
individual with a similar status or function;
(ii) Any employee who solicits a government entity for RHJ and any person
who supervises, directly or indirectly, such employee; and
(iii) Any political action committee controlled by RHJ or by any person
described in paragraphs (i) and (ii) above.
POLITICAL CONTRIBUTION means any gift, subscription, loan, advance, or deposit
of money or anything of value made for:
(i) The purpose of influencing any election for federal, state or local
office;
(ii) Payment of debt incurred in connection with any such election; or
(iii) Transition or inaugural expenses of the successful candidate for
state or local office.
6. CHARITABLE CONTRIBUTIONS
Employees are NOT restricted in regards to giving personal charitable contributions; however, RHJ or an RHJ employee on behalf of the Firm must report all charitable contributions given by RHJ or an RHJ employee on behalf of the Firm, using the Reporting of Political or Charitable Contribution Form on Compliance11, to the CCO within 10 days after the contribution has been made. The information being reported must include the name of the employee that gave the contribution, the name of the recipient of the contribution, the amount of the contribution and whether or not the charity or any person associated with the charity has an existing or potential relationship with the firm and/or the employee giving the contribution.
RESPONSIBILITY
The Compliance Officer will be responsible for administering the Insider Trading, Serving as Officers, Trustees and/or Directors of Outside Organizations, Gift Policies, Political Contributions and Charitable Contributions. All questions regarding these policies should be directed to the Compliance Officer.
CODE OF ETHICS
(REVISED OCTOBER 2012)
Westwood Management Corp.
Westwood International Advisors LLC
Westwood Trust
Westwood Advisors, LLC
Westwood Holdings Group, Inc.
I. INTRODUCTION
The purpose of this Code of Ethics is to promote honest and ethical conduct, focus the Board of Directors and management of Westwood Holdings Group, Inc. on areas of ethical risk, provide guidance to directors, officers and employees to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct and help to preserve the culture of honesty and accountability at the Company.
This Code of Ethics establishes rules of conduct for persons who are associated with the companies named above or with the registered investment companies for which such companies provide investment advisory or principal underwriter services. The Code governs their personal investment and other investment-related activities.
The basic rule is very simple: put the client's interests first. The rest of the rules elaborate this principle. This Code is intended to assist the companies in fulfilling their obligations under the law. Article II lays out who the Code applies to, Article III deals with personal investment activities, Article IV deals with other sensitive business practices, and subsequent parts deal with reporting and administrative procedures.
The Code is very important to the companies and their employees. Violations can not only cause the companies embarrassment, loss of business, legal restrictions, fines and other punishments, but for employees can lead to demotion, suspension, firing, ejection from the securities business, and very large fines.
II. APPLICABILITY
(A) The Code applies to each of the following:
1. The Companies named or described at the top of page one of the Code and all entities that are under common management with these Companies or otherwise agree to be subject to the Code ("Affiliates").
2. Any officer, employee-director or employee of any Company or Affiliate.
(B) DEFINITIONS
1. ACCESS PERSONS. The Companies and the persons described in items (A)2 and (A)3 above.
2. ACCESS PERSON ACCOUNT. Includes all advisory, brokerage, trust or other accounts or forms of direct beneficial ownership in which one or more Access Person and/or one or more members of an Access Person's immediate family have a substantial proportionate economic interestexcluding employee 401K provider accounts (currently with MBM) and any accounts with Westwood Trust fbo the employee or their immediate family. Immediate family includes an Access Person's spouse and minor children and any family member living in the same household as the Access Person. A substantial proportionate economic interest will generally be 10% of the equity in the account in the case of an Access Person and 25% of the equity in the account in the case of all Access Persons in the aggregate whichever is first applicable. Investment partnerships and similar indirect means of ownership other than registered open-end investment companies are also treated as accounts.
As an exception, accounts in which one or more Access Persons and/or their immediate family have a substantial proportionate interest which are maintained with persons who have no affiliation with the companies and with respect to which no Access Person has, in the judgment of the Compliance Officer after reviewing the terms and circumstances, any direct or indirect influence or control over the investment or portfolio execution process are not Access Person Accounts.
As a further exception, bona fide market making accounts of Gabelli & Company are not Access Person Accounts.
As a further exception, bona fide error accounts of the Companies and the Affiliates are not Access Person Accounts.
3. CLIENTS. Investment advisory accounts maintained with any of the Companies or Affiliates by any person, other than Access Person Accounts.
4. COMPANIES. The companies named or described at the top of page one of thisCode.
5. COMPLIANCE OFFICER. The person designated as Westwood's Chief Compliance Officer.
6. COVERED PERSONS. The Companies, the Access Persons and the persons described in item (A)4 above.
7. EXECUTIVE MANAGER. The CEO/President or CIO of Westwood Holdings Group, Inc.
8. FUND CLIENTS. Clients that are registered investment companies or series thereof.
9. PORTFOLIO MANAGERS. Access Persons who are principally responsible for investment decisions with respect to any Westwood strategies.
10. SECURITY. Any financial instruments treated as a security for investment purposes and any related instruments such as futures, forward or swap contracts entered into with respect to one or more securities. However, the term security does not include securities issued by the Government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements, or units of bank regulated commingled funds.
11. Westwood strategy. Westwood strategies are products managed and controlled by Westwood Management Corp. and Westwood International Advisors.
III. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES
(A) BASIC RESTRICTION ON INVESTING ACTIVITIES
If a Security is owned in any Westwood strategy, such Security or any related Security (such as an option, warrant or convertible security) may not be purchased or sold for any Access Person Account subject to the previously owned related Security exception set forth in paragraph (B) below. If an Access Person owns a Security that is subsequently purchased in any Westwood strategy, the Access Person may not sell such Security until it is sold out of all Westwood strategies.If a purchase or sale order is pending for any Westwood strategy by any Company or Affiliate, any request to purchase or sell such Security or any related Security (such as an option, warrant or convertible security) for an Access Person Account will be denied. If a Security is under active consideration for purchase in any Westwood strategy by any Company or Affiliate, any
request to purchase or sell such Security or any related Security (such as an option, warrant or convertible security) for an Access Person Account may be denied at the discretion of the Compliance Officer and the Executive Manager.
(B) INVESTMENTS OWNED PRIOR TO EMPLOYMENT.
If a Security is owned by an Access Person when such person becomes a new employee, such Access Person will have two weeks from their date of employment to decide whether or not they want to sell their position in the Security. After this two week window, all future transactions in such Security will be subject to paragraph A.
In the case of a related Security (such as an option, warrant or convertible security) that is owned by an Access Person when such person becomes a new employee, the Access Person may not exercise/convert such related Security if a purchase or sale order is pending for any Westwood strategy by any Company or Affiliate. If the Security is under active consideration for purchase or sale in any Westwood strategy, any request to exercise/convert a related Security may be denied at the discretion of the Compliance Officer and the Executive Manager.
(C) INITIAL PUBLIC OFFERINGS
No Security or related Security may be acquired in an initial public offering for any Access Person Account.
(D) BLACKOUT PERIOD
No Security or related Security may be bought, sold or exercised for any Access Person Account during the period commencing seven (7) calendar days prior to and ending seven (7) calendar days after the purchase or sale (or entry of an order for the purchase or sale) of that Security or any related Security for the account of any Client.
(E) SHORT-TERM TRADING
With the exception of mutual funds (subject to applicable market timing restrictions) and exchange traded funds,no Security or related Security may, within a 60-day period, be bought and sold or sold and bought at a profit for any Access Person Account.
(F) EXEMPT TRANSACTIONS.
The following transactions are exempt from the restrictions set forth in paragraphs (A), (B) and (D) above and do not require pre-clearance under paragraph (H) below:
1. Participation in an ongoing automatic investment plan including 401K plans or an issuer's dividend reinvestment or stock purchase plan,
2. Participation in any transaction over which no Access Person had any direct or indirect influence or control, involuntary transactions (such as mergers, inheritances, gifts, etc.),
3. Shares of registered open-end investment companies other than shares of investment companies advised or sub-advised by the Companies,
4. Securities transactions processed for an Access Person Account that has been formed for the sole purpose of product development.
5. Non-convertible fixed income Securities rated at least "A", and
6. Municipal Securities.
(G) PERMITTED EXCEPTIONS
Purchases and sales of the following Securities for Access Person Accounts are exempt from the restrictions set forth in paragraphs A, C and D above if such purchases and sales comply with the preclearance requirements of paragraph (H) below:
1. Shares of registered open-end investment companies advised or sub-advised by the Companies (i.e. non-affiliated mutual funds). For reference, a list of affiliated mutual funds is attached as Exhibit A.
2. Exchange traded funds.
In addition, the exercise of rights that were received pro rata with other security holders is exempt if the preclearance procedures are satisfied.
(H) PRE-CLEARANCE OF PERSONAL SECURITIES TRANSACTIONS
No Security or related Security (such as an option, warrant or
convertible security) may be bought, sold or exercised for an Access
Person Account unless (i) the Access Person obtains prior approval
from an Executive Manager andthe Compliance Officer, or in the absence
of the Compliance Officer, from a designee of the Compliance Officer;
(ii) the approved transaction is completed on the same day approval is
received; and (iii) the Compliance Officer or an Executive Manager
does not rescind such approval prior to execution of the transaction.
(See paragraph J below for details of the Pre-Clearance Process.)
(I) PRIVATE PLACEMENTS
The purchases or sale of Securities that are not publicly traded will not be approved unless the Access Person provides full details of the proposed transaction (including written certification that the investment opportunity did not arise by virtue of such person's activities on behalf of any Client) and the Compliance Officer and an Executive Manager conclude, after consultation with one or more of the relevant Portfolio Managers, that the Companies would have no foreseeable interest in investing in such Security or any related Security for the account of any Client.
(J) PRE-CLEARANCE PROCESS
1. No Security may be purchased or sold for any Access Person Account unless the particular transaction has been approved in writing by an Executive Manager andthe Compliance Officer, or in the absence of the Compliance Officer, a designee of the Compliance Officer. The Compliance Officer shall review, not less frequently than weekly, confirmations from brokers to assure that all transactions effected for Access Person Accounts are effected in compliance with this Code.
2. Access Persons must direct brokerage and other firms with which they have Access Person Accounts to furnish to the Compliance Officer on a timely basis duplicate copies of confirmations of, and account statements concerning, all personal Securities transactions or to allow an electronic feed of such statements and confirmations to Compliance11, Westwood's online automated compliance application.
3. An electronic pre-clearance request must be submitted through Compliance11, and an emailed notification of pre-clearance must be received prior to entry of an order. If an employee cannot enter an electronic pre-clearance request through Compliance11 for any reason, a preclearance request can be made by completing and submitting a Trading Approval Form, attached as Exhibit B, to the Compliance Officer for approval by the Compliance Officer and an Executive Manager prior to entry of an order.
4. After reviewing the proposed trade and the level of potential investment interest on behalf of Clients in the Security in question, the Compliance Officer and an Executive Manager shall approve (or disapprove) a pre-clearance request on behalf of an Access Person as expeditiously as possible. Transactions described in paragraph (G) above will generally be approved unless it is believed for any reason that the Access Person Account should not trade in such Security at such time.
5. Once an Access Person's pre-clearance request is approved, the transaction must be executed within 48 hours of approval. If the Access Person's trading order request is not approved, or is not executed within 48 hours of approval, the clearance lapses although such trading order request may be resubmitted at a later date. An exception to this rule applies when pre-clearance is requested for a transaction in WHG stock during an open Trading Window, in which case the pre-clearance remains effective throughout the Trading Window and expires when either the requested number of shares has been executed orthe Trading Window closes.
6. Trading pre-clearance approval for the Compliance Officer must be obtained from the CEO or CIO of Westwood Management Corp., and trading pre-clearance approval for the CIO and the CEO must be obtained from the Compliance Officer.
7. The Chief Compliance Officer shall review all pre-clearance requests, all initial, quarterly and annual disclosure certifications and the trading activities on behalf of all Westwood strategies with a view to ensuring that all Covered Persons are complying with the spirit as well as the detailed requirements of this Code.
IV. OTHER INVESTMENT-RELATED RESTRICTIONS
(A) CONFLICTS OF INTEREST
Access Persons are prohibited from engaging in any activity, practice, or act which conflicts with, or appears to conflict with, the interests of the companies, its customers, or vendors. Covered Persons are required to fully disclose any potential conflict of interest to your supervisor/manager.
A conflict of interest exists when you, knowingly or unknowingly, engage in any activity that may compromise you, another employee, or the company in its relationship with a customer, vendor, or competitor.
1. GIFTS & ENTERTAINMENT. Potential conflicts of interest with a
customer, vendor, or competitor may include soliciting business
for personal gain, accepting gifts other than those of nominal
value (not more than $100), or requesting favors, discounts, or
services.
a. No Access Person shall accept any gift or other item of
more than $100 in value from any client, competitor, or any
person or entity that does business with or on behalf of any
client. If you are offered, receive, or anticipate receiving
something of value from any of the named entities, you must
disclose the matter to your supervisor/manager.
b. Access Persons shall report offers of entertainment
(dinners, sports/concert events from any person or entity
that does business with or on behalf of any Client.
c. Reporting of gifts and entertainment offers shall be made
through Compliance11.
d. Westwood's Compliance Department (in conjunction with all
employees servicing clients) shall track all gifts and
entertainment, if any, offered to and accepted by Taft-
Hartley clients.
2. SERVICE AS A DIRECTOR. No Access Person shall commence service on the Board of Directors of a publicly traded company, or any company with which the Companies do or may do business, or any company in which any Westwood strategy has an interest without prior authorization from the Chief Compliance Officer based upon a determination that the Board service would not be inconsistent with the interests of the Clients.
(B) DISCLOSURE OF CONFLICTS
Full disclosure to your supervisor/manager of any potential conflict
of interest is required as soon as such potential conflict is
discovered. If you believe that unusual circumstances justify your
engaging in an activity that may result in a conflict of interest, you
may request in writing that your supervisor/manager or Compliance
Department review the situation and grant an exception.
V. REPORTS AND ADDITIONAL COMPLIANCE PROCEDURES
(A) QUARTERLY TRANSACTION REPORTS
Every Covered Person must submit aquarterly transaction affirmation
through our online compliance system, Compliance11, containing the
information set forth in paragraph (C) below with respect to
transactions in any Security in which such Covered Person has or by
reason of such transactions acquires, any direct or indirect
beneficial ownership (as defined in Exhibit C) in the Security; and
with respect to any account established by the Covered Person in which
any Securities were held for the direct or indirect benefit of the
Covered Person subject to the exceptions listed below in paragraph
(B).
1. The Transaction Report must be submitted to the Compliance Officer no later than 10 business days after the end of the calendar quarter in which the transaction or account to which the report
relates was effected or established, and the report must contain the date that the report is submitted.
2. A Transaction report must contain the following information:
a. The date of the transaction, the title and number of shares and the principal amount of each Security involved;
b. The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
c. The price at which the transaction was effected; and
d. The name of the broker, dealer or bank with or through whom the transaction was effected.
3. This report must contain the following information with respect to accounts established:
a. The name of the broker, dealer or bank with whom the account was established; and
b. The date the account was established.
(B) TRANSACTION REPORT EXCEPTIONS
A Covered Person is not required to submit a report in the following instances:
1. A Covered Person need not make a report with respect to any transactions effected for, and Securities held in, any account over which such person does not have any DIRECT OR INDIRECT INFLUENCE or control; and
2. A Covered Person need not make a report with respect to any transactions effected pursuant to an automatic investment plan (this includes dividend reinvestment plans),
(C) OWNERSHIP ADMISSION
Any report submitted to comply with the requirements of this Article V may contain a statement that the report shall not be construed as an admission by the person making such report that he has any direct or indirect benefit ownership in the Security to which the report relates. A person need not make any report under this Article V with respect to
transaction effected for, and Securities held in, any account over which the person has no direct or indirect influence or control.
(D) INITIAL HOLDINGS REPORT
No later than 10 business days after beginning employment with any of the Companies or Affiliates or otherwise becoming a Covered Person, each Covered Person must submit an Initial Holdings Report (Exhibit D) containing the following information:
1. The title, number of shares and principal amount of each Security in which the Covered Person had any direct or indirect beneficial ownership when the person became a Covered Person;
2. The name of any broker, dealer or bank with whom the Covered Person maintained an account in which any Securities were held for the direct or indirect benefit of the Covered Person as of the date the person became a Covered Person; and
3. The date that the report is submitted.
(E) ANNUAL CERTIFICATION& ANNUAL HOLDINGS REPORT
1. Annually each Covered Person must certify that he has read and understood the Code and recognizes that he is subject to such Code. A Covered Person's initial Code of Ethics certification will be submitted either on the form attached as Exhibit E, or through Compliance11. All other certifications will be submitted through Compliance11.
2. In addition, annually each Covered Person must certify that he has disclosed or reported all personal Securities transactions required to be disclosed or reported under the Code and that he is not subject to any regulatory disability described in the annual certification form.
3. Each Covered Person annually must submit an Annual Holdings Report. All Annual Holdings Reports will be submitted through Compliance11. The report will contain the following information (which information must be current as of a date no more than 30 days before the report is submitted):
a. The title, number of shares and principal amount of each Security in which the Covered Person had any direct or indirect beneficial ownership;
b. The name of any broker, dealer or bank with whom the Covered Person maintains an account in which any
Securities are held for the direct or indirect benefit of the Covered Person; and
c. The date that the report is submitted.
(F) DUPLICATE BROKERAGE STATEMENTS IN LIEU OF REPORTS
A Covered Person will be deemed to have complied with the QUARTERLY transaction report requirements of this Article V insofar as the Chief Compliance Officer receives in a timely fashion either duplicate monthly or quarterly brokerage statements on which all transactions required to be reported hereunder are describedor an electronic feed of such statements and confirmations through Compliance11.
(G) Reporting of Violations
1. Violations of the Code of Ethics must be promptly reported to the Chief Compliance Officer.
a. Anonymous reporting is acceptable.
b. All violations will be reviewed by the Trade Monitoring and Compliance Committee.
(H) BOARD REPORT
At least annually (or quarterly in the case of Items 4 and 5 below), each of the Companies that has a Fund Client or that provides principal underwriting services for a Fund Client shall, together with each Fund Client, furnish a written report to the Board of Directors of the Fund Client that:
1. Describes any issues arising under the Code since the last report.
2. Certifies that Companies have developed procedures concerning Covered Persons' personal trading activities and reporting requirements relevant to such Fund Clients that are reasonably necessary to prevent violations of the Code;
3. Recommends changes, if any, to the Fund Clients' or the Companies' Codes of Ethics or procedures;
4. Provided a summary of any material or substantive violations of this Code by Covered Persons with respect to such Fund Clients which occurred during the past quarter and the nature of any remedial action taken; and
5. Describes any material or significant exceptions to any provisions of this code of Ethics as determined under Article VI below.
The Compliance Officer shall notify each employee of any of the Companies or Affiliates as to whether such person is considered to be an Access Person or Covered Person and shall notify each other that is considered to be an Access Person or Covered Person.
VI. SANCTIONS
Upon discovering that a Covered Person has not complied with the requirements of this Code, the Board of Directors of the relevant Company or of the relevant Fund Client, whichever is most appropriate under the circumstances, may impose on that person whatever sanctions the Board deems appropriate, including, among other things, disgorgement of profit, censure, suspension or termination of employment. Material violations of requirements of this Code by employees of Covered Persons and any sanctions imposed in connection therewith shall be reported not less frequently than quarterly to the Board of Directors of any relevant Company or Fund Client, as applicable.
VII. EXCEPTIONS
(A) The Trade Monitoring Compliance Committee (the "TMCC") of the Companies reserves the right to grant, on a case-by-case basis, exceptions to any provisions under this Code. Any exceptions made hereunder will be maintained in writing by the TMCC.
(B) Personal Trading. Requests for exceptions to the personal investing restrictions set forth in Article III of this Code must be submitted in writing to the Chief Compliance Officer along with any Trading Approval Form required for the transaction. Following are guidelines that the TMCC will consider when reviewing requests for personal trading restriction exceptions:
1. Access to research/analyst information: an employee requesting an exception should have little or no access to research/analyst information;
2. De minimus trade: if an employee requests an exception for a transaction in a security that is held in a Westwood strategy, the transaction must, in the opinion of the Chief Compliance Officer, be a de minimus trade, i.e. a small number of shares in a security with a large market cap and a high average trading volume that is not likely to adversely affect the price of the security; or
3. Expiration of stock options: the exercise of stock options granted by a previous employer that are about to expire.
VIII. PRESERVATION OF DOCUMENTS
This Code, a copy of each report by a Covered Person, any written report made hereunder by the Companies or the Compliance Officer, lists of all persons required to make reports, a list of any exceptions, and the reasons therefore, with respect to Article III, and any records with respect to transactions pursuant to Article III above, shall be preserved with the records of the relevant Company and any relevant Fund Client for the period required by Rule 17j-l.
IX. OTHER LAWS, RULES AND STATEMENTS OF POLICY
Nothing contained in this Code shall be interpreted as relieving any Covered Person from acting in accordance with the provision of any applicable law, rule or regulation or any other statement of policy or procedure governing the conduct of such person adopted by the Companies, the Affiliates or the Fund Clients.
All activities of the company must be conducted in full compliance with all applicable laws and regulations. Senior management should be informed regarding all matters pertinent to the company's position regarding such laws and regulations. The company expects all employees to follow the spirit as well as the letter of the law. In addition, Covered Persons are expected to fully comply with the company's Amended and Restated Insider Trading Policy that prohibits illegal insider trading and the use of material non-public information. All employees are expected to cooperate fully with the company's internal and outside auditors, attorneys, and regulatory examiners.
X. FUTURE INFORMATION
If any person has any question with regard to the applicability of the provisions of this Code generally or with regard to any Securities transaction or transactions, he should consult the Chief Compliance Officer.
EXHIBIT A
LIST OF AFFILIATED MUTUAL FUNDS
Affiliated mutual funds:
Westwood LargeCap Value Fund -- WHGLX
Westwood SMidCap Fund - WHGMX
Westwood SMidCap Plus Fund -- WHGPX
Westwood SmallCap Value Fund -- WHGSX
Westwood Dividend Growth Fund - WHGDX
Westwood Income Opportunity Fund - WHGIX
Westwood Balanced Fund-- WHGBX
Westwood Short Duration High Yield Fund -- WHGHX
Teton Westwood Equity Fund
Teton Westwood Balanced Fund
Teton Westwood Intermediate Bond Fund
National Bank Westwood Emerging Markets Fund (Canada)
National Bank Westwood Global Equity Fund (Canada)
National Bank Westwood Global Dividend Fund (Canada)
UBS PACE Large Company Value Equity Investments
The Timothy Plan Large/Mid-Cap Value Fund
The Timothy Plan Small-Cap Value Fund
Principal Investors Fund - LargeCap Value Fund III
State Farm Large Cap Equity Fund
State Farm Variable Product Trust
Optimum Small-Mid Cap Value Fund
Dynamic Funds - Marquis Institutional Global Equity Portfolio (SMid Value)
Pictet - U.S. Equity Value Selection
EXHIBIT B
PRE-CLEARANCE TRADING APPROVAL FORM
I, __________________________________________________(name), am an Access Person or authorized officer thereof and seek pre-clearance to engage in the transaction described below; for the benefit of myself or another access person:
ACQUISITION OR DISPOSITION (circle one)
Name of Account: ___________________________________________________ Account Number: ___________________________________________________ Date of Request: ___________________________________________________ Security (Name & Ticker): ___________________________________________________ Amount or # of Shares: ___________________________________________________ Broker: ___________________________________________________ |
If the transaction involves a Security that is not publicly traded, a description of proposed transaction, source of investment opportunity and any potential conflicts of interest:
I hereby certify that, to the best of my knowledge, the transaction described herein is not prohibited by the Code of Ethics and that the opportunity to engage in the transaction did not arise by virtue of my activities on behalf of any Client.
Signature: ________________________ Print Name: ______________________________
APPROVED OR DISAPPROVED (circle one)
Date of Approval ________________________________
Signature: ________________________ Print Name: ______________________________
Compliance Officer Approval: ______________________________
EXHIBIT C
BENEFICIAL OWNERSHIP
For purposes of the attached Code of Ethics, "beneficial ownership" shall be interpreted in the same manner as it would be in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except the determination of direct or indirect beneficial ownership shall apply to all securities that a Covered Person has or acquires. The term "beneficial ownership" of securities would include not only ownership of securities held by a Covered Person for his own benefit, whether in bearer form or registered in his name or otherwise, but also ownership of securities held for his benefit by other (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he has only a remainder interest), and securities held for his account by pledges, securities owned by a partnership in which he is a member if he may exercise a controlling influence over the purchase, sale or voting of such securities, and securities owned by any corporation or similar entity in which he owns securities if the shareholder is a controlling shareholder of the entity and has or shares investment control over the entity's portfolio.
Ordinarily, this term would not include securities held by executors or administrators of estates in which a Covered Person is a legatee or beneficiary unless there is a specified legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as "beneficially" owned by a Covered Person where such person enjoys "financial benefits substantially equivalent to ownership." The Securities and Exchange Commission has said that although the final determination of beneficial ownership is a question to be determined in the light of the facts of the particular case, generally a person is regarded as the beneficial owner of securities held in the name of his or her spouse and their minor children. Absent special circumstances such relationship ordinarily results in such person obtaining financial benefits substantially equivalent to ownership, e.g., application of the income derived from such securities to maintain a common home, or to meet expenses that such person otherwise would meet from other sources, or the ability to exercises a controlling influence over the purchase, sale or voting of such securities.
A Covered Person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contract, understanding, relationship, or other agreement, he obtains therefrom financial benefits substantially equivalent to those of ownership.
A Covered Person also may be regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once or at some future time.
EXHIBIT D
INITIAL HOLDINGS REPORT
Report submitted by:
This initial holdings report (the "Report") is submitted pursuant to Section V (D) of the Code of Ethics of the Companies and supplies information with respect to any Security in which you may be deemed to have any direct or indirect beneficial ownership interest and any accounts established by you in which any Securities were held for your direct or indirect benefit, as of the date you became subject to the Code of Ethics.
Unless the context otherwise requires, all terms used in the Report shall have the same meaning as set forth in the Code of Ethics.
If you have no reportable Securities or accounts, sign and return this page only. If you have reportable Securities or accounts, complete, sign and return Page 2 and any attachments.
I HAVE NO REPORTABLE SECURITIES OR ACCOUNTS AS OF ____________________. I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND THAT, TO THE BEST OF MY KNOWLEDGE, THE INFORMATION FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
Signature: __________________________________
Position: __________________________________
Date: __________________________________
INITIAL HOLDINGS REPORT
Report submitted by:
The Following tables supply the information required by Section V (D) of the Code of Ethics as of the date you became subject to the Code.
SECURITIES HOLDINGS
SECURITY QUANTITY OF NAME OF BROKER/DEALER WHERE SECURITIES
SECURITY NAME TICKER SECURITIES ARE HELD (E.G. SCHWAB) ACCOUNT NUMBER
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I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND THAT, TO THE BEST OF MY KNOWLEDGE, THE INFORMATION FURNISHED IN THIS REPORT IS TRUE AND CORRECT AS OF _________________________.
Signature: ______________________________
Position: _______________________________
Date: ___________________________________
EXHIBIT E
ANNUAL CERTIFICATION OF CODE OF ETHICS
A. I (a Covered Person) hereby certify that I have read and understand the firm's Code of Ethics, and recognize that I am subject to its provisions. In addition, I hereby certify that I have disclosed or reported all personal Securities transactions required to be disclosed or reported under the Code of Ethics;
B. Within the last ten years there have been no complaints or disciplinary actions filed against me by any regulated securities or commodities exchange, any self- regulatory securities or commodities organization, any attorney general, or any governmental office or agency regulating insurance securities, commodities or financial transactions in the United States, in any state of the United States, or in any other country;
C. I have not within the last ten years been convicted of or acknowledged commission of any felony or misdemeanor arising out of my conduct as an employee, salesperson, officer, director, insurance agent, broker, dealer, underwriter, investment manager or investment advisor; and
D. I have not been denied permission or otherwise enjoined by order, judgment or decree of any court of competent jurisdiction, regulated securities or commodities exchange, self-regulatory securities or commodities organization or other federal or state regulatory authority from acting as an investment advisor, securities or commodities broker or dealer, commodity pool operator or trading advisor, or as an affiliated person or employee of any investment company, bank, insurance company or commodity broker, dealer, pool operator or trading advisor, or from engaging in or continuing any conduct or practice in connection with any such activity or the purchase or sale of any security.
E. Unless I am exempt from filing an Annual Holdings Report (as a "disinterested" director of a Fund Client or an independent director of an Affiliate), I have attached a completed Annual Holdings Report which is accurate as of a date no more than 30 days ago.
Signature: ___________________________
Print Name: ___________________________
Date: ___________________________
LOOMIS, SAYLES & CO., L.P.
CODE OF ETHICS
EFFECTIVE:
January 14, 2000
AS AMENDED:
November 27, 2012
TABLE OF CONTENTS 1. INTRODUCTION ............................................................................. 3 2. STATEMENT OF GENERAL PRINCIPLES .......................................................... 3 3. A FEW KEY TERMS .......................................................................... 4 3.1. Covered Security ......................................................................... 4 3.2. Beneficial Ownership ..................................................................... 5 3.3. Investment Control ....................................................................... 6 3.4. Maintaining Personal Accounts ............................................................ 6 4. SUBSTANTIVE RESTRICTIONS ON PERSONAL TRADING ............................................. 7 4.1. Preclearance ............................................................................. 7 4.2. Good Until Canceled and Limit Orders ..................................................... 9 4.3. Short Term Trading Profits ............................................................... 9 4.4. Restrictions on Round Trip Transactions in Loomis Advised Funds .......................... 9 4.5. Derivatives ..............................................................................10 4.6. Short Sales ..............................................................................10 4.7. Competing with Client Trades .............................................................10 4.8. Large Cap/De Minimis Exemption ...........................................................11 4.9. Investment Person Seven-Day Blackout Rule ................................................11 4.10. Research Analyst Three-Day Blackout Before a Recommendation ..............................12 4.11. Access Person Seven-Day Blackout After Recommendation Change .............................13 4.12. Initial Public Offerings .................................................................13 4.13. Private Placement Transactions ...........................................................13 4.14. Exemptions Granted by the Chief Compliance Officer .......................................14 5. PROHIBITED OR RESTRICTED ACTIVITIES ......................................................14 5.1. Public Company Board Service and Other Affiliations ......................................14 5.2. Participation in Investment Clubs and Private Pooled Vehicles ............................15 6. REPORTING REQUIREMENTS ...................................................................15 6.1. Initial Holdings Reporting, Account Disclosure and Acknowledgement of Code ...............15 6.2. Brokerage Confirmations and Brokerage Account Statements .................................16 6.3. Quarterly Transaction Reporting and Account Disclosure ...................................16 6.4. Annual Reporting .........................................................................17 6.5. Review of Reports by Chief Compliance Officer ............................................18 6.6. Internal Reporting of Violations to the Chief Compliance Officer .........................18 7. SANCTIONS ................................................................................18 8. RECORDKEEPING REQUIREMENTS ...............................................................19 9. MISCELLANEOUS ............................................................................19 9.1. Confidentiality ..........................................................................20 9.2. Disclosure of Client Trading Knowledge ...................................................20 9.3. Notice to Access Persons, Investment Persons and Research Analysts as to Status ..........20 9.4. Notice to Personal Trading Compliance of Engagement of Independent Contractors ...........20 9.5. Questions and Educational Materials ......................................................20 |
LOOMIS, SAYLES & CO., L.P.
CODE OF ETHICS
1. INTRODUCTION
This Code of Ethics ("Code") has been adopted by Loomis, Sayles & Co., L.P. ("Loomis Sayles") to govern certain conduct of Loomis Sayles' SUPERVISED PERSONS and personal trading in securities and related activities of those individuals who have been deemed ACCESS PERSONS thereunder, and under certain circumstances, those ACCESS PERSONS' family members and others in a similar relationship to them.
The policies in this Code reflect Loomis Sayles' desire to detect and prevent not only situations involving actual or potential conflicts of interest or unethical conduct, but also those situations involving even the appearance of these.
2. STATEMENT OF GENERAL PRINCIPLES
It is the policy of Loomis Sayles that no ACCESS PERSON or SUPERVISED PERSON as such terms are defined under the Loomis Sayles' Code, (please note that Loomis Sayles treats all employees as ACCESS PERSONS) shall engage in any act, practice or course of conduct that would violate the Code, the fiduciary duty owed by Loomis Sayles and its personnel to Loomis Sayles' clients, Rule 204A-1 under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the provisions of Section 17(j) of the Investment Company Act of 1940, as amended (the "1940 Act"), and Rule 17j-1 there under. It is required that all Access Persons must comply with all applicable laws, rules and regulations including, but not limited to the FEDERAL SECURITIES LAWS. The fundamental position of Loomis Sayles is, and has been, that it must at all times place the interests of its clients first. Accordingly, your personal financial transactions (and in some cases, those of your family members and others in a similar relationship to you) and related activities must be conducted consistently with this Code and in such a manner as to avoid any actual or potential conflict of interest or abuse of your position of trust and responsibility.
Without limiting in any manner the fiduciary duty owed by Loomis Sayles to its clients, it should be noted that Loomis Sayles considers it proper that purchases and sales be made by ACCESS PERSONS in the marketplace of securities owned by Loomis Sayles' clients, PROVIDED that such securities transactions comply with the spirit of, and the specific restrictions and limitations set forth in the Code. In making personal investment decisions, however, you must exercise extreme care to ensure that the provisions of the Code are not violated and under no circumstances, may an ACCESS PERSON use the knowledge of COVERED SECURITIES purchased or sold by any client of Loomis Sayles or COVERED SECURITIES being considered for purchase or sale by any client of Loomis Sayles to profit personally, directly or indirectly, by the market effect of such transactions.
Improper trading activity can constitute a violation of the Code. The Code can also be violated by an Access Person's failure to file required reports, by making inaccurate or misleading reports or statements concerning trading activity, or by opening an account with a non-SELECT BROKER.
It is not intended that these policies will specifically address every situation involving personal trading. These policies will be interpreted and applied, and exceptions and amendments will be made, by Loomis Sayles in a manner considered fair and equitable, but in all cases with the view of placing Loomis Sayles' clients' interests paramount. It also bears emphasis that technical compliance with the procedures, prohibitions and limitations of this Code will not automatically insulate you from scrutiny of, and sanctions for, securities transactions which indicate an abuse of Loomis Sayles' fiduciary duty to any of its clients.
You are encouraged to bring any questions you may have about the Code to PERSONAL TRADING COMPLIANCE. Please do not guess at the answer.
PERSONAL TRADING COMPLIANCE, the CHIEF COMPLIANCE OFFICER and the Ethics Committee will review the terms and provisions of the Code at least annually and make amendments as necessary. Any amendments to the Code will be provided to you.
3. A FEW KEY TERMS
BOLDFACED terms have special meaning in this Code. The application of a particular Code requirement to you may hinge on the elements of the definition of these terms. See the GLOSSARY at the end of this Code for definitions of these terms. In order to have a basic understanding of the Code, however, you must have an understanding of the terms "COVERED SECURITY", "BENEFICIAL OWNERSHIP" and "INVESTMENT CONTROL" as used in the Code.
3.1. COVERED SECURITY
This Code generally relates to transactions in and ownership of an investment that is a COVERED SECURITY. Currently, this means any type of equity or debt security (such as common and preferred stocks, and corporate and government bonds or notes), any equivalent (such as ADRs), any derivative, instrument representing, or any rights relating to, a COVERED SECURITY, and any closely related security (such as certificates of participation, depository receipts, collateral--trust certificates, put and call options, warrants, and related convertible or exchangeable securities and securities indices). Shares of closed-end funds, municipal obligations and securities issued by agencies and instrumentalities of the U.S. government (e.g. GNMA obligations) are also considered COVERED SECURITIES under the Code.
Additionally, the shares of any investment company registered under the Investment Company Act that is advised, sub-advised, or distributed by Loomis Sayles, Natixis, or a Natixis affiliate ("REPORTABLE FUNDS") are deemed to be COVERED SECURITIES for purposes of certain provisions of the Code. REPORTABLE FUNDS include any open-ended or closed-end funds advised, sub-advised, or distributed by Loomis Sayles, Natixis, or a Natixis affiliate, but exclude money market funds. A current list of REPORTABLE FUNDS is attached as EXHIBIT ONE and will be maintained on the firm's intranet site under the Legal and Compliance page.
EXPLANATORY NOTE: WHILE THE DEFINITION OF REPORTABLE FUNDS ENCOMPASSES
FUNDS THAT ARE ADVISED, SUB-ADVISED AND/OR DISTRIBUTED
BY NATIXIS AND ITS AFFILIATES, ONLY THOSE FUNDS ADVISED
OR SUB-ADVISED BY LOOMIS SAYLES ("LOOMIS ADVISED FUND")
ARE SUBJECT TO CERTAIN TRADING RESTRICTIONS OF THE CODE
(SPECIFICALLY, THE SHORT- TERM TRADING PROFIT AND ROUND
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TRIP TRANSACTION RESTRICTIONS). PLEASE REFER TO SECTION
4.3 AND 4.4 OF THE CODE FOR FURTHER EXPLANATION OF
THESE TRADING RESTRICTIONS. ADDITIONALLY, EXHIBIT ONE
DISTINGUISHES BETWEEN THOSE FUNDS THAT ARE SUBJECT TO
REPORTING ONLY UNDER THE CODE (ALL REPORTABLE FUNDS)
AND THOSE THAT ARE SUBJECT TO BOTH REPORTING AND THE
AFOREMENTIONED TRADING RESTRICTIONS (LOOMIS ADVISED
FUNDS).
Shares of exchange traded funds ("ETFs") and closed-end funds are deemed to be COVERED SECURITIES for the purposes of certain provisions of the Code. Broad based open-ended ETFs with either a market capitalization exceeding U.S. $1 billion OR an average daily trading volume exceeding 1 million shares (over a 90 day period) ("EXEMPT ETFS") are exempt from certain provisions of the Code. A current list of EXEMPT ETFS is attached as EXHIBIT TWO and will be maintained on the firm's intranet site under the Legal and Compliance page.
All ACCESS PERSONS are expected to comply with the spirit of the Code, as well as the specific rules contained in the Code. Therefore, while the lists of REPORTABLE FUNDS and EXEMPT ETFS are subject to change, it is ultimately the responsibility of all ACCESS PERSONS to review these lists which can be found in EXHIBIT(S) ONE AND TWO, prior to making an investment in a Reportable Fund or ETF.
Please see EXHIBIT THREE for the application of the Code to a specific COVERED SECURITY or instrument, including exemptions from preclearance.
It should be noted that private placements, hedge funds and investment pools are deemed to be COVERED SECURITIES for purposes of the Code whether or not advised, sub-advised, or distributed by Loomis Sayles or a Natixis investment adviser. Investments in such securities are discussed under sections 4.13 and 5.2.
3.2. BENEFICIAL OWNERSHIP
The Code governs any COVERED SECURITY in which an Access Person has any direct or indirect "BENEFICIAL OWNERSHIP." BENEFICIAL OWNERSHIP for purposes of the Code means a direct or indirect "pecuniary interest" that is held or shared by you directly or indirectly (through any contract, arrangement, understanding, relationship or otherwise) in a COVERED SECURITY. The term "pecuniary interest" in turn generally means your opportunity directly or indirectly to receive or share in any PROFIT derived from a transaction in a COVERED SECURITY, whether or not the COVERED SECURITY or the relevant account is in your name and regardless of the type of account (i.e. brokerage account, direct account, or retirement plan account). Although this concept is subject to a variety of U.S. Securities and Exchange Commission ("SEC") rules and interpretations, you should know that you are PRESUMED under the Code to have an indirect pecuniary interest as a result of:
o ownership of a COVERED SECURITY by your spouse or minor children;
o ownership of a COVERED SECURITY by a live-in partner who shares your household and combines his/her financial resources in a manner similar to that of married persons;
o ownership of a COVERED SECURITY by your other family members sharing your household (including an adult child, a stepchild, a grandchild, a parent, stepparent, grandparent, sibling, mother- or father-in-law, sister- or brother-in-law, and son- or daughter-in-law);
o your share ownership, partnership interest or similar interest in COVERED SECURITIES held by a corporation, general or limited partnership or similar entity you control;
o your right to receive dividends or interest from a COVERED SECURITY even if that right is separate or separable from the underlying securities;
o your interest in a COVERED SECURITY held for the benefit of you alone or for you and others
in a trust or similar arrangement (including any present or future right to income or principal); and
o your right to acquire a COVERED SECURITY through the exercise or conversion of a "derivative COVERED SECURITY."
EXPLANATORY NOTE: ALL ACCOUNTS IN WHICH AN ACCESS PERSON HAS BENEFICIAL
OWNERSHIP ARE SUBJECT TO THE CODE (SUCH ACCOUNTS INCLUDE,
BUT ARE NOT LIMITED TO, PERSONAL BROKERAGE ACCOUNTS, MUTUAL
FUND ACCOUNTS, ACCOUNTS OF YOUR SPOUSE, ACCOUNTS OF MINOR
CHILDREN LIVING IN YOUR HOUSEHOLD, FAMILY OF FUND ACCOUNTS,
TRANSFER AGENT ACCOUNTS HOLDING MUTUAL FUNDS OR BOOK ENTRY
SHARES, IRAS, 401KS, TRUSTS, DRIPS, ESOPS, ETC).
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Please see EXHIBIT FOUR to this Code for specific examples of the types of interests and accounts subject to the Code.
3.3. INVESTMENT CONTROL
The Code governs any COVERED SECURITY in which an Access Person has direct or indirect "INVESTMENT CONTROL." The term INVESTMENT CONTROL encompasses any influence (i.e., power to manage, trade, or give instructions concerning the investment disposition of assets in the account or to approve or disapprove transactions in the account), whether sole or shared, direct or indirect, you exercise over the account or COVERED SECURITY.
You should know that you are PRESUMED under the Code to have INVESTMENT CONTROL as a result of having:
o INVESTMENT CONTROL (sole or shared) over your personal brokerage account(s)
o INVESTMENT CONTROL (sole or shared) over an account(s) in the name of your spouse or minor children, unless, you have renounced an interest in your spouse's assets (subject to the approval of the CHIEF COMPLIANCE OFFICER)
o INVESTMENT CONTROL (sole or shared) over an account(s) in the name of any family member, friend or acquaintance
o Involvement in an Investment Club
o Trustee power over an account(s)
o The existence and/or exercise of a power of attorney over an account
Please see EXHIBIT FOUR to this Code for specific examples of the types of interests and accounts subject to the Code.
3.4. MAINTAINING PERSONAL ACCOUNTS
All ACCESS PERSONS who have personal accounts that hold or can hold COVERED SECURITIES in which they have direct or indirect INVESTMENT CONTROL AND BENEFICIAL OWNERSHIP are required to maintain such accounts at one of the following firms: Bank of America/Merrill Lynch, Charles Schwab, E*TRADE, Fidelity Investments, Morgan Stanley Smith Barney, TD Ameritrade, Scottrade, UBS, or Wells Fargo (collectively, the "SELECT BROKERS"). Additionally, an ACCESS PERSON may only purchase and hold shares of REPORTABLE FUNDS through either a SELECT BROKER,
directly from the REPORTABLE FUND through its transfer agent, or through one or more of Loomis Sayles' retirement plans.
Accounts in which the ACCESS PERSON only has either INVESTMENT CONTROL or BENEFICIAL OWNERSHIP; certain retirement accounts with an ACCESS PERSON'S prior employer; and/or the retirement accounts of an ACCESS PERSON'S spouse; may be maintained with a firm other than the SELECT BROKERS with the approval of PERSONAL TRADING COMPLIANCE or the CHIEF COMPLIANCE OFFICER. In addition, PERSONAL TRADING COMPLIANCe or the CHIEF COMPLIANCE OFFICER may grant exemptions to the Select Broker requirement for accounts not used for general trading purposes such as ESOPs, DRIPs, securities held physically or in book entry form, family of fund accounts or situations in which the ACCESS PERSON has a reasonable hardship for maintaining their accounts with a Select Broker..
In addition, ACCESS PERSONS with a foreign residence are not required to maintain their personal accounts with a SELECT BROKER. However, such ACCESS PERSONS who have personal accounts that hold or can hold COVERED SECURITIES, including REPORTABLE FUNDS in which they have direct or indirect INVESTMENT CONTROL and/or BENEFICIAL OWNERSHIP, are responsible for ensuring that PERSONAL TRADING COMPLIANCE receives duplicate confirms and statements in a timely fashion. All of the remaining requirements and restrictions of the Code apply to ACCESS PERSONS with a foreign residence.
EXPLANATORY NOTE: WHILE CERTAIN ACCOUNTS MAY BE GRANTED AN EXEMPTION FROM
CERTAIN PROVISIONS OF THE CODE, INCLUSIVE OF THE SELECT
BROKER REQUIREMENT (ACCOUNTS MANAGED BY AN OUTSIDE ADVISER
IN WHICH THE ACCESS PERSON EXERCISES NO INVESTMENT
DISCRETION, ACCOUNTS IN WHICH THE ACCESS PERSON'S SPOUSE IS
EMPLOYED BY ANOTHER INVESTMENT FIRM AND MUST ABIDE BY THAT
FIRM'S CODE OF ETHICS, ETC.), SUCH ACCOUNTS ARE STILL
SUBJECT TO THE REPORTING REQUIREMENTS OF THE CODE AND MAY BE
SUBJECT TO THE PRE-CLEARANCE REQUIREMENTS OF THE CODE (E.G.
JOINT ACCOUNTS). THE TERMS OF A SPECIFIC EXEMPTION WILL BE
OUTLINED IN AN EXEMPTION MEMORANDUM WHICH IS ISSUED TO THE
ACCESS PERSON BY PERSONAL TRADING COMPLIANCE. AN ACCESS
PERSON'S FAILURE TO ABIDE BY THE TERMS AND CONDITIONS OF AN
ACCOUNT EXEMPTION ISSUED BY PERSONAL TRADING COMPLIANCE
COULD RESULT IN A VIOLATION OF THE CODE.
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4. SUBSTANTIVE RESTRICTIONS ON PERSONAL TRADING
The following are substantive prohibitions and restrictions on Access Persons' personal trading and related activities. In general, the prohibitions set forth below relating to trading activities apply to accounts holding COVERED SECURITIES in which an ACCESS PERSON has BENEFICIAL OWNERSHIP AND INVESTMENT CONTROL.
4.1. PRECLEARANCE
Each ACCESS PERSON must pre-clear through the PTA Preclearance System ("PTA") all VOLITIONAL transactions in COVERED SECURITIES (i.e. transactions in which the ACCESS PERSON has determined the timing as to when the purchase or sale transaction will occur and amount of shares to be purchased or sold) in which he or she has INVESTMENT CONTROL AND in which he or she has or would acquire BENEFICIAL OWNERSHIP. Exceptions to the preclearance requirement include, but are not limited to: Open-ended mutual funds including REPORTABLE FUNDS, EXEMPT ETFS listed in EXHIBIT TWO, and US Government Agency bonds (i.e. GNMA, FNMA, FHLMC), as set forth in
EXHIBIT(S) THREE AND FIVE.
EXPLANATORY NOTE: FUTURES, OPTIONS AND SWAP TRANSACTIONS IN COVERED
SECURITIES MUST BE MANUALLY PRE-CLEARED BY PERSONAL TRADING
COMPLIANCE SINCE PTA CANNOT HANDLE SUCH TRANSACTIONS.
INITIAL PUBLIC OFFERINGS, PRIVATE PLACEMENT TRANSACTIONS,
INCLUDING HEDGE FUNDS WHETHER OR NOT THEY ARE ADVISED, SUB-
ADVISED, OR DISTRIBUTED BY LOOMIS SAYLES OR A NATIXIS
INVESTMENT ADVISER, PARTICIPATION IN INVESTMENT CLUBS AND
PRIVATE POOLED VEHICLES REQUIRE SPECIAL PRECLEARANCE AS
DETAILED UNDER SECTIONS 4.12, 4.13 AND 5.2 OF THE CODE.
EXPLANATORY NOTE: BROAD BASED OPEN-ENDED ETFS WITH EITHER A MARKET
CAPITALIZATION EXCEEDING $1BILLION OR AN AVERAGE DAILY
TRADING VOLUME EXCEEDING 1 MILLION SHARES (OVER A 90 DAY
PERIOD )ARE EXEMPT FROM THE PRECLEARANCE AND TRADING
RESTRICTIONS SET FORTH IN SECTIONS 4.1, 4.3, 4.6, 4.7, 4.9,
4.10 AND 4.11 OF THE CODE. A LIST OF THE EXEMPT ETFS IS
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PROVIDED IN EXHIBIT TWO OF THE CODE. ALL CLOSED END-FUNDS,
CLOSED-END ETFS, SECTOR BASED/NARROWLY DEFINED ETFS AND
BROAD BASED OPEN-ENDED ETFS WITH A MARKET CAPITALIZATION
BELOW U.S. $1 BILLION AND AN AVERAGE DAILY TRADING VOLUME
BELOW 1 MILLION SHARES (OVER A 90 DAY PERIOD) ARE SUBJECT TO
THE PRECLEARANCE AND TRADING RESTRICTIONS DETAILED UNDER
SECTION 4 OF THE CODE.
ALL ETFS, INCLUDING THOSE THAT ARE EXEMPT FROM PRECLEARANCE, AND CLOSED- END FUNDS ARE SUBJECT TO THE REPORTING REQUIREMENTS DETAILED IN SECTION 6 OF THE CODE.
Any transaction approved pursuant to the preclearance request procedures MUST BE EXECUTED BY THE END OF THE TRADING DAY ON WHICH IT IS APPROVED unless PERSONAL TRADING COMPLIANCE extends the preclearance for an additional trading day. If the ACCESS PERSON'S trade has not been executed by the end of the same trading day (or the next trading day in the case of an extension), the "preclearance" will lapse and the ACCESS PERSON may not trade without again seeking and obtaining preclearance of the intended trade.
For ACCESS PERSONS with a U.S. residence, preclearance requests can only be submitted through PTA and/or to Personal Trading Compliance Monday -- Friday from 9:30am-4:00pm Eastern Standard Time. ACCESS PERSONS with a foreign residence will be given separate preclearance guidelines instructing them on the availability of PTA and Personal Trading Compliance support hours.
If after preclearance is given and before it has lapsed, an ACCESS PERSON becomes aware that a COVERED SECURITY as to which he or she obtained preclearance has become the subject of a buy or sell order or is being considered for purchase or sale for a client account, the ACCESS PERSON who obtained the preclearance must consider the preclearance revoked AND MUST NOTIFY PERSONAL TRADING COMPLIANCE IMMEDIATELY. If the transaction has already been executed before the ACCESS PERSON becomes aware of such facts, no violation will be considered to have occurred as a result of the ACCESS PERSON'S transactions.
If an ACCESS PERSON has actual knowledge that a requested transaction is nevertheless in violation of this Code or any provision thereof, approval of the request will not protect the ACCESS PERSON'S transaction from being considered in violation of the Code. The CHIEF COMPLIANCE OFFICER or PERSONAL TRADING COMPLIANCE may deny or revoke preclearance for any reason that is deemed to be consistent with the spirit of the Code.
4.2. GOOD UNTIL CANCELED AND LIMIT ORDERS
No ACCESS PERSON shall place a "good until canceled," "limit" or equivalent order with his/her broker except that an ACCESS PERSON may utilize a "day order with a limit" so long as the transaction is consistent with provisions of this Code, including the preclearance procedures. All orders must expire at the end of the trading day on which they are pre-cleared unless otherwise extended by PERSONAL TRADING COMPLIANCE.
4.3. SHORT TERM TRADING PROFITS
No ACCESS PERSON may profit from the VOLITIONAL purchase and sale, OR conversely the VOLITIONAL sale and purchase, of the same or equivalent COVERED SECURITY (including LOOMIS ADVISED FUNDS) within 60 calendar days (unless the sale involved shares of a COVERED SECURITY that were acquired more than 60 days prior). Hardship exceptions may be requested (in advance) from PERSONAL TRADING COMPLIANCE.
An Access Person may sell a COVERED SECURITY (including LOOMIS ADVISED FUNDS) or cover an existing short position at a loss within 60 calendar days. Such requests must be submitted through the PTA System and to PERSONAL TRADING COMPLIANCE for approval because the PTA System does not have the capability to determine whether the COVERED SECURITY will be sold at a gain or a loss.
EXPLANATORY NOTE: FOR PURPOSES OF CALCULATING THE 60 DAY HOLDING PERIOD,
THE TRADE DATE OF A GIVEN PURCHASE OR SALE IS DEEMED TO BE
DAY ZERO. 60 FULL DAYS MUST PASS BEFORE AN ACCESS PERSON CAN
TRADE THAT SAME COVERED SECURITY FOR A PROFIT AND THEREFORE,
ALLOWING THE ACCESS PERSON TO DO SO ON THE 61ST DAY.
EXPLANATORY NOTE: THE SHORT TERM TRADING PROFITS PROVISION IS APPLICABLE TO
TRANSACTIONS THAT ARE EXECUTED ACROSS ALL OF AN ACCESS
PERSON'S ACCOUNTS. FOR EXAMPLE, IF AN ACCESS PERSON SOLD
SHARES OF ABC IN FIDELITY BROKERAGE ACCOUNT 1234 TODAY, THAT
ACCESS PERSON WOULD NOT BE ALLOWED TO BUY SHARES OF ABC IN
CHARLES SCHWAB IRA ACCOUNT 4567 AT A PROFIT (LOWER PRICE)
WITHIN 60 DAYS FOLLOWING THE SALE.
EXPLANATORY NOTE: PLEASE REFER TO EXHIBIT ONE FOR A CURRENT LIST OF LOOMIS
ADVISED FUNDS. PLEASE ALSO NOTE THAT ALL CLOSED-END FUNDS
ARE SUBJECT TO THE TRADING RESTRICTIONS OF SECTION 4.3 OF
THE CODE.
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4.4. RESTRICTIONS ON ROUND TRIP TRANSACTIONS IN LOOMIS ADVISED FUNDS
In addition to the 60 day holding period requirement for purchases and sales of LOOMIS ADVISED FUNDS, an ACCESS PERSON is prohibited from purchasing, selling and then re-purchasing shares of the same Loomis Advised Fund within a 90 day period ("Round Trip Restriction"). The Round Trip Restriction does not limit the number of times an Access Person can purchase a LOOMIS ADVISED FUND or sell a LOOMIS ADVISED FUND during a 90 day period. In fact, subject to the holding period requirement described above, an ACCESS PERSON can purchase a LOOMIS ADVISED FUND (through one or multiple transactions) and can liquidate their position in that fund (through one or several transactions) during a 90 day period. However, an ACCESS PERSON cannot then reacquire a position in the same LOOMIS ADVISED FUND previously sold within the same 90 day period.
The Round Trip Restriction will only apply to VOLITIONAL transactions in LOOMIS ADVISED FUNDS. Therefore, shares of LOOMIS ADVISED FUNDS acquired through a dividend reinvestment or dollar cost averaging program, and automatic monthly contributions to the firm's 401K plan will not be considered when applying the Round Trip Restriction.
Finally, all VOLITIONAL purchase and sale transactions of LOOMIS ADVISED FUNDS, in any share class and in ANY employee account (i.e., direct account with the LOOMIS ADVISED FUND, Select Broker account, 401K account, etc.) will be matched for purposes of applying the Round Trip Restriction.
EXPLANATORY NOTE: ONLY LOOMIS ADVISED FUNDS ARE SUBJECT TO SECTION 4.4 OF
THE CODE. PLEASE REFER TO EXHIBIT ONE FOR A CURRENT LIST
OF LOOMIS ADVISED FUNDS.
4.5. DERIVATIVES
No ACCESS PERSON shall use derivatives including but not limited to options, futures, swaps or warrants on a COVERED SECURITY to evade the restrictions of the Code. In other words, no ACCESS PERSON may use derivative transactions with respect to a COVERED SECURITY if the Code would prohibit the ACCESS PERSON from taking the same position directly in the underlying COVERED SECURITY.
EXPLANATORY NOTE: WHEN TRANSACTING IN DERIVATIVES, ACCESS PERSONS MUST
PRECLEAR THE DERIVATIVE AND THE UNDERLYING SECURITY IN
PTA AS WELL AS RECEIVE MANUAL APPROVAL FROM PERSONAL
TRADING COMPLIANCE BEFORE EXECUTING THEIR TRANSACTION.
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4.6. SHORT SALES
No ACCESS PERSON may purchase a put option, sell a call option, sell a COVERED SECURITY short or otherwise take a short position in a COVERED SECURITY then being held long in a Loomis Sayles client account, unless, in the cases of the purchase of a put or sale of a call option, the option is on a broad based index.
4.7. COMPETING WITH CLIENT TRADES
Except as set forth in Section 4.8, an ACCESS PERSON may not, directly or indirectly, purchase or sell a COVERED SECURITY (REPORTABLE FUNDS are not subject to this rule.) when the ACCESS PERSON knows, or reasonably should have known, that such COVERED SECURITIES transaction competes in the market with any actual or considered COVERED SECURITIES transaction for any client of Loomis Sayles, or otherwise acts to harm any Loomis Sayles client's COVERED SECURITIES transactions.
Generally preclearance will be DENIED if:
o a COVERED SECURITY or a closely related COVERED SECURITY is the subject of a pending "buy" or "sell" order for a Loomis Sayles client until that buy or sell order is executed or withdrawn.
o the COVERED SECURITY is being considered for purchase or sale for a Loomis Sayles client, until that security is no longer under consideration for purchase or sale.
o the COVERED SECURITY is on the Loomis Sayles "Restricted List" or "Concentration List" (or such other trading restriction list as Loomis Sayles, may from time to time establish).
For those transactions pre-cleared through the PTA System, such system will have the information necessary to deny preclearance if any of these situations apply. Therefore, you may assume the COVERED SECURITY is not being considered for purchase or sale for a client account UNLESS you have actual knowledge to the contrary, in which case the preclearance you received is null and void. For COVERED SECURITIES requiring manual preclearance (i.e. futures, options and other derivative transactions in COVERED SECURITIES), the applicability of such restrictions will be determined by PERSONAL TRADING COMPLIANCE upon the receipt of the preclearance request.
4.8. LARGE CAP/DE MINIMIS EXEMPTION
An ACCESS PERSON who wishes to make a trade in a COVERED SECURITY that would otherwise be denied preclearance solely because the COVERED SECURITY is under consideration or pending execution for a client as provided in Section 4.7 will nevertheless receive approval when submitted for preclearance provided that:
o the issuer of the COVERED SECURITY in which the ACCESS PERSON wishes to transact has a market capitalization exceeding U. S. $5 billion (a "Large Cap Security"); AND
o the AGGREGATE amount of the ACCESS PERSON'S transactions in that Large Cap Security on that day across all personal accounts does not exceed $10,000 USD.
Such transactions will be subject to all other provisions of the Code.
4.9. INVESTMENT PERSON SEVEN-DAY BLACKOUT RULE
No INVESTMENT PERSON shall, directly or indirectly, purchase or sell any COVERED SECURITY (REPORTABLE FUNDS are not subject to this rule) within a period of seven (7) calendar days (trade date being day zero) BEFORE and AFTER the date that a Loomis Sayles client, with respect to which he or she has the ability to influence investment decisions or has prior investment knowledge regarding associated client activity, has purchased or sold such COVERED SECURITY or a closely related COVERED SECURITY. It is ultimately the INVESTMENT PERSON'S responsibility to understand the rules and restrictions of the Code and to know what COVERED SECURITIES are being traded in his/her client(s) account(s) or any account(s) with which he/she is associated.
EXPLANATORY NOTE: THE "SEVEN DAYS BEFORE" ELEMENT OF THIS RESTRICTION IS
BASED ON THE PREMISE THAT AN INVESTMENT PERSON WHO HAS THE
ABILITY TO INFLUENCE INVESTMENT DECISIONS OR HAS PRIOR
INVESTMENT KNOWLEDGE REGARDING ASSOCIATED CLIENT ACTIVITY
CAN NORMALLY BE EXPECTED TO KNOW, UPON EXECUTION OF HIS OR
HER PERSONAL TRADE, WHETHER ANY CLIENT AS TO WHICH HE OR SHE
IS ASSOCIATED, HAS TRADED, OR WILL BE TRADING IN THE SAME OR
CLOSELY RELATED COVERED SECURITY WITHIN SEVEN DAYS OF HIS OR
HER PERSONAL TRADE. FURTHERMORE, AN INVESTMENT PERSON WHO
HAS THE ABILITY TO INFLUENCE INVESTMENT DECISIONS HAS A
FIDUCIARY OBLIGATION TO RECOMMEND AND/OR EFFECT SUITABLE AND
ATTRACTIVE TRADES FOR CLIENTS REGARDLESS OF WHETHER SUCH
TRADES MAY CAUSE A PRIOR PERSONAL TRADE TO BE CONSIDERED AN
APPARENT VIOLATION OF THIS RESTRICTION. IT WOULD CONSTITUTE
A BREACH OF FIDUCIARY DUTY AND A VIOLATION OF THIS CODE TO
DELAY OR FAIL TO MAKE
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ANY SUCH RECOMMENDATION OR TRANSACTION IN A CLIENT ACCOUNT
IN ORDER TO AVOID A CONFLICT WITH THIS RESTRICTION.
IT IS UNDERSTOOD THAT THERE MAY BE PARTICULAR CIRCUMSTANCES (I.E. NEWS ON AN ISSUER, A CLIENT INITIATED LIQUIDATION, SUBSCRIPTION OR REBALANCING) THAT MAY OCCUR AFTER AN INVESTMENT PERSON'S PERSONAL TRADE WHICH GIVES RISE TO AN OPPORTUNITY OR NECESSITY FOR AN ASSOCIATED CLIENT TO TRADE IN THAT COVERED SECURITY WHICH DID NOT EXIST OR WAS NOT ANTICIPATED BY THAT PERSON AT THE TIME OF THAT PERSON'S PERSONAL TRADE. PERSONAL TRADING COMPLIANCE, WILL REVIEW ANY EXTENUATING CIRCUMSTANCES WHICH MAY WARRANT THE WAIVING OF ANY REMEDIAL ACTIONS IN A PARTICULAR SITUATION INVOLVING AN INADVERTENT VIOLATION OF THIS RESTRICTION. IN SUCH CASES, AN EXCEPTION TO THE INVESTMENT PERSON SEVEN-DAY BLACKOUT RULE WILL BE GRANTED UPON APPROVAL BY THE CHIEF COMPLIANCE OFFICER.
THE CHIEF COMPLIANCE OFFICER, OR DESIGNEE THEREOF, MAY GRANT A WAIVER OF THE INVESTMENT PERSON SEVEN-DAY BLACKOUT RULE IF THE INVESTMENT PERSON'S PROPOSED TRANSACTION IS CONFLICTING WITH CLIENT "CASH FLOW" TRADING IN THE SAME SECURITY (I.E., PURCHASES OF A BROAD NUMBER OF PORTFOLIO SECURITIES IN ORDER TO INVEST A CAPITAL ADDITION TO THE ACCOUNT OR SALES OF A BROAD NUMBER OF SECURITIES IN ORDER TO GENERATE PROCEEDS TO
SATISFY A CAPITAL WITHDRAWAL FROM THE ACCOUNT). SUCH "CASH
FLOW" TRANSACTIONS ARE DEEMED TO BE NON- VOLITIONAL AT THE
SECURITY LEVEL SINCE THEY DO NOT CHANGE THE WEIGHTING OF THE
SECURITY BEING PURCHASED OR SOLD IN THE PORTFOLIO.
EXPLANATORY NOTE: THE TRADE DATE OF AN INVESTMENT PERSON'S PURCHASE OR SALE
IS DEEMED TO BE DAY ZERO. ANY ASSOCIATED CLIENT TRADE
ACTIVITY EXECUTED, IN EITHER THAT COVERED SECURITY OR A
CLOSELY RELATED COVERED SECURITY, 7 FULL CALENDAR DAYS
BEFORE OR AFTER AN ACCESS PERSON'S TRADE WILL BE CONSIDERED
A VIOLATION OF THE INVESTMENT PERSON SEVEN-DAY BLACKOUT
RULE. FOR EXAMPLE, IF A CLIENT ACCOUNT PURCHASED SHARES OF
COMPANY ABC ON MAY 4TH, ANY ACCESS PERSON WHO IS ASSOCIATED
WITH THAT CLIENT ACCOUNT CANNOT TRADE ABC IN A PERSONAL
ACCOUNT UNTIL MAY 12TH WITHOUT CAUSING A POTENTIAL CONFLICT
WITH THE INVESTMENT PERSON SEVEN-DAY BLACKOUT RULE.
EXPLANATORY NOTE: WHILE THE INVESTMENT PERSON SEVEN-DAY BLACKOUT RULE IS
DESIGNED TO ADDRESS CONFLICTS BETWEEN INVESTMENT PERSONS AND
THEIR CLIENTS, IT IS THE FIDUCIARY OBLIGATION OF ALL ACCESS
PERSONS TO NOT EFFECT TRADES IN THEIR PERSONAL ACCOUNT IF
THEY HAVE PRIOR KNOWLEDGE OF ANY LOOMIS SAYLES CLIENT TRADE
ACTIVITY THAT COULD POTENTIALLY CAUSE HARM TO CLIENTS OR BY
WHICH THE ACCESS PERSON COULD POTENTIALLY BENEFIT. THE
PERSONAL TRADE ACTIVITY OF ALL ACCESS PERSONS IS MONITORED
BY PERSONAL TRADING COMPLIANCE FOR POTENTIAL CONFLICTS WITH
CLIENT ACCOUNT TRADING ACTIVITY.
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4.10. RESEARCH ANALYST THREE-DAY BLACKOUT BEFORE A RECOMMENDATION
During the three (3) business day period BEFORE a RESEARCH ANALYST issues a RECOMMENDATION on a COVERED SECURITY, that RESEARCH ANALYST may not purchase or sell COVERED SECURITIES of that same issuer.
EXPLANATORY NOTE: IT IS UNDERSTOOD THAT THERE MAY BE PARTICULAR CIRCUMSTANCES
SUCH AS A NEWS RELEASE, CHANGE OF CIRCUMSTANCE OR SIMILAR
EVENT THAT MAY OCCUR AFTER A RESEARCH ANALYST'S PERSONAL
TRADE WHICH GIVES RISE TO A NEED, OR MAKES IT APPROPRIATE,
FOR A RESEARCH ANALYST TO ISSUE A RECOMMENDATION ON SAID
COVERED SECURITY. A RESEARCH ANALYST HAS AN AFFIRMATIVE DUTY
TO MAKE UNBIASED RECOMMENDATIONS AND ISSUE REPORTS, BOTH
WITH RESPECT TO THEIR TIMING AND SUBSTANCE, WITHOUT REGARD
TO HIS OR HER PERSONAL INTEREST. IT WOULD CONSTITUTE A
BREACH OF A RESEARCH ANALYST'S FIDUCIARY DUTY AND A
VIOLATION OF THIS CODE TO DELAY OR FAIL TO ISSUE A
RECOMMENDATION IN ORDER TO AVOID A CONFLICT WITH THIS
RESTRICTION.
PERSONAL TRADING COMPLIANCE WILL REVIEW ANY EXTENUATING
CIRCUMSTANCES WHICH MAY WARRANT THE WAIVING OF ANY REMEDIAL
SANCTIONS IN A PARTICULAR SITUATION INVOLVING AN INADVERTENT
VIOLATION OF THIS RESTRICTION. IN SUCH CASES, AN EXCEPTION
TO THE RESEARCH ANALYST 3-DAY BLACKOUT RULE WILL BE GRANTED
UPON APPROVAL BY THE CHIEF COMPLIANCE OFFICER.
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4.11. ACCESS PERSON SEVEN-DAY BLACKOUT AFTER RECOMMENDATION CHANGE
During the seven (7) calendar day period after a RECOMMENDATION is issued for a COVERED SECURITY, no ACCESS PERSON may purchase or sell COVERED SECURITIES of that same issuer. A request to pre-clear a transaction in a COVERED SECURITY will be denied if there has been a RECOMMENDATION published for the issuer of such COVERED SECURITY during the past seven (7) calendar days.
EXPLANATORY NOTE: THE DATE OF ISSUANCE FOR A GIVEN RECOMMENDATION IS DEEMED
TO BE DAY ZERO. 7 FULL DAYS MUST PASS BEFORE AN ACCESS
PERSON CAN TRADE IN A COVERED SECURITY OF THAT SAME ISSUER.
IN ADDITION, A BOND RECOMMENDATION CHANGE WILL RESTRICT AN
EMPLOYEE'S INTEREST IN PURCHASING THE EQUITY SECURITIES OF
THE SAME ISSUER, AND VICE VERSA.
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4.12. INITIAL PUBLIC OFFERINGS
Investing in INITIAL PUBLIC OFFERINGS of COVERED SECURITIES is prohibited unless such opportunities are connected with your prior employment compensation (i.e. options, grants, etc.) or your spouse's employment compensation. No ACCESS PERSON may, directly or indirectly, purchase ANY SECURITIES sold in an INITIAL PUBLIC OFFERING without obtaining prior written approval from the CHIEF COMPLIANCE OFFICER.
4.13. PRIVATE PLACEMENT TRANSACTIONS
No ACCESS PERSON may, directly or indirectly, purchase any COVERED SECURITY offered and sold pursuant to a PRIVATE PLACEMENT TRANSACTION without obtaining the advance written approval of PERSONAL TRADING COMPLIANCE, the CHIEF COMPLIANCE OFFICER AND the applicable ACCESS PERSON'S supervisor or other appropriate member of senior management. Private Placement investments include hedge funds. A Private Placement investment approval can be obtained by completing an automated Private Placement Preclearance Form which can be found on the Legal and Compliance Intranet Homepage under 'Personal Trading Compliance Forms'.
EXPLANATORY NOTE: IF YOU HAVE BEEN AUTHORIZED TO ACQUIRE A COVERED SECURITY IN
A PRIVATE PLACEMENT TRANSACTION, YOU MUST DISCLOSE TO
PERSONAL TRADING COMPLIANCE IF YOU ARE INVOLVED IN A
CLIENT'S SUBSEQUENT CONSIDERATION OF AN INVESTMENT IN
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THE ISSUER OF THE PRIVATE PLACEMENT, EVEN IF THAT INVESTMENT INVOLVES A DIFFERENT TYPE OR CLASS OF COVERED SECURITY. IN SUCH CIRCUMSTANCES, THE DECISION TO PURCHASE SECURITIES OF THE ISSUER FOR A CLIENT MUST BE INDEPENDENTLY REVIEWED BY AN INVESTMENT PERSON WITH NO PERSONAL INTEREST IN THE ISSUER.
The purchase of additional shares, (including mandatory capital calls), or the subsequent sale (partial or full) of an approved PRIVATE PLACEMENT, must receive preclearance approval from the Chief Compliance Officer. In addition, ALL transactions in PRIVATE PLACEMENTS must be reported quarterly and annually as detailed in Section 6 of the Code.
EXPLANATORY NOTE: TO SUBMIT A PRECLEARANCE REQUEST FOR SUBSEQUENT TRADE
ACTIVITY IN A PRIVATE PLACEMENT, ACCESS PERSONS MUST
COMPLETE THE AUTOMATED PRIVATE PLACEMENT PRECLEARANCE FORM
WHICH WILL BE REVIEWED BY PERSONAL TRADING COMPLIANCE TO
ENSURE THERE ARE NO CONFLICTS WITH ANY UNDERLYING CODE
PROVISIONS INCLUDING THE SHORT-TERM TRADING RULE.
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4.14. EXEMPTIONS GRANTED BY THE CHIEF COMPLIANCE OFFICER
Subject to applicable law, PERSONAL TRADING COMPLIANCE or the CHIEF COMPLIANCE OFFICER may from time to time grant exemptions, other than or in addition to those described in EXHIBIT FIVE, from the trading restrictions, preclearance requirements or other provisions of the Code with respect to particular individuals such as non-employee directors, consultants, temporary employees, interns or independent contractors, and types of transactions or COVERED SECURITIES, where, in the opinion of the CHIEF COMPLIANCE OFFICER, such an exemption is appropriate in light of all the surrounding circumstances.
5. PROHIBITED OR RESTRICTED ACTIVITIES
5.1. PUBLIC COMPANY BOARD SERVICE AND OTHER AFFILIATIONS
To avoid conflicts of interest, inside information and other compliance and business issues, the firm prohibits ACCESS PERSONS from serving as officers or members of the board of any publicly traded entity. This prohibition does not apply to service as an officer or board member of any parent or subsidiary of the firm.
In addition, in order to identify potential conflicts of interests, compliance and business issues, before accepting any service, employment, engagement, connection, association, or affiliation in or within any enterprise, business or otherwise, (herein after, collectively outside activity(ies)), an ACCESS PERSON must obtain the advance written approval of PERSONAL TRADING COMPLIANCE, the CHIEF COMPLIANCE OFFICER AND the applicable ACCESS PERSON'S supervisor or other appropriate member of senior management.
An Outside Business Activity approval can be obtained by completing an automated Outside Business Activity Approval Form which can be found on the Legal and Compliance Intranet
Homepage under 'Personal Trading Compliance Forms'. In determining whether to approve such Outside Activity, PERSONAL TRADING COMPLIANCE and the CHIEF COMPLIANCE OFFICER will consider whether such service will involve an actual or perceived conflict of interest with client trading, place impediments on Loomis Sayles' ability to trade on behalf of clients or otherwise materially interfere with the effective discharge of Loomis Sayles' or the ACCESS PERSON'S duties to clients.
EXPLANATORY NOTE: EXAMPLES OF OUTSIDE ACTIVITIES INCLUDE, BUT ARE NOT LIMITED
TO, FAMILY BUSINESSES, ACTING AS AN OFFICER, PARTNER OR
TRUSTEE OF AN ORGANIZATION OR TRUST, POLITICAL POSITIONS,
SECOND JOBS, PROFESSIONAL ASSOCIATIONS, ETC. OUTSIDE
ACTIVITIES THAT ARE NOT COVERED BY THE CODE ARE ACTIVITIES
THAT INVOLVE A CHARITY OR FOUNDATION, AS LONG AS YOU DO NOT
PROVIDE INVESTMENT OR FINANCIAL ADVICE TO THE ORGANIZATION.
EXAMPLES WOULD INCLUDE: VOLUNTEER WORK, HOMEOWNERS'
ORGANIZATIONS (SUCH AS CONDOS OR COOP BOARDS), OR OTHER
CIVIC ACTIVITIES.
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5.2. PARTICIPATION IN INVESTMENT CLUBS AND PRIVATE POOLED VEHICLES
No ACCESS PERSON shall participate in an investment club or invest in a hedge fund, or similar private organized investment pool (but not an SEC registered open-end mutual fund) without the express permission of PERSONAL TRADING COMPLIANCE, the CHIEF COMPLIANCE OFFICER AND the applicable ACCESS PERSON'S supervisor or other appropriate member of senior management, whether or not the investment vehicle is advised, sub-advised or distributed by Loomis Sayles or a Natixis investment adviser.
6. REPORTING REQUIREMENTS
6.1. INITIAL HOLDINGS REPORTING, ACCOUNT DISCLOSURE AND ACKNOWLEDGEMENT OF CODE
Within 10 days after becoming an ACCESS PERSON, each ACCESS PERSON must
file with PERSONAL TRADING COMPLIANCE, a report of all COVERED SECURITIES
holdings (including holdings of
REPORTABLE FUNDS) in which such ACCESS PERSON has BENEFICIAL OWNERSHIP OR
INVESTMENT CONTROL. The information contained therein must be current as of a
date not more than 45 days prior to the individual becoming an ACCESS PERSON.
Additionally, within 10 days of becoming an ACCESS PERSON, such ACCESS PERSON must report all brokerage or other accounts that hold or can hold COVERED SECURITIES in which the ACCESS PERSON has BENEFICIAL OWNERSHIP OR INVESTMENT CONTROL. The information must be as of the date the person became an ACCESS PERSON. An ACCESS PERSON can satisfy these reporting requirements by providing PERSONAL TRADING COMPLIANCE with a current copy of his or her brokerage account or other account statements, which hold or can hold COVERED SECURITIES. An automated Initial Code of Ethics Certification and Disclosure Form can be found on the Legal and Compliance Intranet Homepage under 'Personal Trading Compliance Forms'. This form must be completed and submitted to PERSONAL TRADING COMPLIANCE by the Access Person within 10 days of becoming an Access Person. The content of the Initial Holdings information must include, at a minimum:
The title and type of security, the ticker symbol or CUSIP, number of shares, and principal amount of each Covered Security (including Reportable Funds) and the name of any broker, dealer or bank with which the securities are held.
EXPLANATORY NOTE: LOOMIS SAYLES TREATS ALL OF ITS EMPLOYEES AS ACCESS
PERSONS. THEREFORE, YOU ARE DEEMED TO BE AN ACCESS PERSON AS
OF THE FIRST DAY YOU BEGIN WORKING FOR THE FIRM.
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EXPLANATORY NOTE: TYPES OF ACCOUNTS IN WHICH ACCESS PERSONS ARE REQUIRED TO
REPORT INCLUDE, BUT ARE NOT LIMITED TO, PERSONAL BROKERAGE
ACCOUNTS, MUTUAL FUND ACCOUNTS, ACCOUNTS OF YOUR SPOUSE,
ACCOUNTS OF MINOR CHILDREN LIVING IN YOUR HOUSEHOLD, FAMILY
OF FUND ACCOUNTS, TRANSFER AGENT ACCOUNTS HOLDING MUTUAL
FUNDS OR BOOK ENTRY SHARES, IRAS, 401KS, TRUSTS, DRIPS,
ESOPS ETC. IN ADDITION, PHYSICALLY HELD SHARES OF COVERED
SECURITIES MUST ALSO BE REPORTED. AN ACCESS PERSON SHOULD
CONTACT PERSONAL TRADING COMPLIANCE IF THEY ARE UNSURE AS TO
WHETHER AN ACCOUNT OR PERSONAL INVESTMENT IS SUBJECT TO
REPORTING UNDER THE CODE SO THE ACCOUNT OR INVESTMENT CAN BE
PROPERLY REVIEWED.
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Upon becoming an ACCESS PERSON, each ACCESS PERSON will receive a copy of the Code. Within the 10 day initial disclosure period and annually thereafter, each ACCESS PERSON must acknowledge that he or she has received, read and understands the Code and recognize that he or she is subject hereto, and certify that he or she will comply with the requirements of the Code.
6.2. BROKERAGE CONFIRMATIONS AND BROKERAGE ACCOUNT STATEMENTS
Each ACCESS PERSON must notify PERSONAL TRADING COMPLIANCE IMMEDIATELY upon the opening of an account that holds or may hold COVERED SECURITIES (including REPORTABLE FUNDS), IN WHICH SUCH ACCESS PERSON HAS BENEFICIAL OWNERSHIP OR INVESTMENT CONTROL. In addition, if the account has been granted an exemption to the Code's SELECT BROKER requirements and/or the account is unable to be added to the applicable SELECT BROKER'S daily electronic broker feed, which supplies PTA with daily executed confirms and positions, PERSONAL TRADING COMPLIANCE will instruct the broker dealer to provide it with duplicate copies of the account's confirmations and statements. If the broker dealer cannot provide PERSONAL TRADING COMPLIANCE with confirms and statements, the Access Person is responsible for providing PERSONAL TRADING COMPLIANCE with copies of such confirms and statements promptly. Upon the opening of an account, an automated Personal Account Information Form must be completed and submitted to PERSONAL TRADING COMPLIANCE. This form can be found on the Legal and Compliance Intranet Homepage under 'Personal Trading Compliance Forms'.
EXPLANATORY NOTE: IF THE OPENING OF AN ACCOUNT IS NOT REPORTED IMMEDIATELY
TO PERSONAL TRADING COMPLIANCE, BUT IS REPORTED DURING THE
CORRESPONDING QUARTERLY CERTIFICATION PERIOD, AND THERE HAS
NOT BEEN ANY TRADE ACTIVITY IN THE ACCOUNT, THEN THE ACCESS
PERSON WILL BE DEEMED TO HAVE MET THEIR REPORTING
OBLIGATIONS UNDER THIS SECTION OF THE CODE.
EXPLANATORY NOTE: FOR THOSE ACCOUNTS THAT ARE MAINTAINED AT A SELECT BROKER
AND ARE ELIGIBLE FOR THE BROKER'S DAILY ELECTRONIC CONFIRM
AND POSITION FEED, ACCESS PERSONS DO NOT NEED TO PROVIDE
DUPLICATE CONFIRMS AND STATEMENTS TO PERSONAL TRADING
COMPLIANCE. HOWEVER, IT IS THE ACCESS PERSONS RESPONSIBILITY
TO ACCURATELY REVIEW AND CERTIFY THEIR QUARTERLY TRANSACTION
AND ANNUAL HOLDINGS REPORTS AND TO NOTIFY PERSONAL TRADING
COMPLIANCE IF THERE ARE ANY DISCREPANCIES.
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6.3. QUARTERLY TRANSACTION REPORTING AND ACCOUNT DISCLOSURE
Utilizing the PTA System, each ACCESS PERSON must file a report of all VOLITIONAL transactions in COVERED SECURITIES (including VOLITIONAL transactions in REPORTABLE FUNDS) made during each calendar quarterly period in which such ACCESS PERSON has, or by reason of such transaction acquires or disposes of, any BENEFICIAL OWNERSHIP of a COVERED SECURITY (even if such ACCESS PERSON has no direct or indirect INVESTMENT CONTROL over such COVERED SECURITY), or as to which
the Access Person has any direct or indirect INVESTMENT CONTROL (even if such ACCESS PERSON has no BENEFICIAL OWNERSHIP in such COVERED SECURITY). NON-VOLITIONAL transactions in COVERED SECURITIES (including REPORTABLE FUNDS) such as automatic monthly payroll deductions, changes to future contributions within the Loomis Sayles Retirement Plans, dividend reinvestment programs, dollar cost averaging programs, and transactions made within the Guided Choice Program are subject to annual reporting only. If no transactions in any COVERED SECURITIES, required to be reported, were effected during a quarterly period by an ACCESS PERSON, such ACCESS PERSON shall nevertheless submit a report through PTA within the time frame specified below stating that no reportable securities transactions were effected. The following information will be available in electronic format for ACCESS PERSONS to verify on their Quarterly Transaction report:
The date of the transaction, the title of the security, ticker symbol or CUSIP, number of shares, and principal amount of each reportable security, nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition), the price of the transaction, and the name of the broker, dealer or bank with which the transaction was effected. HOWEVER, THE ACCESS PERSON IS RESPONSIBLE FOR CONFIRMING THE ACCURACY OF THIS INFORMATION AND INFORMING PERSONAL TRADING COMPLIANCE IF HIS OR HER REPORTING INFORMATION IS INACCURATE OR INCOMPLETE.
With the exception of those accounts described in EXHIBIT FOUR,
ACCESS PERSONS are also required to report each account that may hold or holds
COVERED SECURITIES (including accounts that hold or may hold REPORTABLE FUNDS)
IN WHICH SUCH ACCESS PERSON HAS BENEFICIAL OWNERSHIP OR INVESTMENT CONTROL
opened or closed during the reporting period.
Every quarterly report must be submitted no later than thirty (30) calendar days after the close of each calendar quarter.
6.4. ANNUAL REPORTING
On an annual basis, as of a date specified by PERSONAL TRADING COMPLIANCE, each ACCESS PERSON must file with PERSONAL TRADING COMPLIANCE a dated annual certification which identifies all holdings in COVERED SECURITIES (including REPORTABLE FUNDS) in which such ACCESS PERSON has BENEFICIAL OWNERSHIP and/or INVESTMENT CONTROL. This reporting requirement also applies to shares of COVERED SECURITIES, including shares of REPORTABLE FUNDS that were acquired during the year in NON-VOLITIONAL transactions. Additionally, each ACCESS PERSON must identify all personal accounts which hold or may hold COVERED SECURITIES (including REPORTABLE FUNDS), in which such ACCESS PERSON has BENEFICIAL OWNERSHIP and/or INVESTMENT CONTROL. The information in the Annual Package shall reflect holdings in the ACCESS PERSON'S account(s) that are current as of a date specified by PERSONAL TRADING COMPLIANCE. The following information will be available in electronic format for ACCESS PERSONS to verify on the Annual Holdings report:
The title of the security, the ticker symbol or CUSIP, number of shares, and principal amount of each COVERED SECURITY (including REPORTABLE FUNDS) and the name of any broker, dealer or bank with which the securities are held. HOWEVER, THE ACCESS PERSON IS RESPONSIBLE FOR CONFIRMING THE ACCURACY OF THIS INFORMATION AND INFORMING PERSONAL TRADING COMPLIANCE IF HIS OR HER REPORTING INFORMATION IS INACCURATE OR INCOMPLETE.
Furthermore, on an annual basis, each ACCESS PERSON must acknowledge and certify that during the past year he/she has received, read, understood and complied with the Code, Insider Trading Policies and Procedures, and policies and procedures on political contributions found in the Policies and Procedures on Gifts, Business Entertainment, and Political Contributions, except as otherwise disclosed in writing to PERSONAL TRADING COMPLIANCE or the CHIEF COMPLIANCE OFFICER.
Finally, as part of the annual certification, each ACCESS PERSON must acknowledge and confirm any Outside Activities in which he or she currently participates.
Every annual report must be submitted no later than (45) calendar days after the date specified by PERSONAL TRADING COMPLIANCE.
6.5. REVIEW OF REPORTS BY CHIEF COMPLIANCE OFFICER
The CHIEF COMPLIANCE OFFICER shall establish procedures as the CHIEF COMPLIANCE OFFICER may from time to time determine appropriate for the review of the information required to be compiled under this Code regarding transactions by ACCESS PERSONS and to report any violations thereof to all necessary parties.
6.6. INTERNAL REPORTING OF VIOLATIONS TO THE CHIEF COMPLIANCE OFFICER
Prompt internal reporting of any violation of the Code to the CHIEF COMPLIANCE OFFICER or PERSONAL TRADING COMPLIANCE is required under Rule 204A-1. While the daily monitoring process undertaken by PERSONAL TRADING COMPLIANCE is designed to identify any violations of the Code and handle any such violations immediately, ACCESS PERSONS and SUPERVISED PERSONS are required to promptly report any violations they learn of resulting from either their own conduct or those of other ACCESS PERSONS and SUPERVISED PERSONS to the CHIEF COMPLIANCE OFFICER or PERSONAL TRADING COMPLIANCE. It is incumbent upon Loomis Sayles to create an environment that encourages and protects ACCESS PERSONS and SUPERVISED PERSONS who report violations. In doing so, individuals have the right to remain anonymous in reporting violations. Furthermore, any form of retaliation against an individual who reports a violation could constitute a further violation of the Code, as deemed appropriate by the CHIEF COMPLIANCE OFFICER. All ACCESS PERSONS and SUPERVISED PERSONS should therefore feel safe to speak freely in reporting any violations.
7. SANCTIONS
Any violation of the substantive or procedural requirements of this Code will result in the imposition of a sanction as set forth in the firm's then current Sanctions Policy, or as the Ethics Committee may deem appropriate under the circumstances of the particular violation. These sanctions may include, but are not limited to:
o a letter of caution or warning (i. e. Procedures Notice);
o payment of a fine,
o requiring the employee to reverse a trade and realize losses or disgorge any profits;
o restitution to an affected client;
o suspension of personal trading privileges;
o actions affecting employment status, such as suspension of employment without pay, demotion or termination of employment; and
o referral to the SEC, other civil authorities or criminal authorities.
Serious violations, including those involving deception, dishonesty or knowing breaches of law or fiduciary duty, will result in one or more of the most severe sanctions regardless of the
violator's history of prior compliance.
EXPLANATORY NOTE: ANY VIOLATION OF THE CODE, FOLLOWING A "FIRST OFFENSE"
WHETHER OR NOT FOR THE SAME TYPE OF VIOLATION, WILL BE
TREATED AS A SUBSEQUENT OFFENSE.
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Fines, penalties and disgorged profits will be donated to a charity selected by the Loomis Sayles Charitable Giving Committee.
8. RECORDKEEPING REQUIREMENTS
Loomis Sayles shall maintain and preserve records, in an easily accessible place, relating to the Code of the type and in the manner and form and for the time period prescribed from time to time by applicable law. Currently, Loomis Sayles is required by law to maintain and preserve:
o in an easily accessible place, a copy of this Code (and any prior Code of Ethics that was in effect at any time during the past five years) for a period of five years;
o in an easily accessible place a record of any violation of the Code and of any action taken as a result of such violation for a period of five years following the end of the fiscal year in which the violation occurs;
o a copy of each report (or information provided in lieu of a report including any manual preclearance forms and information relied upon or used for reporting) submitted under the Code for a period of five years, provided that for the first two years such copy must be preserved in an easily accessible place;
o copies of ACCESS PERSONS' and SUPERVISED PERSONS' written acknowledgment of receipt of the Code;
o in an easily accessible place, a record of the names of all ACCESS PERSONS within the past five years, even if some of them are no longer Access Persons, the holdings and transactions reports made by these Access Persons, and records of all Access Persons' personal securities reports (and duplicate brokerage confirmations or account statements in lieu of these reports);
o a copy of each report provided to any Investment Company as required by paragraph (c)(2)(ii) of Rule 17j-1 under the 1940 Act or any successor provision for a period of five years following the end of the fiscal year in which such report is made, provided that for the first two years such record shall be preserved in an easily accessible place; and
o a written record of any decision, and the reasons supporting any decision, to approve the purchase by an ACCESS PERSON of any COVERED SECURITY in an INITIAL PUBLIC OFFERING OR PRIVATE PLACEMENT TRANSACTION or other limited offering for a period of five years following the end of the fiscal year in which the approval is granted.
EXPLANATORY NOTE: UNDER RULE 204-2, THE STANDARD RETENTION PERIOD REQUIRED
FOR ALL DOCUMENTS AND RECORDS LISTED ABOVE IS FIVE YEARS, IN
EASILY ACCESSIBLE PLACE, THE FIRST TWO YEARS IN AN
APPROPRIATE OFFICE OF PERSONAL TRADING COMPLIANCE.
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9. MISCELLANOUS
9.1. CONFIDENTIALITY
Loomis Sayles will keep information obtained from any ACCESS PERSON hereunder in strict confidence. Notwithstanding the forgoing, reports of COVERED SECURITIES transactions and violations hereunder will be made available to the SEC or any other regulatory or self-regulatory organizations to the extent required by law rule or regulation, and in certain circumstances, may in Loomis Sayles' discretion be made available to other civil and criminal authorities. In addition, information regarding violations of the Code may be provided to clients or former clients of Loomis Sayles that have been directly or indirectly affected by such violations.
9.2. DISCLOSURE OF CLIENT TRADING KNOWLEDGE
No ACCESS PERSON may, directly or indirectly, communicate to any person who is not an ACCESS PERSON or other approved agent of Loomis Sayles (e.g., legal counsel) any non-public information relating to any client of Loomis Sayles or any issuer of any COVERED SECURITY owned by any client of Loomis Sayles, including, without limitation, the purchase or sale or considered purchase or sale of a COVERED SECURITY on behalf of any client of Loomis Sayles, except to the extent necessary to comply with applicable law or to effectuate COVERED SECURITIES transactions on behalf of the client of Loomis Sayles.
9.3. NOTICE TO ACCESS PERSONS, INVESTMENT PERSONS AND RESEARCH ANALYSTS AS TO STATUS
PERSONAL TRADING COMPLIANCE will initially determine an employee's status as an ACCESS PERSON, RESEARCH ANALYST or INVESTMENT PERSON and the client accounts to which INVESTMENT PERSONS should be associated, and will inform such persons of their respective reporting and duties under the Code.
All ACCESS PERSONS and/or the applicable Supervisor thereof, have an obligation to inform PERSONAL TRADING COMPLIANCE if an ACCESS PERSON'S responsibilities change during the ACCESS PERSON'S tenure at Loomis Sayles.
9.4. NOTICE TO PERSONAL TRADING COMPLIANCE OF ENGAGEMENT OF INDEPENDENT CONTRACTORS
Any person engaging a consultant, temporary employee, intern or independent contractor shall notify PERSONAL TRADING COMPLIANCE of this engagement and provide to PERSONAL TRADING COMPLIANCE, the information necessary to make a determination as to how the Code shall apply to such consultant, temporary employee, intern or independent contractor, if at all.
9.5. QUESTIONS AND EDUCATIONAL MATERIALS
Employees are encouraged to bring to PERSONAL TRADING COMPLIANCE any questions you may have about interpreting or complying with the Code about COVERED SECURITIES, accounts that hold or may hold COVERED SECURITIES or personal trading activities of you, your family, or household members, about your legal and ethical responsibilities or about similar matters that may involve the Code.
PERSONAL TRADING COMPLIANCE will from time to time circulate educational materials or bulletins or conduct training sessions designed to assist you in understanding and carrying out your duties under the Code. On an annual basis, each ACCESS PERSON is required to successfully complete a Code of Ethics and Fiduciary Duty tutorial designed to educate ACCESS PERSONS on their responsibilities under the Code.
GLOSSARY OF TERMS
The BOLDFACE terms used throughout this policy have the following meanings:
1. "ACCESS PERSON" means an "access person" as defined from time to time in Rule 17j-1 under the 1940 Act or any applicable successor provision. Currently, this means any director, or officer of Loomis Sayles, or any ADVISORY PERSON (as defined below) of Loomis Sayles, but does not include any director who is not an officer or employee of Loomis Sayles or its corporate general partner and who meets all of the following conditions:
a. He or she, in connection with his or her regular functions or duties, does not make, participate in or obtain information regarding the purchase or sale of Covered Securities by a registered investment company, and whose functions do not relate to the making of recommendations with respect to such purchases or sales;
b. He or she does not have access to nonpublic information regarding any clients' purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any REPORTABLE FUND; and
c. He or she is not involved in making securities recommendations to clients, and does not have access to such recommendations that are nonpublic.
Loomis Sayles treats all employees as Access Persons.
2. "ADVISORY PERSON" means an "advisory person" and "advisory representative" as defined from time to time in Rule 17j-1 under the 1940 Act and Rule 204-2(a)(12) under the Advisers Act, respectively, or any applicable successor provision. Currently, this means (i) every employee of Loomis Sayles (or of any company in a CONTROL relationship to Loomis Sayles), who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a COVERED SECURITY by Loomis Sayles on behalf of clients, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) every natural person in a CONTROL relationship to Loomis Sayles who obtains information concerning recommendations made to a client with regard to the purchase or sale of a COVERED SECURITY. ADVISORY PERSON also includes: (a) any other employee designated by PERSONAL TRADING COMPLIANCE or the CHIEF COMPLIANCE OFFICER as an ADVISORY PERSON under this Code; (b) any consultant, temporary employee, intern or independent contractor (or similar person) engaged by Loomis Sayles designated as such by PERSONAL TRADING COMPLIANCE or the CHIEF COMPLIANCE OFFICER as a result of such person's access to information about the purchase or sale of COVERED SECURITIES by Loomis Sayles on behalf of clients (by being present in Loomis Sayles offices, having access to computer data or otherwise).
3. "BENEFICIAL OWNERSHIP" is defined in Section 3.2 of the Code.
4. "CHIEF COMPLIANCE OFFICER" refers to the officer or employee of Loomis Sayles designated from time to time by Loomis Sayles to receive and review reports of
purchases and sales by ACCESS PERSONS, and to address issues of personal trading. "PERSONAL TRADING COMPLIANCE" means the employee or employees of Loomis Sayles designated from time to time by the General Counsel of Loomis Sayles to receive and review reports of purchases and sales, and to address issues of personal trading, by the CHIEF COMPLIANCE OFFICER, and to act for the CHIEF COMPLIANCE OFFICER in the absence of the CHIEF COMPLIANCE OFFICER.
5. "EXEMPT ETF" is defined in Section 3.1 of the Code and a list of such funds is found in EXHIBIT TWO.
6. "FEDERAL SECURITIES LAWS" refers to the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, the Investment Advisers Act of 1940, Title V of the Gramm-Leach-Bliley Act, any rules adopted by the SEC under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted there under by the SEC or the U.S. Department of the Treasury, and any amendments to the above mentioned statutes.
7. "INVESTMENT CONTROL" is defined in Section 3.3 of the Code. This means "control" as defined from time to time in Rule 17j-1 under the 1940 Act and Rule 204-2(a)(12) under the Advisers Act or any applicable successor provision. Currently, this means the power to directly or indirectly influence, manage, trade, or give instructions concerning the investment disposition of assets in an account or to approve or disapprove transactions in an account.
8. "INITIAL PUBLIC OFFERING" means an "initial public offering" as defined
from time to time in Rule 17j-l under the 1940 Act or any applicable
successor provision. Currently, this means any offering of securities
registered under the Securities Act of 1933 the issuer of which immediately
before the offering, was not subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934.
9. "INVESTMENT COMPANY" means any INVESTMENT COMPANY registered as such under the 1940 Act and for which Loomis Sayles serves as investment adviser or subadviser or which an affiliate of Loomis Sayles serves as an investment adviser.
10. "INVESTMENT PERSON" means all PORTFOLIO MANAGERS of Loomis Sayles and other ADVISORY PERSONS who assist the PORTFOLIO MANAGERS in making and implementing investment decisions for an INVESTMENT COMPANY or other client of Loomis Sayles, including, but not limited to, designated RESEARCH ANALYSTS and traders of Loomis Sayles. A person is considered an INVESTMENT PERSON only as to those client accounts or types of client accounts as to which he or she is designated by PERSONAL TRADING COMPLIANCE or the CHIEF COMPLIANCE OFFICER as such. As to other accounts, he or she is simply an ACCESS PERSON.
11. "NON-VOLITIONAL" transactions are any transaction in which the employee has not determined the timing as to when the purchase or sale will occur and the amount of shares to be purchased or sold, i.e. changes to future contributions within the Loomis Sayles Retirement Plans, dividend reinvestment programs, dollar cost averaging program, automatic monthly payroll deductions, and any transactions made within the
Guided Choice Program. NON-VOLITIONAL transactions are not subject to the preclearance or quarterly reporting requirements under the Code.
12. "PORTFOLIO MANAGER" means any individual employed by Loomis Sayles who has been designated as a PORTFOLIO MANAGER by Loomis Sayles. A person is considered a PORTFOLIO MANAGER only as to those client accounts as to which he or she is designated by the CHIEF COMPLIANCE OFFICER as such. As to other client accounts, he or she is simply an ACCESS PERSON.
13. "PRIVATE PLACEMENT TRANSACTION" means a "limited offering" as defined from time to time in Rule 17j-l under the 1940 Act or any applicable successor provision. Currently, this means an offering exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) or 4(6) or Rule 504, 505 or 506 under that Act, including hedge funds.
14. "RECOMMENDATION" means any initial rating or change therein, in the case of an equity COVERED SECURITY, or any initial rating or status, or change therein in the case of a fixed income COVERED SECURITY in either case issued by a RESEARCH ANALYST.
15. "REPORTABLE FUND" is defined in Section 3.1 of the Code, and a list of such funds is found in EXHIBIT ONE.
16. "LOOMIS ADVISED FUND" is any Reportable Fund advised or sub-advised by Loomis Sayles. A list of these funds can be found in EXHIBIT ONE.
17. "RESEARCH ANALYST" means any individual employed by Loomis Sayles who has been designated as a RESEARCH ANALYST or RESEARCH ASSOCIATE by Loomis Sayles. A person is considered a RESEARCH ANALYST only as to those COVERED SECURITIES which he or she is assigned to cover and about which he or she issues research reports to other INVESTMENT PERSONS or otherwise makes recommendations to Investment Persons beyond publishing their research. As to other securities, he or she is simply an ACCESS PERSON.
18. "COVERED SECURITY" is defined in Section 3.1 of the Code. 19. "SELECT BROKER" is defined in Section 3.4 of the Code.
20. "SUPERVISED PERSON" is defined in Section 202(a)(25) of the Advisers Act and currently includes any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of Loomis Sayles, or other person who provides investment advice on behalf of Loomis Sayles and is subject to the supervision and control of Loomis Sayles.
21. "VOLITIONAL" transactions are any transactions in which the employee has determined the timing as to when the purchase or sale transaction will occur and amount of shares to be purchased or sold, i.e. making changes to existing positions or asset allocations within the Loomis Sayles retirement plans, sending a check or wire to the Transfer Agent of a REPORTABLE FUND, and buying or selling shares of a REPORTABLE FUND in a brokerage
account or direct account held with the applicable fund's Transfer Agent. VOLITIONAL transactions are subject to the preclearance and reporting requirements under the Code.
CBRE CLARION SECURITIES
CODE OF ETHICS
JANUARY 2013
CONTENTS
I. ABOUT THIS CODE OF ETHICS ........................................ 2
II. GENERAL PRINCIPLES OF HOW WE CONDUCT BUSINESS .................... 3
A. CBRE Clarion Principles ..................................... 3
B. CBRE Corporate Values and Standards of Business Conduct ..... 4
C. Sanctions ................................................... 4
III. PERSONAL TRADING ................................................. 6
A. Prohibition on Personal Trading in Real Estate or
Infrastructure Securities ................................. 7
B. Types of Investments Covered by this Code ................... 7
C. Types of Accounts Covered by this Code ...................... 8
D. Black-Out and Holding Periods ............................... 10
E. Pre-Clearance Requirements .................................. 11
F. Reporting Personal Securities Investments and Transactions .. 12
G. Reporting Commercial Real Estate Transactions ............... 13
IV. GENERAL STANDARDS OF PROFESSIONAL CONDUCT ........................ 15
A. Material Non-Public Information (Inside Information) ........ 15
B. Gifts, Entertainment, and Client Contributions .............. 17
C. Personal Political Contributions ............................ 17
D. Anti-Bribery and Anti-Corruption ............................ 18
E. Confidential Information and Privacy ........................ 18
F. CFA Institute Code of Ethics and Standards of
Professional Conduct ...................................... 19
G. Fairness in Communications .................................. 19
V. OTHER POTENTIAL CONFLICTS OF INTEREST ............................ 21
A. Outside Business Activities ................................. 22
B. Affiliations with Clients or Real Estate Companies .......... 23
C. Additional Compensation Arrangements ........................ 23
VI. RECORDKEEPING .................................................... 24
APPENDIX: GLOSSARY ............................................... 25
I. About This Code of Ethics
CBRE Clarion Securities (CBRE Clarion) has adopted this Code of Ethics (Code) to clearly state how we prevent personal conflicts of interest and personal conduct from impacting our clients.
This Code applies to you if you are an employee, officer, director, or independent contractor working for CBRE Clarion or any its subsidiaries. As a representative of CBRE Clarion, it is understood that you will act with integrity and good faith.
WE ARE FIDUCIARIES FOR OUR CLIENTS. THIS MEANS THAT WE HAVE A DUTY TO ACT
FAIRLY, HONESTLY, AND IN THE BEST INTERESTS OF OUR CLIENTS AND INVESTORS.
Part of fulfilling these duties is ensuring that personal interests and conduct which might conflict -- or appear to conflict -- with the interests of clients are disclosed and controlled. The controls we have put in place to address these potential conflicts are summarized in this Code.
Specifically, this Code outlines:
o THE GENERAL PRINCIPLES OF HOW WE CONDUCT BUSINESS,
o THE CONDITIONS WE APPLY TO YOUR PERSONAL TRADING,
o THE PRINCIPLES OF OUR PROFESSIONAL CONDUCT, AND
o THE CONDITIONS OF YOUR ACTIVITIES OUTSIDE AND APART FROM CBRE CLARION.
Lastly, but no less importantly, our Code satisfies the regulatory requirements of the Investment Advisers Act of 1940 (Rule 204A-1) and the Investment Company Act of 1940 (Rule 17j-1).
You are expected to understand and abide by this Code as a condition of your association with CBRE Clarion. This Code is being delivered to you for your reference. Any changes to this Code will also be provided to you. This Code (and any amendments) will be available in the Compliance Manual and on our intranet site. You will be required to acknowledge receipt and acceptance of this Code upon joining the firm and then on an annual basis.
If you have any questions about any TERMS used in the Code, please refer to glossary in the appendix.
II. General Principles of How We Conduct Business
A. CBRE CLARION PRINCIPLES
In recognition of the trust and confidence placed in us by our clients -- and because we believe that our operations should benefit our clients -- we expect you to conduct yourself in accordance with the following universally applicable principles:
THE INTERESTS OF OUR CLIENTS ARE PARAMOUNT.
YOU MUST PLACE CLIENT INTERESTS BEFORE YOUR OWN.
YOU MUST AVOID ACTIONS OR ACTIVITIES THAT BRING INTO QUESTION YOUR
INDEPENDENCE OR JUDGMENT.
YOU MUST ACT WITH INTEGRITY, RESPECT, COMPETENCE, LOYALTY, AND
PROFESSIONALISM.
The following conditions are extensions of the above principles:
o You must comply with the federal securities laws and other applicable regulations, including those related to professional designations or licenses. You must not knowingly participate, or assist, in any legal or ethical violation of those laws or regulations.
o You must not commit any criminal act which could call into question your honesty, trustworthiness, or fitness as a financial professional.
o You must not engage in any activity which is manipulative, fraudulent, or deceptive to a client or investor. This principle applies to prospective clients and investors.
o You must not mislead any client or investor by making any untrue statement of material fact or by failing to fully and accurately disclose material information. This principle applies to prospective clients and investors.
Furthermore, as an investment adviser, we will deal fairly with all customers, including when we provide investment recommendations and make investment decisions.
B. CBRE CORPORATE VALUES AND STANDARDS OF BUSINESS CONDUCT
As part of CBRE Group (CBRE), we share the same corporate values. The CBRE corporate values are timeless and transcend all markets, services lines, languages, and business cultures.
The CBRE corporate values are RISE:
o RESPECT -- To treat everyone with dignity, value their contributions, and help one another succeed.
o INTEGRITY -- To uphold the highest standards of truthfulness and reliability in our business practices.
o SERVICE -- To dedicate ourselves to making a meaningful impact with our clients and in our communities.
o EXCELLENCE -- To aspire to be the best in everything we do and drive for continuous improvement.
Additionally, you must follow the CBRE Standards of Business Conduct (SOBC), which is available to you through the CBRE corporate intranet. The CBRE SOBC represents a non-negotiable commitment to "do the right thing" when acting on behalf of CBRE. The CBRE SOBC embodies the fundamental principles that govern CBRE's ethical and legal obligations. They describe, summarize, and implement policies, some of which have been in place at CBRE for many years. The CBRE SOBC is organized into four general categories:
o Conduct Relating to EACH OTHER
o Conduct Relating to OUR BUSINESS PARTNERS, CLIENTS, AND COMPETITORS
o Conduct Relating to CBRE'S RESOURCES
o Conduct Relating to OUR COMMUNITIES
C. SANCTIONS
As stated before, you are expected to understand and abide by this Code as a condition of your association with CBRE Clarion.
Violations of this Code are taken seriously. If you become aware of any violation of this Code (including one involving yourself), you are required to promptly report it to the Chief Compliance Officer.
Any violation reported or identified will be reviewed by the Chief Compliance Officer and summarized in writing. Violations will be reported to the appropriate level of management or
oversight committee (including the CBRE Clarion Management Committee or the CBRE Clarion Risk & Control Committee). Additionally, a violation may be reported to CBRE global compliance, as well as certain clients (such as registered investment companies). The Chief Compliance Officer will approve a resolution for the situation and, if necessary, any sanctions.
Sanctions for violations of this Code may vary depending on the facts and circumstances. In determining the appropriate sanction, the Chief Compliance Officer and management may consider your history of prior violations, if the violation was accidental, or if the violation caused any harm to any clients.
The sanctions for violations may include:
o WRITTEN WARNING
MINOR VIOLATIONS o ADDITIONAL TRAINING AND RENEWAL OF
YOUR ACCEPTANCE OF THIS CODE
o NOTICE TO YOUR MANAGER
o UN-DO THE TRANSACTION
SERIOUS VIOLATIONS o "GIVE-UP" OF PROFITS FROM THE VIOLATION
o BE SUBJECT TO A FINANCIAL PENALTY
IMPOSED BY THE FIRM
VERY SERIOUS OR
REPEATED o TERMINATION OF EMPLOYMENT
VIOLATIONS
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IF WE REQUIRE YOU TO "GIVE-UP" PROFITS OR IF WE IMPOSE A FINANCIAL PENALTY ON YOU, THE PROCEEDS WILL BE DONATED TO A CHARITY SELECTED BY THE FIRM, IN THE NAME OF THE FIRM.
If your job involves supervising other employees, you should exercise reasonable supervision over those subordinate employees to prevent any violation of applicable laws, regulations, our Compliance Manual, or this Code by those employees.
* * * * *
III. PERSONAL TRADING
As an investment adviser, we impose certain conditions on your personal
investing activities.
Specifically, we:
o prohibit certain investments,
o require minimum holding periods on certain investments,
o require pre-clearance on certain investments, and
o require periodic reporting of investments, transactions, and accounts.
If you are associated with a CBRE Clarion subsidiary, you are also required to follow the local personal trading policies IN ADDITION to the requirements of this Code.
For U.S. regulatory purposes, each employee, officer, director, or independent contractor working for CBRE Clarion or any its subsidiaries is designated as an ACCESS PERSON.
OVERVIEW OF PERSONAL TRADING REQUIREMENTS
o Real Estate and Infrastructure Securities in the Investable Universe for Clients (including ETFs)
o IPOs
o Private Placements and Hedge Funds
o Intersts in Commercial Real Estate
o CBRE Clarion-advised Closed-End Funds
o CBRE Clarion-advised / sub-advised Mutual Funds
o Initial and Annual disclosure of personal accounts
o Initial and Annual disclosure of personal investments and commercial real estate holdings
A. PROHIBITION ON PERSONAL TRADING IN REAL ESTATE OR INFRASTRUCTURE SECURITIES
You cannot invest in any real estate or infrastructure security (collectively "real estate securities") which would be eligible for client accounts. This means you may not own, buy, sell, short, or otherwise trade in real estate securities (including any derivatives linked to these securities).
We will provide a list of the real estate securities (the "investable universe") for your reference. This list will be updated periodically and will be available through the company intranet site (Clarinet) and through the Compliance department. You should refer to this list before making any personal investment to confirm that the security is not on this list. Any securities on the published list are prohibited.
Additionally, you cannot directly invest in any public securities issued by CBRE. However, you are permitted to invest in the CBRE Stock Fund, which invests in Class A of CBRE common stock and is available in the CBRE Clarion 401k plan. Investments in the CBRE Stock Fund are subject to the 30-day minimum HOLDING PERIOD described in Section III.D.2. (below). If you wish to invest in any private investment funds offered or sponsored through CBRE, you must comply with the co-investment guidelines in the CBRE Global Investors INVESTMENT MANAGEMENT POLICIES AND PROCEDURES GUIDE and receive approval from CBRE Clarion Compliance BEFORE investing. Please see the Chief Compliance Officer or General Counsel for more information.
B. TYPES OF INVESTMENTS COVERED BY THIS CODE
1. Securities
The trading restrictions and reporting requirements of this Code apply to your investments in SECURITIES. SECURITIES are:
o Stocks
o Bonds
o Exchange Traded Funds
o Exchange Traded Notes
o Closed-End Funds
o Derivatives (such as options, futures, forwards)
o Privately Offered Investments (such as hedge funds and private equity funds)
o Mutual Funds advised or sub-advised by CBRE Clarion
o CBRE Stock Fund
To be clear, "mutual funds advised or sub-advised by CBRE Clarion" is any mutual fund which is a client of CBRE Clarion, either directly or indirectly. These are funds where you may have access to portfolio or trading information through CBRE Clarion.
SECURITIES are NOT:
o Money market funds
o U. S. government securities or agencies
o Banker's acceptances
o Bank certificates of deposit
o Commercial paper
o Mutual funds NOT advised or sub-advised by CBRE Clarion
To clarify, any mutual fund which is not our client (I.E. not advised or sub-advised by CBRE Clarion) is not a SECURITY.
2. Interests in Commercial Real Estate
COMMERCIAL REAL ESTATE is any land or building suitable for office, commercial, industrial, retail, hotel, and/or multi-family housing (consisting of more than four (4) units). Personal residences, vacation homes, and multi-family housing (consisting of four (4) units or less) are NOT considered COMMERCIAL REAL ESTATE.
An INTEREST in COMMERCIAL REAL ESTATE includes the property itself, as well as any debt or equity SECURITIES of an entity engaged in investing, owning, or transacting in COMMERCIAL REAL ESTATE. An INTEREST also includes both direct and indirect INTERESTS.
The CBRE policy addressing personal ownership in COMMERCIAL REAL ESTATE is detailed in Policy 6.14 of the CBRE Policies and Procedures Manual.
C. TYPES OF ACCOUNTS COVERED BY THIS CODE
The trading restrictions and reporting requirements of this Code apply to your SECURITIES ACCOUNTS. Your SECURITIES ACCOUNT is any account where you can buy, sell, or hold SECURITIES. Depending on the investment options for the account, a SECURITIES ACCOUNT could include:
o Personal brokerage accounts
o Trust accounts
o Retirement accounts (personal and employer sponsored)
o Education savings accounts (such as Section 529 Plan account)
This Code applies to the SECURITIES ACCOUNTS where you have a financial interest or control. You are considered to have a financial interest or control over accounts where a named account owner is:
o You
o Your spouse
o Your child living at home
o A dependent family member sharing your household
o Anyone who has given you discretion over their investments
If someone has authorized you to make investment decisions on her / his behalf, then her / his SECURITIES ACCOUNTS would be considered your SECURITIES ACCOUNTS according to this Code. For example, if your neighbor has given you the authority to make investments on her behalf in an investment account, then your neighbor's investment account is considered your SECURITIES ACCOUNT.
You are considered to be a BENEFICIAL OWNER of these accounts for the purpose of this Code.
1. Disclosing Your Securities Accounts
You must disclose the existence of all of your SECURITIES ACCOUNTS. You are required to list all of your SECURITIES ACCOUNTS when you join CBRE Clarion. Any time you open a new SECURITIES ACCOUNT, you are required to report the new account at that time. Annually, you will be asked to provide an updated list of all of your SECURITIES ACCOUNTS.
You do not need to report any SECURITIES ACCOUNT where you do not have any influence or control prior to a trade. For example, if you have an account where you have hired an independent money manager with the authority to make investment decisions without asking for your prior approval or notification, then you do not need to report that account.
2. Arranging for Duplicate Statements
The Compliance department will make arrangements to have duplicate account statements for your SECURITIES ACCOUNTS sent directly to us. These account statements will be delivered either in paper form to a secure post office box, off-site from our office, or in electronic format to our code of ethics system. Only Compliance personnel will have access to your statement information.
The Compliance department may require your consent to arrange for the duplicate statements.
D. BLACK-OUT AND HOLDING PERIODS
1. Closed-End Funds
On occasion, we will notify you that you are prohibited from purchasing or selling any shares in the CBRE Clarion Global Real Estate Income Fund (NYSE ticker: IGR) or Investors in Global Real Estate Limited (LN ticker: IGRE). This type of prohibition is often related to a pending board meeting or public announcement. This is considered a BLACK-OUT period. A BLACK-OUT period may be announced without prior warning and may continue for any length of time. We may also issue BLACK-OUT periods for other closed-end funds where we are the adviser or sub-adviser.
When you make a decision to buy or sell shares of IGR or IGRE, you must maintain that position for a minimum of 30 days. For example:
o If you buy shares today, you cannot sell shares for the next 30 days.
o If you sell shares today, you cannot buy shares for the next 30 days.
This minimum time period between buying and selling (or selling and buying) is
the HOLDING PERIOD.
If you are an officer or director of IGR, your HOLDING PERIOD is 180 days. However, there may be exceptions within the regulations; consult with the Chief Compliance Officer or General Counsel for further information.
2. Mutual Funds and CBRE Stock Fund
There is a 30-day minimum HOLDING PERIOD for your investments in mutual funds where we are the adviser or sub-adviser. This HOLDING PERIOD applies to the mutual funds which are considered SECURITIES; that is, any mutual fund which is our client. Additionally, this HOLDING PERIOD applies to the CBRE Stock Fund within the CBRE Clarion 401k.
Similar to the closed-end funds:
o If you buy shares today, you cannot sell shares for the next 30 days.
o If you sell shares today, you cannot buy shares for the next 30 days.
The 30-day minimum HOLDING PERIOD applies to your transactions in your CBRE Clarion 401k and any similar SECURITIES ACCOUNT.
E. PRE-CLEARANCE REQUIREMENTS
1. Personal Transactions
If you are located in our U.S. office, you do NOT need to get pre-clearance approval for most personal investments. There are three exceptions; you will need pre-clearance for personal investments in initial public offerings (IPOs), private offerings, and commercial real estate transactions (all three are described below).
If you are associated with our Hong Kong subsidiary, you must get pre-clearance for all personal trades. This is done through a pre-clearance form, which is available locally and through CBRE Clarion Compliance in the U.S. Please see the local Hong Kong Compliance Manual for a full description of personal trading requirements.
If you are associated with one of our subsidiaries, in Australia, Japan, or the U.K., the restrictions on personal trading are the same as if you were located in our U.S. office.
2. Initial Public Offerings (IPO)
You must get pre-clearance approval from the Chief Compliance Officer before you invest in any IPO.
3. Private Offerings
You must get pre-clearance approval from the Chief Compliance Officer before you invest in any private offering (such as a hedge fund or private equity fund). This applies for any private fund organized or sponsored by CBRE Clarion; you must get pre-clearance for your initial investment in any hedge fund sponsored by CBRE Clarion.
4. Commercial Real Estate
You must get pre-clearance approval from the Chief Compliance Officer before you engage in any transaction involving COMMERCIAL REAL ESTATE. At this time, the Chief Compliance Officer will review with you the conditions of the CBRE policy on personal ownership of real estate.
F. REPORTING PERSONAL SECURITIES INVESTMENTS AND TRANSACTIONS
You are required to submit reports of your personal SECURITIES investments to the Compliance department. Specifically, you are required to disclose:
o Your SECURITIES ACCOUNTS
o Your SECURITIES holdings upon joining the firm
o Your personal SECURITIES transactions on a quarterly basis
o Your SECURITIES holdings on an annual basis
These reports will be treated as confidential.
If you are an officer or director of IGR, you must report every personal trade in shares of IGR IMMEDIATELY. The U.S. Securities and Exchange Commission (SEC) requires prompt notice of any such transactions. These reports are filed with the SEC and will be publicly available.
1. Disclosing Your Securities Accounts
As discussed above in Section III.C. (above), you must disclose the existence of all of your SECURITIES ACCOUNTS. You are required to list all of your SECURITIES ACCOUNTS when you join CBRE Clarion. Any time you open a new securities account, you are required to report the new account. Quarterly, you will be asked if you opened any new SECURITIES ACCOUNTS. Annually, you will be asked to provide an updated list of all of your SECURITIES ACCOUNTS.
You do not need to report any SECURITIES ACCOUNT where you do not have any influence or control prior to a trade. For example, if you have an account where you have hired an independent money manager with the authority to make investment decisions without asking for your prior approval or notification, then you would not need to report that account.
PERSONAL INVESTMENT REPORTING SCHEDULE
INITIAL QUARTERLY ANNUAL HOLDINGS TRANSACTIONS HOLDINGS REPORT REPORT REPORT |
2. Initial Holdings Report
When you join the firm, you will have an orientation meeting with a member of the Compliance department. At that time, you will be provided with access to the Initial Holdings Report. The report will ask you to disclose all of your SECURITIES holdings and SECURITIES ACCOUNTS. Within 10 days of this orientation, you must submit the completed report to the Compliance department.
At this time, the Compliance department will work with you to arrange for duplicate account statements for your SECURITIES ACCOUNTS to be automatically delivered to the Compliance department.
3. Quarterly Transactions Report
Each quarter, you will be asked to report all of your transactions (such as purchases and sales) in SECURITIES. This report will require specific information, such as number of units, execution price, and broker. You must complete this report even if you did not have any transactions during the quarter.
4. Annual Holdings Report
Each year, you will be asked to report all of your personal SECURITIES holdings. This report will require specific information, such number of units, market price, and account information. You must complete this report even if you do not hold any SECURITIES or have any SECURITIES ACCOUNTS.
G. REPORTING COMMERCIAL REAL ESTATE TRANSACTIONS
You are required to submit reports of your personal investments in COMMERCIAL REAL ESTATE to the Compliance department. Specifically, you are required to disclose:
o Your INTERESTS IN COMMERCIAL REAL ESTATE
o Your COMMERCIAL REAL ESTATE transactions
1. Initial Interests in Commercial Real Estate
If you are a new employee, you will be provided with access to the Commercial Real Estate Report at your orientation. The report will ask you to disclose all of your INTERESTS in COMMERCIAL REAL ESTATE. Within 10 days of this orientation, you must submit the completed report to the Compliance department.
2. Pre-Approval
You must get pre-clearance approval from the Chief Compliance Officer before you engage in any transaction involving an INTEREST in COMMERCIAL REAL ESTATE. At this time, the Chief Compliance Officer will review with you the conditions of the CBRE policy on personal ownership of real estate.
3. Quarterly Transactions Report
Each quarter, you will be asked to report all of your transactions (such as purchases and sales) of INTERESTS in COMMERCIAL REAL ESTATE. You must complete this report even if you did not have any transactions during the quarter.
4. Annual Holdings Report
Each year, you will be asked to report all of your INTERESTS in COMMERCIAL REAL ESTATE. You must complete this report even if you do not hold any INTERESTS in COMMERCIAL REAL ESTATE.
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IV. GENERAL STANDARDS OF PROFESSIONAL CONDUCT
In addition to our general principles and the guidelines for your personal investments, you must follow our general standards of professional conduct. These standards are generally based in regulation and expected best practices within our industry.
Specifically, the general standards of professional conduct relate to your conduct involving:
o the use and communication of MATERIAL NON-PUBLIC INFORMATION (also referred to as "inside information"),
o your receipt or offering of GIFTS and ENTERTAINMENT,
o your political contributions,
o preserving the confidential information and the privacy of our clients,
o providing investment advice to our clients, and
o fairness in your communications with our clients, investors, prospects, and general public.
A. MATERIAL NON-PUBLIC INFORMATION (INSIDE INFORMATION)
You are subject to the laws and regulations relating to the use and communication of MATERIAL NON-PUBLIC INFORMATION. Some of these laws are criminal and have very severe penalties for violations.
You must follow the POLICIES AND PROCEDURES TO PREVENT THE MISUSE OF MATERIAL NON-PUBLIC INFORMATION contained in SECTION 2_2000 of our Compliance Manual. The summary in this Code is intended for a quick reference.
If you come in contact with MATERIAL NON-PUBLIC INFORMATION, you:
CANNOT TRADE any security related to the information. THIS PROHIBITION EXTENDS TO TRANSACTIONS FOR YOUR PRESONAL ACCOUNT, THE ACCOUNTS OF YOUR FAMILY AND FRIENDS, AND FOR OUR CLIENTS.
CANNOT COMMUNICATE or otherwise transmit the material non-public information to anyone else. THE PROHIBITION EXTENDS TO ANY PERSON INTERNALLY WITHIN CLARION, TO AFFILIATES OF CLARION, OR TO ANY OUTSIDE PARTY.
MUST REPORT the situation to the Chief Compliance Officer or General Counsel immediately.
MATERIAL NON-PUBLIC INFORMATION relates to public companies, closed-end funds advised by CBRE Clarion, mutual funds advised / sub-advised by CBRE Clarion, and CBRE-related securities to cite a few examples.
The definition of MATERIAL NON-PUBLIC INFORMATION is contained in the glossary of this Code.
A more detailed discussion of this topic (including examples) is contained in
our POLICIES AND PROCEDURES TO PREVENT THE MISUSE OF MATERIAL NON-PUBLIC
INFORMATION, which is SECTION 2_2000 in our Compliance Manual.
B. GIFTS, ENTERTAINMENT, AND CLIENT CONTRIBUTIONS
Offering or receiving business GIFTS and ENTERTAINMENT is a customary way to strengthen business relationships. With certain restrictions, offering and receiving GIFTS and ENTERTAINMENT can be an acceptable and lawful business practice.
You must follow the GIFT, ENTERTAINMENT, AND CLIENT CONTRIBUTION policy contained in SECTION 2_4000 of our Compliance Manual. The summary in this Code is intended for a quick reference.
The overriding principle of our policy is that GIFTS, ENTERTAINMENT, or CLIENT CONTRIBUTIONS should not be offered, accepted, or solicited if it creates the impression that CBRE Clarion is trying to induce someone or if it appears that CBRE Clarion will be under an obligation.
You cannot offer or accept any GIFT, ENTERTAINMENT, OR CLIENT CONTRIBUTION if:
o It could be perceived as a bribe.
o Doing so is dishonest, illegal, or misleading.
o By doing so, the recipient appears to be under an obligation.
o By doing so, you would violate the GIFT, ENTERTAINMENT, AND CLIENT CONTRIBUTION policy.
GIFTS and ENTERTAINMENT should not involve activities, products, or venues which could be considered embarrassing or in "bad taste."
Any GIFT or ENTERTAINMENT you accept or offer must be reasonable in cost, quantity, and frequency. The specific limits on the amount and frequency of GIFTS and ENTERTAINMENT are detailed in the GIFT, ENTERTAINMENT, AND CLIENT CONTRIBUTION policy in the Compliance Manual. You must familiarize yourself and comply with these limits.
C. PERSONAL POLITICAL CONTRIBUTIONS
You cannot use political contributions or other payments to GOVERNMENT OFFICIALS with the intent to influence decisions to select or retain CBRE Clarion as an investment adviser for state or local government entities. The practice of using political contributions to influence the solicitation of advisory services for government entities is considered "pay-to-play" and is prohibited under the Investment Advisers Act of 1940. You must follow the POLICY ON POLITICAL CONTRIBUTIONS contained in SECTION 2_6000 of our Compliance Manual. The summary in this Code is intended for a quick reference.
You must get prior approval from the CBRE Clarion General Counsel or Chief Compliance Officer before making any political contribution. Even with approval, you will be limited in the amount of your contribution. You must also report any political contributions, including those made to a political party or a political action committee.
If you wish to become involved with a political party or a political action committee, you must notify the General Counsel and Chief Compliance Officer before engaging in the activity. However, you cannot coordinate or solicit contributions for a political action committee.
D. ANTI-BRIBERY AND ANTI-CORRUPTION
Bribery in any form is unacceptable. Payments, or any promise of a payment, to a GOVERNMENT OFFICIAL or entity, a commercial entity, or individual intended to influence any act or decision of such person or organization are illegal and not tolerated. The ANTI-BRIBERY AND ANTI-CORRUPTION POLICIES AND PROCEDURES contained in SECTION 2_4100 of the Compliance Manual prohibit bribes, kickbacks, facilitating or grease payments, cash advances. The policy also requires pre-approval for any payments (including travel, meals, GIFTS, and ENTERTAINMENT) to GOVERNMENT OFFICIALS.
It is important for you to realize that the representatives for a client which is a municipal, state, or national government or agency (including the pension plan) could be considered GOVERNMENT OFFICIALS.
E. CONFIDENTIAL INFORMATION AND PRIVACY
We are professionals and provide investment services to professional clients and investors.
You must preserve the confidentiality of information provided to us by any client concerning matters within the scope of our relationship. You must only use this information to provide service to the client or investor. You can only disclose confidential client / investor information in accordance with our privacy policy, as described in our Privacy Notice to clients and investors (see SECTION 6_4000 in our Compliance Manual). You must also follow the corporate CLEAN DESK POLICY, available on the firm's intranet site.
In addition to information related to clients and investors, the information generated and utilized by CBRE Clarion is considered confidential, proprietary information. You cannot use or communicate this information beyond the activities needed to fulfill your job duties.
You cannot make a transaction -- or direct someone else to make a transaction -- in an investment based on advanced knowledge of a research report to be published by CBRE Clarion, CBRE, or any CBRE affiliate or based on the advance knowledge of a client transaction.
F. CFA INSTITUTE CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT
We are a firm of diverse professional competencies and backgrounds. Our management and investment personnel are members of the CFA Institute. Therefore, we abide by the CFA Institute Code of Ethics and Standards of Professional Conduct (CFA Code and CFA Standards). Even if you are not a member of the CFA Institute, you are expected to follow the CFA Code and CFA Standards where it applies to your activities.
The full CFA Code and CFA Standards are included as an appendix within our Compliance Manual and they are also available on the CFA Institute's public website (WWW.CFAINSTITUTE.ORG).
G. FAIRNESS IN COMMUNICATIONS
1. Misrepresenting Services or Guaranteeing Performance
You must not make any statements, orally or in writing, to any clients, investors, prospective clients or investors, or the general public which false or misleading. Any marketing materials must be generated and distributed in accordance with our MARKETING AND ADVERTISING POLICIES AND PROCEDURES, contained in SECTION 6_10000 in our Compliance Manual.
Further, you must not misrepresent:
o The services that you or CBRE Clarion is capable of performing for a client or investor,
o Your qualifications or the qualifications of CBRE Clarion, and/or
o The expected performance of any investment.
Investment personnel and CBRE Clarion may make reasonable estimations of future earnings, funds from operations, dividends and other items if the statistics are clearly labeled as estimates or projections and are based on reasonable information.
2. Presenting Performance Returns
You must not make any statements, orally or in writing, which misrepresent the investment performance that you, the firm, or any client has accomplished or can reasonably be expected to achieve.
You must follow our policies and procedures to generate and disseminate marketing materials contained in SECTION 6_10000 of our Compliance Manual prior to communicating any materials to client or prospective client.
As a firm, we comply with the Global Investment Performance Standards (GIPS[R]). If you communicate any performance information to any outside party, you must make every reasonable effort to ensure that the performance information is a fair, accurate, and a complete presentation of such performance.
3. Plagiarism
You must not plagiarize any content when creating material for clients or the general public. You must not copy or use in substantially the same form, material prepared by other persons without acknowledging its use and identifying the name of the author or the publisher of such material.
Plagiarism generally does not apply to when you simply cite factual information published by recognized financial and statistical reporting services or similar sources.
* * * * *
V. OTHER POTENTIAL CONFLICTS OF INTEREST
It is not possible to provide a precise or comprehensive definition of a conflict of interest. However, one factor that is common to all conflict of interest situations is the possibility that your actions or decisions will be affected because of actual or potential differences between your own personal interests and the interests of CBRE Clarion, our affiliates, or our clients.
A conflict of interest does not have anything to do with your motivations or integrity. Rather, an activity is a conflict of interest if it creates the perception of conflicting loyalties or could potentially result in conflicting loyalties.
A particular activity or situation may be considered a conflict of interest even though it does not result in any financial loss to CBRE Clarion, our clients, or our affiliates. In fact, the activity or situation may not even result in any gain to you or CBRE Clarion.
You must disclose all situations and relationships which could reasonably be PERCEIVED to interfere with your duty to CBRE Clarion, or with your ability to provide unbiased service to our clients and investors. YOU WILL BE REQUIRED TO IDENTIFY ALL RELEVANT RELATIONSHIPS AND SITUATIONS INITIALLY UPON JOINING THE FIRM AND UPDATE THIS LIST EACH YEAR. If necessary, we may restrict some of your activities as result of a conflict of interest, up to and including requiring you to cease the relationship or situation.
You may also be subject to disclosure requirements related to conflicts of interest imposed by laws, regulations, or outside professional organizations governing your activities.
If you are a member of the investment team, you must disclose any material conflict of interest relating to your recommendations or investment actions. This is particularly important if you have any material personal ownership of the securities or other investments involved in the recommendation or investment action which could reasonably be perceived to impair your ability to render unbiased and objective advice.
A. OUTSIDE BUSINESS ACTIVITIES
1. Loyalty
You cannot engage in other employment or business activities, including personal investments, which interfere with your duties to CBRE Clarion, divides your loyalty to CBRE Clarion, or creates the appearance of a conflict of interest.
You and members of your immediate family cannot engage in any transaction which involves CBRE Clarion if you or the member of your family has a substantial interest in the transaction or can benefit directly or indirectly from the transaction (other than through your normal compensation). There may be exceptions specifically permitted by management which would be authorized in writing.
If you receive any business or investment opportunity as a result of your association with CBRE Clarion where CBRE Clarion or our clients might reasonably be expected to participate or have an interest, you must disclose this opportunity and the relevant facts to the Chief Compliance Officer and receive approval before proceeding.
2. Interest in Competitors or Service Providers
You cannot operate or participate in any outside enterprise which competes with CBRE Clarion.
We understand that you may have family members who work in the financial services industry. In some circumstances, this could create a divided loyalty or the appearance of one. To assist CBRE Clarion in monitoring potential conflicts of interest, you must notify the Chief Compliance Officer if any family member has a relationship with a competitor or service provider of CBRE Clarion where your family member is:
o an employee,
o an officer,
o a director,
o a trustee, or
o an owner.
3. Outside Employment and Service as a Corporate Director
If you wish to operate or participate in any outside enterprise where you are compensated or receive some other financial benefit, you must notify the Chief Compliance Officer and receive written consent from management (and, if applicable, from the outside party for whom you work).
Outside enterprises include serving as a director of a public company (including a public company in the CBRE Clarion investable universe), serving as a trustee or general partner of a partnership, or serving as an officer or board member of a not-for-profit organization.
You should not have any outside employment that could cause embarrassment to or jeopardize the interests of CBRE Clarion. Outside employment should not interfere with CBRE Clarion operations, or adversely affect your productivity or the productivity of other employees.
B. AFFILIATIONS WITH CLIENTS OR REAL ESTATE COMPANIES
Another relationship which can create the perception of a conflict of interest is if you have a personal relationship with someone associated with a client or investors, a consulting firm evaluating our advisory business, or a real estate or infrastructure company in our "investable universe." To assist CBRE Clarion in monitoring potential conflicts of interest, you must notify the Chief Compliance Officer if any family member has a relationship with a client, an investor, a consulting firm evaluating our advisory business, or a real estate company which is in our "investable universe" where your family member is:
o an employee,
o an officer or executive,
o a director, or
o a trustee.
C. ADDITIONAL COMPENSATION ARRANGEMENTS
If you receive compensation or some other financial benefit from any outside party for professional services, you must notify the Chief Compliance Officer.
You cannot accept compensation, in any form, for any services performed in your capacity as a CBRE Clarion employee from any outside party.
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VI. RECORDKEEPING
CBRE Clarion will maintain books and records related to this Code as set forth below. These records will be maintained in accordance with Rule 204-2 and Rule 204A-1 under the Investment Advisers Act of 1940 and Rule 17j-1 under the Investment Company Act of 1940. The records will be maintained in an accessible location and will be available for examination by representatives of the SEC and other regulatory agencies with appropriate jurisdiction.
o A copy of this Code (and any other code adopted by CBRE Clarion), which was in place at any time within the past five years.
o A record of any Code violation and any sanctions imposed will be preserved for a period of at least five years following the end of the fiscal year in which the violation occurred.
o A copy of each Quarterly Transaction Report, Initial Holdings Report, Annual Holdings Report and account statements and duplicate confirmations submitted under this Code will be preserved for a period of at least five years from the end of the fiscal year in which it is made. These records will be maintained in a confidential and secure place.
o A record of all ACCESS PERSONS, both current and those within the past five years, who are or were required to submit reports under this Code, or who are or were responsible for reviewing these reports.
o A record of each ACCESS PERSON'S written acknowledgement that each had received and understood this Code. Furthermore, the acknowledgement forms will be kept for five years after the individual ceases to be a supervised person.
o A record of any decision, and the reasons supporting the decision, to approve the acquisition of securities acquired in an IPO or Limited Offering, for at least five years after the end of the fiscal year in which the approval is granted.
o A copy of each annual report of issues arising under this Code will be maintained for at least five years from the end of the fiscal year in which it is made.
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APPENDIX: GLOSSARY
THE DEFINITIONS AND TERMS USED IN THIS CODE ARE INTENDED TO MEAN THE SAME AS THEY DO UNDER THE INVESTMENT ADVISERS ACT OF 1940 AND OTHER FEDERAL SECURITIES LAWS. IF A DEFINITION IN THIS GLOSSARY CONFLICTS WITH THE DEFINITION IN THE INVESTMENT ADVISERS ACT OR 1940 OR OTHER FEDERAL SECURITIES LAW, OR IF A TERM IN THIS CODE IS NOT DEFINED, YOU SHOULD FOLLOW THE DEFINITIONS AND MEANINGS IN THE REGULATIONS.
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ACCESS PERSON Any officer or advisory representative of CBRE Clarion. Any
employee of CBRE Clarion who makes, participates in, or
obtains information regarding client transactions. Any
natural person in a control relationship to the clients.
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ANYTHING OF VALUE Anything that provides a benefit to the recipient,
including, but not limited to: cash or cash equivalents;
the purchase of property or services at inflated or
discounted prices; extravagant entertainment; cars; jewelry;
home improvements; intangible benefits; travel; and/or
stocks.
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BENEFICIAL OWNER Any person who -- directly or indirectly through any
contract, arrangement, understanding, relationship or
otherwise -- has (or shares in) any direct or indirect
financial interest in a security. You should generally
consider yourself the "beneficial owner" of any securities
in which you have a direct or indirect ownership interest.
In addition, you should consider yourself the beneficial
owner of securities held by your spouse, your minor
children, a relative who shares your home, or other persons
by reason of any contract, arrangement, understanding or
relationship that provides you with sole or shared voting or
investment power.
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BLACK-OUT A temporary restriction from buying or selling a particular
security.
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COMMERCIAL Any land or building suitable for office, commercial,
REAL ESTATE industrial, retail, hotel, and/or multi-family housing
(consisting of more than four (4) units). Personal
residences, vacation homes, and multi-family housing
(consisting of four (4) units or less) are NOT considered
COMMERCIAL REAL ESTATE.
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ENTERTAINMENT Any benefit, where the donor is present , provided to you
or your related person by an external (non-CBRE) person or
provided by you to an external (non-CBRE) person in the
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form of:
o Meals, drinks, visits to theatres, other venues, etc.;
o Tickets to events (e.g., invitations to concerts, exhibitions, sporting events); or
o Personal events at discounted rates (e.g., travel or accommodation arrangements, etc.).
Entertainment does not include meals during business hours with external persons at restaurants near a CBRE Clarion office.
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GIFT Any benefit (both monetary and non-monetary) other than
Entertainment provided to you or your related person by an
external (non-CBRE) person or provided by you to an external
(non-CBRE) person. Benefits expressly include all kinds of
services and the procurement of goods at a price below
market value. Gifts do not include any item that:
o Is one of a number of identical items that are
widely distributed (e.g., pens, desk sets,
promotional materials, items marked with a
corporate logo, etc.) the value of which does not
exceed $75; or
o Is covered by the definition of "Entertainment."
Gift does not include items provided by CBRE entities or
employees to other CBRE entities or employees.
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GOVERNMENT Means:
OFFICIAL
o Any officer or employee of a government;
o Any officer or employee of any organ or
instrumentality of the government;
o Any person acting in an official capacity for or
on behalf of any government or its
instrumentality;
o Officers or employees of state-owned companies or
controlled commercial enterprises (even if a
company is not wholly owned by the state, it may
be considered an "instrumentality" of a government
if the government exercises substantial control
over it or if it performs a government function);
o Any officer or employee of a public international
organization; and
o Political parties, their officials, and
candidates for public office.
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HOLDING PERIOD A minimum period of time you must wait between opposite
transactions in the same security. That is, a minimum number
of days between the last purchase and first sale of a
security or between the last sale and the first purchase of
a security.
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INTEREST IN Includes the property itself, as well as any debt or equity
COMMERCIAL SECURITIES of an entity engaged in investing, owning, or
REAL ESTATE transacting in COMMERCIAL REAL ESTATE. An INTEREST also
includes direct and INTERESTS.
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MATERIAL Any information about a public company, security, or
NON-PUBLIC portfolio which has not been generally disclosed to the
INFORMATION public or the marketplace, and the dissemination of this
information would be considered important by reasonable
investors in determining whether to trade the company's
securities. Material non-public information is often
referred to as "inside information."
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26 CBRE Clarion Securities | CODE OF ETHICS
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Generally, information is "material" if a reasonable
investor would consider the information important in making
an investment decision. Information is also "material" if it
is reasonably certain to have a significant effect on the
price of the security.
Information is considered "non-public" unless it has been
communicated to the general public or the marketplace.
Information is "public" if it appears in a public filing, a
press release, or publication.
The specificity of the information, as well as the extent
of its difference from public information, its nature, and
its reliability, may be important factors in determining if
the information is "material" and "non-public."
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SECURITIES Means any note, stock, treasury stock, security future,
bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit sharing agreement,
collateral trust certificate, reorganization certificate or
subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a
security, fractional undivided interest in oil, gas, or
other mineral rights, any put, call, straddle, option, or
privilege on any, security (including a certificate of
deposit) or on any group or index of securities (including
any interest therein or based on the value thereof), or any
put, call, straddle, option, or privilege entered into on a
national securities exchange relating to foreign currency,
or, in general, any interest or instrument commonly known as
a "security," or any certificate of interest or
participation in, temporary or interim certificate for,
receipt for, guarantee of, or warrant or right to subscribe
to or purchase, any of the foregoing.
"Securities" does not include direct obligations of the U.S.
Government or its agencies, bankers' acceptances, bank
certificates of deposit, commercial paper, or high quality
short-term debt instruments, including repurchase
agreements.
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SECURITIES ACCOUNT Any account which can buy, sell, or hold securities.
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IF YOU HAVE ANY QUESTIONS REGARDING ANY ASPECT OF THIS CODE,
PLEASE SEE THE CHIEF COMPLIANCE OFFICER.
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APPENDIX I
CODE OF ETHICS; PERSONAL TRADING
1. GENERAL
In compliance with Rule 204A-1 of the Advisers Act, SKY Harbor has adopted this Code of Ethics in order to establish the standard of conduct expected of all Supervised Persons in light of the Firm's duties to its clients. It also establishes reporting and other requirements for personal securities transactions. The Chief Compliance Officer may designate such deputy compliance officers as the Chief Compliance Officer may deem necessary or appropriate to fulfill the responsibilities of the Chief Compliance Officer under this Code of Ethics.
2. FIDUCIARY STANDARD OF CONDUCT
SKY Harbor and its members, directors, officers, principals, partners, agents or employees have a fundamental obligation to act in the best interests of our clients and to provide investment advice in our clients' best interests. SKY Harbor owes its clients a duty of undivided loyalty and utmost good faith, which includes a responsibility to treat clients fairly and avoid actual or apparent conflicts of interest.
The purpose of this fiduciary duty is to eliminate conflicts of interest and to prevent overreaching by the Firm or taking unfair advantage of a client's trust. Because this responsibility applies to everyone, all Supervised Persons, managers and supervisors must make certain that each employee is aware of the obligation.
Accordingly, Supervised Persons and all other employees of the Firm must act at all times in accordance with the Firm's fiduciary duty to the Funds and advisory clients. Each Supervised Person should (i) at all times place the interests of the Firm's clients before his or her own interests, (ii) act with honesty and integrity with respect to its clients and Fund investors, (iii) never take inappropriate advantage of his or her position for his or her personal benefit, (iv) seek to eliminate or at least disclose, all conflicts of interest that may incline him or her -- consciously or unconsciously -- to render advice that is not disinterested, (v) make full and fair disclosure of all material facts, particularly where the Firm's or Supervised Person's interests may conflict with the Fund's or client's (generally, facts are "material" if a reasonable investor would consider them important), and (vi) have a reasonable, independent basis for his or her investment advice.
Although this Code of Ethics sets forth several specific guidelines and procedures, any Supervised Person who has a question about a specific conflict of interest, potential conflict of interest or any other situation, whether it appears in compliance with the letter of the law, this Code of Ethics and/or the Compliance Manual, should consult the Chief Compliance Officer.
All Supervised Persons are expected to be familiar and comply with the laws and regulations applicable to their day-to-day responsibilities, including U.S. federal securities laws and regulations. If a Supervised Person has any question with respect to any such law or regulation, he or she should consult this Code of Ethics, the Compliance Manual or the General Counsel and Chief Compliance Officer.
3. REPORTING VIOLATIONS
Supervised Persons must report any violations of this Code of Ethics promptly to the Chief Compliance Officer.
4. PERSONAL SECURITIES TRANSACTIONS
In order to avoid actual and perceived conflicts of interests with its clients as well as the laws relating to insider trading, the Firm has adopted a strict personal securities transactions policy. This Policy governs any investment by an "Access Person" in securities, including any interest or instrument commonly known as a security, including stocks, bonds, options, warrants, financial commodities, futures, other directive products and interests in privately placed offerings, limited partnerships and other entities. The following Supervised Persons are "ACCESS PERSONS":
o all of the members, directors, officers and partners of the Firm and
o any Supervised Person:
o who has access to non-public information regarding any clients' purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund; or
o who is involved in making investment or securities recommendations to clients, or who has access to such recommendations that are non-public.
Except as otherwise noted, the Firm's restrictions on personal investment transactions apply to all Access Persons.
(a) GENERAL PRINCIPLES REGARDING SECURITIES TRANSACTIONS OF ACCESS PERSONS
No Access Person may purchase or sell, directly or indirectly, for his or her own account, or any account in which he or she may have a beneficial interest:(23)
(23) The term "beneficial interest" is defined by the rules of the SEC. Generally, under the SEC rules, a person is regarded as having a beneficial interest in securities held in the name of: a husband, wife, spousal equivalent, or a minor child; a relative sharing the same house; anyone else, if the Access Person obtains benefits substantially equivalent to ownership of the securities, can obtain ownership of the securities immediately or at some future time or can vote or dispose of the securities.
If an Access Person acts as a fiduciary with respect to funds and accounts managed outside of the Firm (for example, if the Access Person acts as the executor of an estate for which he or she makes investment decisions), he or she will have a beneficial interest in the assets of that fund or account. Accordingly, any securities transactions an Access Person makes on behalf of that fund or account will be subject to the general trading restrictions set forth herein. An Access Person should review the restrictions on his or her availability to act as a fiduciary outside of the Firm set forth in Chapter VI.
o Any security (or related option or warrant) that to his or her knowledge the Firm is buying or selling for clients, until such buying or selling is completed or canceled; or
o Any security (or related option or warrant) that to his or her knowledge is under active consideration for purchase or sale by the Firm for its clients.
(b) PRE-CLEARANCE PROCEDURES
Each Access Person must obtain pre-clearance for any personal investment transaction in (1) any U.S. initial public offering and (2) any security sold in the United States in reliance on the private placement exemptions in Section 4(2) of the Securities Act or Regulation D thereunder (together, a "PRE-CLEARANCE SECURITY").
An Access Person must obtain pre-clearance for all Pre-clearance Securities transactions, including the writing of an option to purchase or sell a Pre-clearance Security, by completing and signing the Request for Prior Approval of Personal Investment Transactions Form provided for that purpose by the Firm and by obtaining the signature of the Chief Compliance Officer. An Access Person will be required to make certain certifications each time he or she trades a Pre-clearance Security, including that he or she has no knowledge that would violate the General Principles set forth above. A sample copy of the Request for Prior Approval of Personal Investment Transactions Form is attached as EXHIBIT A-1 to the Compliance Manual.
Pre-clearance will be given on the day an Access Person requests it under normal circumstances. An Access Person must complete an approved securities transaction by the end of the business week in which he or she obtains the approval.(24) If the transaction is not completed within this time period, such Access Person must obtain a new pre-clearance, including one for any uncompleted portion of the transaction.
(24) For example: assuming a regular business week, whether an Access Person obtains approval on Monday or Wednesday, he or she has until the close of business on that Friday to execute the transaction.
POST-TRANSACTION APPROVAL IS NOT PERMITTED. If the Firm determines that an Access Person completed a trade before approval or after the clearance expires, such Access Person will be considered to be in violation of this Code of Ethics. After the first such violation, the Access Person will typically receive a warning. Upon the second such violation, a 30-day trading suspension will typically be imposed on the Access Person's personal trading privileges. If any additional violations occur, the sanctions to be imposed will be determined by the Chief Compliance Officer and others as considered necessary at that time.
(c) TRADING RESTRICTIONS
In addition to the more general restrictions discussed above, the Firm has adopted other restrictions on personal investment transactions.
o No Access Person may:
o Purchase or sell, directly or indirectly, for his or her own account or for any account in which he or she may have a beneficial interest, any security that is subject to a Firm-Wide Restriction because of, for example, the possession of material non-public information.
o Enter into a short sale transaction or purchase a put option on any security of an issuer for which a position is held long by a Fund.
o Purchase or sell any security (whether debt or equity) for his or her own account, or any account in which he or she may have a beneficial interest issued by a company whose securities has been bought or sold on behalf of any Advisory Client or Fund. Violation of this prohibition will require reversal of the transaction and any resulting profits will be subject to disgorgement at the discretion of Chief Compliance Officer.
(d) SECURITIES OR TRANSACTIONS NOT SUBJECT TO CERTAIN PERSONAL INVESTMENT TRANSACTION POLICIES
The following securities and any associated transactions are exempt from the reporting requirements ("EXEMPT SECURITIES"):
o Direct Obligations of the U.S. Government (I.E., treasury securities).
o Bank Certificates of Deposit.
o Bankers' Acceptances.
o Commercial Paper.
o High quality short-term debt obligations, including repurchase agreements.
o Shares issued by money market funds.
o Shares issued by open-end investment companies (I.E., mutual funds).(25)
o Shares issued by unit investments trusts that are invested exclusively in one or more open-end funds.
o Securities purchased through an automatic dividend reinvestment plan.
o Limited partner interests in the Funds.
(e) REPORTING OF TRANSACTIONS
(i) QUARTERLY PERSONAL SECURITIES TRANSACTIONS REPORTS
All Access Persons must file with the Chief Compliance Officer a Personal Securities Transactions Report by the 30th day of January, April, July and October or, if that day is not a business day, then the first business day thereafter. In each Personal Securities Transactions Report, the Access Person must report all personal investment transactions in which he or she has a beneficial interest and which were transacted during the quarter other than those in Exempt Securities.
Every Access Person must file a Personal Securities Transactions Report when due even if such person made no purchases or sales of securities during the period covered by the report. An Access Person is charged with the responsibility for making the Personal Securities Transactions Reports. Any effort by the Chief Compliance Officer to facilitate the reporting process does not change or alter that responsibility. The Personal Securities Transactions Report must be on the form provided by the Firm. A sample of the Firm's form as of this date is attached as EXHIBIT A-2 to the Compliance Manual. Since the form may change over time, an Access Person should ask the Chief Compliance Officer for a copy of the current form.
In lieu of filing such a Personal Securities Transactions Report, an Access Person may arrange for all the brokerage firms at which the Access Person maintains an account in which he or she has a beneficial interest to supply to the Firm, on a timely basis, duplicate copies of trade confirmations and copies of periodic broker account statements which state the name of his or her account and account number. To maximize the protection of his or her privacy, an Access Person should direct his or her brokers to send this information to: SKY Harbor Capital Management, LLC, 20 Horseneck Lane,
Greenwich, CT 06830, ATTN: Chief Compliance Officer. Any securities transactions (other than those in Exempt Securities) that are not reported on such account statements must be reported on a Personal Securities Transactions Report.
An Access Person should provide a list using the form attached as EXHIBIT A-3 to the Compliance Manual of all of his or her brokerage accounts to the Chief Compliance Officer. An Access Person is responsible for updating this form within 30 days of opening a new brokerage account.
(ii) CERTAIN EXCEPTIONS
Quarterly Reports need not be filed with respect to:
1. Transactions in an account over which the Access Person has no direct or indirect influence or control (I.E., those done through a managed account or blind trust);
2. Transactions effected pursuant to an "automatic investment plan"; and
3. Transactions that are reported on broker trade confirmations or account statements that are provided to the Firm no later than 30 days after the end of the applicable calendar quarter.
An "automatic investment plan" is a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan.
(iii) ANNUAL HOLDINGS REPORT
All Access Persons must also complete an annual holdings report along with the Personal Securities Transactions Report due by the 30th day of January (the "ANNUAL HOLDINGS REPORT"). This Annual Holdings Report must include a listing of all securities in which an Access Person has a beneficial interest as of the 45 days preceding the filing date of the report, other than Exempt Securities. New Access Persons must provide an Annual Holdings Report within 10 business days of the commencement of such person's employment or becoming classified an Access Person. A sample of the Firm's form is attached as EXHIBIT A-4 to the Compliance Manual.
MARSICO CAPITAL MANAGEMENT, LLC
THE MARSICO INVESTMENT FUND
CODE OF ETHICS
A. INTRODUCTION AND OVERVIEW ............................................. 2
B. KEY DEFINITIONS ....................................................... 3
C. PERSONS COVERED BY THE CODE ........................................... 5
D. SUMMARY OF GENERAL CONDUCT GUIDELINES FOR PERSONAL INVESTMENTS ........ 5
D.1. PROHIBITED AND PERMITTED TRANSACTIONS IN RESTRICTED-REPORTABLE
INVESTMENTS ......................................................... 6
D.2. PERMITTED TRANSACTIONS IN OTHER INVESTMENTS ........................... 9
D.3. SALE TRANSACTIONS REQUIRING PRE-CLEARANCE ............................. 10
D.4. SPECIAL TRANSACTIONS REQUIRING PRE-CLEARANCE OF PURCHASE OR SALE ...... 11
E.1. REPORTING OBLIGATIONS ................................................. 13
E.2. REVIEW OF REPORTS AND OTHER DOCUMENTS ................................. 16
F. VIOLATIONS OF THE CODE ................................................ 16
G. PROTECTION OF MATERIAL, NON-PUBLIC INFORMATION ........................ 16
H.1. MISCELLANEOUS ISSUES CONCERNING BOARD SERVICE, GIFTS, AND LIMITED
OFFERINGS ........................................................... 17
H.2. RECORDKEEPING REQUIREMENTS ............................................ 19
H.3. BOARD APPROVAL AND ANNUAL REVIEW REQUIREMENTS ......................... 20
|
I. DEFINITIONS OF CERTAIN TERMS .......................................... 20
J. ADOPTION AND EFFECTIVE DATE ........................................... 23
A. INTRODUCTION AND OVERVIEW
This is the Code of Ethics ("Code") of Marsico Capital Management, LLC ("MCM") and The Marsico Investment Fund (the "Funds") (together, "Marsico"). The Code imposes stringent restrictions on personal investing and on other business activities and gifts to help ensure that our professional and personal conduct preserves Marsico's reputation for high standards of ethics and integrity.
The Code applies to Employees and other Covered Persons identified in
Section B below. As used in the Code, terms such as "you," "your" "we," and
"our" may refer to Employees alone or to Covered Persons generally (including
Employees and related persons as defined in Section B.1.), depending on the
context. Please ask the Compliance Department if you have any questions. It is
your responsibility to become familiar with the Code and comply with it as a
condition of your employment. Violations will be taken seriously and may result
in sanctions including termination of employment.
The Code's restrictions reflect fiduciary duties and other duties that we owe to clients (including the Marsico Funds and their shareholders), such as:
o The duty to place the interests of clients first and avoid abuses of their trust
o Treat clients with care, loyalty, honesty, and good faith
o Treat clients equitably and avoid favoritism
o Don't place own interests ahead of clients
o Don't take an investment opportunity that belongs to clients
o The duty to avoid, manage, minimize, or disclose material conflicts of interest
o Restrict personal investing to keep focus on client interests and minimize investment-related conflicts of interest
o Restrict outside business activities to minimize other conflicts of interest
o Seek to disclose material conflicts of interest that cannot be avoided
o The duty not to take inappropriate advantage of position
o Avoid extravagant gifts or entertainment from or to service providers or clients to avoid misunderstanding about appropriate business relationships
o The duty to comply with securities laws
o Don't mislead clients through misstatements or failures to state material facts
o Don't engage in fraud or deceit upon clients
Because regulations and industry standards can change, Marsico reserves the right to amend any part of the Code. Marsico also may grant exemptions when necessary if no harm to clients is expected to result and the exemption is documented by the Compliance Department.
No code of ethics can anticipate every situation. Even if no specific Code provision applies, please abide by the general duties and other principles of the Code outlined above. IF YOU HAVE ANY QUESTIONS ABOUT THE CODE OR WHETHER CERTAIN MATTERS MAY BE COVERED BY IT, PLEASE CONTACT THE COMPLIANCE DEPARTMENT OR THE LEGAL DEPARTMENT.
B. KEY DEFINITIONS
A few key capitalized terms in the Code are defined here. Other terms are defined in Section I later in the Code.
1. COVERED PERSON means all persons subject to any Code requirements, including all Employees; their immediate family members by blood or marriage living in an Employee's household; any relative or non-relative who shares significant financial arrangements with an Employee (as may be reflected in, without limitation, a joint checking account or investment account); and any other Access Person as defined in Section I.
Although certain requirements and restrictions of the Code apply only to Employees, others apply to all Covered Persons. In particular, all accounts and trades of Covered Persons must meet trading restrictions and reporting requirements, and each Employee must report all accounts and trades for related Covered Persons as discussed in Section E.1., including:
o ANY ACCOUNT in which a Covered Person has a direct or indirect Beneficial Ownership interest, and TRADES IN SUCH ACCOUNTS, unless Compliance determines otherwise.
o ANY OTHER ACCOUNT over which a Covered Person has direct or indirect influence or control (generally including an account in which a person has a direct or indirect material interest in the outcome of trades in the account), and TRADES IN SUCH ACCOUNTS, unless Compliance determines otherwise.
Please ask the Compliance Department if you have any questions.
2. COVERED SECURITY means all securities and similar investments subject to the Code, including any stock, bond, or other instrument that is considered a "security" under the Investment Company Act, futures or options based on such a security, and any interest in a private investment fund, hedge fund, or limited partnership, but not does not include certain investments listed in C. below. More specifically, Covered Securities include the following:
A. RESTRICTED-REPORTABLE INVESTMENTS -- means those investments that a Covered Person generally MAY NOT PURCHASE OR SELL SHORT, MUST PRE-CLEAR ANY SALES OR EXCHANGES OF, and MUST REPORT ANY HOLDINGS OF AND TRANSACTIONS IN. Restricted-Reportable Investments include the following:
o Shares of publicly traded common stock or preferred stock
o Corporate bonds
o Closed-end funds
o Exchange-traded funds ("ETFs") or exchange-traded notes ("ETNs") or similar products that are linked to securities indices, sectors/industries, or commodities (SALES OF ETFS OR ETNS DO NOT REQUIRE PRE-CLEARANCE)
o Any security future, or any put, call, straddle, option, or privilege on a particular security
o Shares of funds sub-advised by Marsico ("MCM Sub-Advised Funds")
The Marsico Funds are also considered Restricted-Reportable Investments for purposes of this Code, although they can be PURCHASED without pre-clearance through UMB Fund Services ("UMB") or through MCM's 401(k) plan ("Great-West"). SALES OR EXCHANGES OF MARSICO FUND SHARES MUST BE PRE-CLEARED BY COMPLIANCE.
B. REPORTABLE INVESTMENTS means those investments that a Covered Person generally can purchase, hold, exchange, sell, or sell short without pre-clearance, but for which transactions must be reported. Reportable Investments include the following:
o Municipal securities and foreign sovereign debt, including bills, bonds or notes
o Any put, call, straddle, option, or privilege on a group or index of securities
o Any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency
o Futures, options, or other derivatives based directly on particular Reportable Investments but not on Restricted- Reportable Investments
C. THE FOLLOWING ARE NOT CONSIDERED COVERED SECURITIES, and therefore transactions in them are not restricted or reportable under the Code:
o Direct obligations of the U.S. government (e.g. Treasury securities)
o Bankers' acceptances, bank certificates of deposit, commercial paper, and high-quality short-term debt instruments, including repurchase agreements
o Shares issued by money market funds
o Shares of other open-end mutual funds, EXCEPT ETFs and shares of the Marsico Funds or MCM Sub-advised Funds (which are Restricted-Reportable Investments)
o Interests in a state-sponsored college savings 529 plan
o Investments that are not securities, such as commodities, foreign currencies, futures, options, or other derivatives (if not based directly on particular Restricted-Reportable Investments). However, any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency MUST BE REPORTED quarterly and/or annually as described in Section 2.B. above.
C. PERSONS COVERED BY THE CODE
Certain requirements and restrictions of the Code apply to Employees alone, while others apply to all Covered Persons generally (including Employees and related persons as defined in Section B.1.), depending on the context. Please ask the Compliance Department if you have any questions.
TRUSTEES OF THE FUNDS
Trustees of the Funds who are Employees are subject to all provisions of the Code. In contrast, Trustees who are not "interested persons" of the Funds, as defined in the Investment Company Act of 1940, ("Independent Trustees"), are subject to the Code generally, but are not subject to the investment restrictions or reporting requirements in Sections D, D.1, D.2, D.3, or D.4. Independent Trustees are not subject to Section E.1, applicable to a transaction in a Covered Security, UNLESS THE INDEPENDENT TRUSTEE KNEW OR SHOULD HAVE KNOWN, IN THE ORDINARY COURSE OF FULFILLING HIS OR HER OFFICIAL DUTIES AS A FUND TRUSTEE, THAT DURING THE 15-DAY PERIOD IMMEDIATELY BEFORE OR AFTER THE INDEPENDENT TRUSTEE'S TRANSACTION IN A COVERED SECURITY, MARSICO PURCHASED OR SOLD THAT SECURITY FOR A FUND, OR CONSIDERED THE PURCHASE OR SALE OF THAT SECURITY. In addition, Independent Trustees are not subject to the restrictions in Section H.1 regarding board service, other business activities, or gifts and entertainment.
A special provision of the Code applies to any Independent Trustee who is
an officer or director of an operating company, if the company's securities are
held by a Fund, or are under consideration for purchase or sale by the Fund. See
Section G below.
D. SUMMARY OF GENERAL CONDUCT GUIDELINES FOR PERSONAL INVESTMENTS
SPECIFIC LIMITATIONS ON PERSONAL INVESTING: The Code generally prohibits Covered Persons from PURCHASING Restricted-Reportable Investments, but permits them to HOLD, ACQUIRE, OR SELL these and other investments in certain circumstances. Details are described in Sections D.1, D.2, D.3, and Section E below.
OTHER CONDUCT GUIDELINES FOR PERSONAL INVESTING: In addition, SEC rules impose certain general conduct guidelines that apply to personal investments that are permitted by the Code:
1. A Covered Person may not acquire an interest in a Limited Offering or in an Initial Public Offering without the prior written approval of MCM.
2. With respect to the Marsico Funds, an Employee may not, in connection with the acquisition or sale of any Security Held or to be Acquired by a Fund or any Security issued by the Fund:
(a) Employ any device, scheme, or artifice to defraud the Fund;
(b) Make to the Fund any untrue statement of a material fact, or omit to state to the Fund a material fact necessary in order to make the statements made not misleading, in light of the circumstances under which the statements are made;
(c) Engage in any act, practice, or course of business that would operate as a fraud or deceit upon any Fund; or
(d) Engage in any manipulative practice with respect to the Fund.
Here are a few examples of conduct that must be avoided under the conduct guidelines:
o Causing a Fund to invest (or not invest) in a security to achieve a personal benefit for a Covered Person rather than for the benefit of the Fund
o Causing a Fund to buy a security to support or drive up the value of a Covered Person's own investment in the security
o Causing a Fund not to sell a security to protect a Covered Person's own investment
o Exploiting knowledge of Fund transactions to profit from their market effects
o Selling a security for a Covered Person's own account based on the knowledge that the Fund is about to sell the same security
D.1. PROHIBITED AND PERMITTED TRANSACTIONS IN RESTRICTED-REPORTABLE INVESTMENTS
a. PROHIBITIONS ON PURCHASING/SELLING SHORT RESTRICTED-REPORTABLE INVESTMENTS. Restricted-Reportable Investments may be securities that Employees may buy or sell for clients. To minimize potential conflicts of interest, Marsico has decided to PROHIBIT all Covered Persons from PURCHASING or SELLING SHORT any Restricted-Reportable Investments (other than Marsico Fund shares) except in limited cases. Thus, unless otherwise permitted, you may not purchase or sell short any:
o Shares of publicly traded common stock or preferred stock
o Corporate bonds
o Closed-end funds
o Exchange-traded funds ("ETFs") or exchange-traded notes ("ETNs") or similar products that are linked to securities indices, sectors/industries, or commodities
o Any security future, or any put, call, straddle, option, or privilege on a particular security
o Shares of MCM Sub-Advised Funds
b. HOLDING PREVIOUSLY ACQUIRED RESTRICTED-REPORTABLE INVESTMENTS. Despite restrictions on purchasing these securities, Covered Persons may HOLD Restricted-Reportable Investments purchased before a related Employee joined Marsico (except for shares of MCM Sub-Advised Funds, as discussed in e. below) and may HOLD ETFs and/or ETNs purchased prior to 9/1/08.
c. SALES OR EXCHANGES OF RESTRICTED-REPORTABLE INVESTMENTS. Covered Persons may SELL a Restricted-Reportable Investment if a related Employee complies with the sale pre-approval requirements ("pre-clearance") in Section D.3. (sales of ETFs or ETNs do not require pre-clearance).
d. EXEMPTIONS FOR ACQUISITIONS OF RESTRICTED-REPORTABLE INVESTMENTS INVOLVING LIMITED DISCRETION. Despite general restrictions on purchasing these securities, Covered Persons may otherwise ACQUIRE AND HOLD certain Restricted-Reportable Investments through certain transactions involving limited discretion, subject to conduct guidelines in Section D and security and account reporting requirements in Section E.1. In particular, Covered Persons may acquire Restricted-Reportable Investments through:
o DIVIDEND REINVESTMENT PLANS (if a Covered Person previously owned Restricted-Reportable Investments and elected to participate in such a plan, and does not make discretionary additional purchases)
o THE RECEIPT OR EXERCISE OF RIGHTS, WARRANTS, OR OTHER SECURITIES GRANTED TO A COMPANY'S EXISTING SHAREHOLDERS or to its current or former employees (such as the receipt of securities of a spin-off of an existing company, or the exercise of warrants or rights to buy tracking stock or additional securities)
o THE RECEIPT OF STOCK THROUGH STOCK DIVIDENDS, STOCK SPLITS, MERGERS, SPINOFFS, OR OTHER CORPORATE EVENTS THAT ARE GENERALLY APPLICABLE TO ALL EXISTING HOLDERS OF THE SAME CLASS OF SECURITIES. MCM hereby grants prior approval to acquire an interest in an Initial Public Offering if the securities acquired are issued to existing shareholders pursuant to this paragraph. Please note that any SALE of Restricted-Reportable Investments obtained through these means must meet the sale pre-clearance and other requirements described in Section D.3.
o NON-VOLITIONAL TRANSACTIONS. A Covered Person may acquire or divest Restricted-Reportable Investments through non-volitional transactions that the person generally does not control (such as when an issuer whose securities you already own issues new securities to you or calls a security, a derivative instrument expires, or you receive a gift from someone outside your control). If you acquire Restricted-Reportable Investments through a non-volitional transaction, but can control their sale, the SALE must meet the sale pre-clearance and other requirements described in Section D.3.
e. HOLDING OF SHARES OF MCM SUB-ADVISED FUNDS. A COVERED PERSON MUST DISPOSE OF, AND MAY NOT HOLD SHARES OF, AN MCM SUB-ADVISED FUND AFTER A RELATED EMPLOYEE JOINS MARSICO. Covered Persons who acquired MCM Sub-advised Fund shares prior to a related Employee's employment with Marsico should sell those shares within 60 days of joining Marsico. A pre-clearance is not required in this circumstance.
f. PURCHASES/HOLDING/SALES OF MARSICO FUND SHARES. Covered Persons may invest in Marsico Fund shares subject to the following restrictions:
o Marsico Fund shares may only be purchased through UMB or Great-West. Marsico Fund shares may not be purchased through brokers or other channels.
o If a Covered Person acquired Marsico Fund shares through brokers or other channels other than UMB or Great-West before a related Employee joined Marsico, the Covered Person must initiate a transfer of the shares to UMB or Great-West, or sell the shares within 60 days of joining Marsico.
o Covered Persons must hold all Marsico Fund shares for at least 30 days after purchase. Waivers may be granted in cases of death, disability, or other special circumstances approved by the Compliance Department (such as systematic withdrawal programs). Automatic investments into Marsico Fund shares (eg. generated by ongoing systematic bi-monthly contributions into the Great-West 401(k) plan or an ongoing automatic investment plan into a UMB account) are exempt from the 30 day hold period (standard Compliance preclearance of the sale is still required). Sanctions may be imposed for a violation up to and including disgorgement of any profit on a sale. The Compliance Department's determination regarding any sanction will be final.
Marsico Fund shares are subject to sale pre-clearance and reporting requirements discussed in Section D.3, subject to certain exceptions:
o An Employee may obtain a hardship withdrawal or borrow against an MCM 401(k) Plan account with Great-West, even though such a withdrawal or borrowing may involve an effective sale of some or all Marsico Fund shares held in the account, without pre-clearing the sale.
D.2. PERMITTED TRANSACTIONS IN OTHER INVESTMENTS
A Covered Person may freely, without pre-clearance, purchase, hold, exchange, sell, or sell short Reportable Investments, or investments that are not Covered Securities. These transactions must still comply with Section D and reporting requirements in Section E.1.
a. PURCHASE, HOLDING, OR SALE OF REPORTABLE INVESTMENTS
A Covered Person (or financial adviser, trustee or other person) may, without pre-clearance, buy, hold, exchange, sell, or sell short Reportable Investments, including the following:
o Municipal securities and foreign sovereign debt, including bills, bonds or notes
o Any put, call, straddle, option, or privilege on a group or index of securities
o Any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency
o Futures, options, or other derivatives, including those based directly on particular Reportable Investments (no exemption applies to instruments based directly on particular Restricted-Reportable Investments)
(REMINDER: YOU MUST REPORT QUARTERLY ANY TRADING ACTIVITY IN THE ABOVE SECURITIES AND YOU MUST REPORT ANNUALLY YOUR HOLDINGS OF THE ABOVE SECURITIES)
b. PURCHASE, HOLDING, OR SALE OF INVESTMENTS THAT ARE NOT COVERED SECURITIES
A Covered Person (or financial adviser, trustee or other person) may, without pre-clearance, buy, hold, exchange, sell, or sell short without restrictions any security or other investment that is not a Covered Security, including the following:
o Direct obligations of the U.S. government (e.g. Treasury securities)
o Bankers' acceptances, bank certificates of deposit, commercial paper, and high-quality short-term debt instruments, including repurchase agreements
o Shares issued by money market funds
o Shares of other open-end mutual funds, except ETFs and shares of the Marsico Funds or MCM Sub-advised Funds (which are Restricted-Reportable Investments)
o Interests in a state-sponsored college savings 529 plan
o Investments that are not securities, such as commodities, foreign currencies, futures, options, or other derivatives (if not based directly on particular Restricted-Reportable Investments). However, any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency MUST BE REPORTED quarterly and/or annually as described in Section D.2.a above.
(REMINDER: You do NOT need to report activity in or holdings of Investments that are not Covered Securities)
D.3. SALE TRANSACTIONS REQUIRING PRE-CLEARANCE
A Covered Person may SELL OR EXCHANGE a Restricted-Reportable Investment (including Marsico Fund shares or other securities) if the person follows pre-clearance and other procedures designed to avoid potential conflicts of interest.
a. RESTRICTED-REPORTABLE INVESTMENTS (INCLUDING MARSICO FUND SHARES). BEFORE a Covered Person sells or exchanges any Restricted-Reportable Investment (including Marsico Fund shares), a related Employee must complete and submit a Pre-clearance Form and receive written approval (except that sales of ETFs or ETNs do not require pre-clearance). The persons authorized to pre-clear transactions and sign the form are:
Compliance Analysts or Vice President, Compliance Chief Compliance Officer of MCM Chief Compliance Officer of the Marsico Funds
Once pre-clearance is granted, it is valid only until the close of the next business day and only for the security and amount indicated on the Pre-clearance Form unless discussed with Compliance staff.
FAILURE TO OBTAIN PRE-CLEARANCE FOR A SALE OF ANY RESTRICTED-REPORTABLE INVESTMENT (INCLUDING MARSICO FUND SHARES) IS A BREACH OF MARSICO'S RULES. A violation by an Employee or a related Covered Person may expose the Employee to sanctions, may require a trade to be canceled, and the Covered Person or related Employee may be required to bear any loss. MCM may require any profits from an unauthorized trade to be donated to a charity.
b. HOLDING PERIOD FOR SHARES OF MARSICO FUNDS. As a general principle, Covered Persons should engage in personal securities transactions in the Marsico Funds for investment purposes rather than to generate short-term trading profits. Therefore, Covered Persons are generally prohibited from selling Marsico Fund shares acquired within the previous 30 days. MCM may waive compliance with this requirement in advance for good cause shown (such as a need to sell investments to buy a home).
c. BLACKOUT PERIOD. You MAY NOT SELL a Restricted-Reportable Investment for EITHER SEVEN CALENDAR DAYS BEFORE, OR SEVEN CALENDAR DAYS AFTER, a trade in the same security or an equivalent security for a Fund or other client. This blackout period is intended to ensure that a Covered Person's securities transactions do not coincide with those of MCM's clients. Its application BEFORE a trade for a client poses difficulties (since it may be impossible to predict whether a security will be traded in the future). Nonetheless, Marsico makes reasonable efforts to apply this period.
If a pre-cleared trade falls within the blackout period, MCM may ask the Covered Person to cancel the transaction if appropriate in the circumstances, or waive compliance with the requirement if there is good cause or under other special circumstances.
D. 4. SPECIAL TRANSACTIONS REQUIRING PRE-CLEARANCE OF PURCHASE OR SALE
a. EMPLOYMENT ARRANGEMENTS. A Covered Person may buy or sell Restricted-Reportable Investments, including options under a present or former EMPLOYMENT ARRANGEMENT, and may exercise or sell any options, if the employer or an affiliate issues the securities or options. An Employee must obtain MCM's prior approval if a related Covered Person enters into such an arrangement to receive options or other securities in connection with a new employment arrangement commencing after the Employee has joined MCM. (see form of Approval of Investment in Limited Offering). [Covered in b. below]
b. LIMITED OFFERINGS. A Covered Person may NOT acquire an interest in ANY LIMITED OFFERING (such as an interest in a private company, partnership, limited liability company, private equity fund, venture capital fund, hedge fund, or other unregistered operating company or investment company that invests in securities, real estate, or other assets) UNLESS a related Employee obtains MCM's PRIOR APPROVAL (see form of Approval of Investment in Limited Offering). Investments in a hedge fund or other Limited Offering whose assets are invested in publicly-traded shares of stock and other securities like those purchased for MCM clients (except a fund advised by MCM) will generally be subject to conditions similar to those for a Special Account discussed below.
A Covered Person may SELL an interest in a Limited Offering without restrictions (unless the person will receive an interest in an Initial Public Offering in return, which requires MCM's prior approval). Holdings and transactions in a Limited Offering must be reported on Code report forms (subject to exceptions discussed in E.1.d. below).
A Covered Person need not seek approval for or list additional transactions in a Limited Offering after the initial transaction if the additional transactions do not increase the amount of the person's investment or ownership interest beyond what was originally approved by MCM. If there are additional investments beyond the amounts approved, the transactions must be reported.
If a Covered Person acquires a Limited Offering in a private company, either before association with Marsico or through an Exempted Transaction, MCM may have to follow special procedures if it later seeks to purchase securities of the same issuer for clients. The Employee having a Beneficial Ownership interest in the investment may be excluded from decision-making relating to such an investment. If the Employee plays a part in MCM's consideration of the investment, MCM's decision to invest must be independently reviewed by other investment personnel with no personal interest in the issuer. MCM may request information from Employees regarding these items, as appropriate.
Pre-approval and reporting requirements may not apply to a Covered Person's ownership of certain personal or family companies or partnerships that do not hold assets primarily for investment. Shares of a company that holds only family property (such as an airplane, residence, or vacation home), and is not primarily intended as an investment, are exempted because the company is not an investment vehicle. In contrast, if the company holds assets mainly for investment, owns substantial income-producing assets, or offers shares to non-family members, it may be viewed as an investment vehicle, and the exemption may NOT apply.
c. SPECIAL ACCOUNTS. A financial adviser, trustee, or other person may buy or sell Restricted-Reportable Investments in a managed Special Account for an Employee (or other Covered Person in whose securities the Employee has a Beneficial Ownership interest) ONLY in rare circumstances requiring, among other things that the Employee obtains MCM's prior approval (see form of Special Account Certification). Approval will require that:
(1) The financial adviser, trustee, or other person who manages the Special Account has complete control over the account under a written grant of discretion or other formal arrangement, and that the Employee has no direct or indirect influence or control over the Special Account or investment decisions made for it;
(2) The Employee (and any related person) does not disclose to the financial adviser, trustee, or other person who manages the Special Account any action that Marsico may take or has or has not taken, or any consideration by Marsico of any security;
(3) The financial adviser, trustee, or other person who manages the Special Account does not disclose to the Employee (or related Covered Person) any investment decision to be implemented for the Special Account until after the decision has been implemented; and
(4) The Employee completes the form of Special Account Certification (or its equivalent) and any other documents requested by MCM; report the EXISTENCE of the Special Account in periodic holdings and transaction reports; and report SECURITIES HOLDINGS AND TRANSACTIONS IN the Special Account through account statements or otherwise if requested.
Whether an exemption will be granted for a Special Account will be determined on a case-by-case basis. MCM reserves the rights to impose additional conditions as necessary or appropriate depending on the circumstances, and to revoke the exemption at any time.
d. A Covered Person may NOT ACQUIRE an interest in an INITIAL PUBLIC OFFERING UNLESS a related Employee obtains the prior approval of MCM's Compliance Department (see form of Approval of Investment in Initial Public Offering), or the purchase occurs through a transaction involving limited discretion. Because IPO securities generally are Restricted-Reportable Investments, sales of such securities also are subject to pre-clearance requirements.
E.1. REPORTING OBLIGATIONS
Each Employee must give MCM periodic written reports about the Employee's securities holdings, transactions, and accounts and those of other Covered Persons related to the Employee as defined in B.1. above. SEC requirements mainly determine these reports and their contents.
FAILURE TO FILE A TIMELY, ACCURATE, AND COMPLETE REPORT IS A SERIOUS BREACH OF THE CODE AND SEC RULES. If you are late, or file a report that is misleading or incomplete, you may face sanctions including identification by name to the Funds' board of directors or MCM management, withholding of salary or bonuses, or termination of employment.
a. INITIAL HOLDINGS REPORT: Each Employee must provide an initial complete listing of all accounts and each Covered Security (consisting of Restricted-Reportable Investments and Reportable Investments as defined on pages 3 and 4, including Marsico Fund shares and MCM Sub-advised Fund shares) in which you or related Covered Persons had any direct or indirect Beneficial Ownership as of the date when employment began.
(1) Specifically, within ten days after you begin employment with Marsico, you must submit to Marsico a report that contains:
(a) The name/title and ticker symbol (or CUSIP) of each Covered Security (including all holdings of Marsico Fund shares and of MCM Sub-advised Fund shares).
(b) The number of equity shares held; and the principal amount of the COVERED SECURITY as of the date when you began employment with Marsico. You may provide this information in part by referring to attached copies of broker transaction confirmations or account statements that contain accurate, up-to-date information. All information contained in confirmations or account statements attached to the initial holdings report must be current as of a date not more than 45 days prior to the date of your employment.
(c) The name and address of any broker, dealer, bank, or other institution (such as a general partner of a limited partnership, or transfer agent of a company) that maintained ANY ACCOUNT in which ANY SECURITIES (Covered Securities or not) were held for your or any related Covered Person's direct or indirect benefit when you began employment with Marsico, the approximate date(s) when those accounts were established, and the account numbers and names of the persons for whom the accounts are held. MCM's Compliance Department will request duplicate account statements and confirmations from relevant brokers, dealers, banks and other institutions with assistance from the Marsico Employee.
(d) The date that you submitted the report.
b. QUARTERLY TRANSACTION REPORT: Each Employee must provide a quarterly report indicating all transactions during the quarter in Covered Securities (this includes Restricted-Reportable Investments and Reportable Investments as defined on pages 3 and 4) in which you or related Covered Persons had any direct or indirect Beneficial Ownership.
(1) Specifically, within thirty days after the end of each calendar quarter, you must submit to Marsico a report that contains:
(a) The date of each transaction (purchases, exchanges, sales), the name/title and ticker symbol (or CUSIP), interest rate and maturity date (if applicable), and the number of equity shares of and the principal amount of each COVERED SECURITY involved. Any transactions in an automatic investment plan including a dividend reinvestment plan do not need to be reported. In the event that no reportable transactions occurred during the quarter, the report should be so noted and submitted.
(b) The nature of the transaction (I.E., purchase, sale, or other type of acquisition or disposition).
(c) The price at which the transaction was effected.
(d) The name of the broker, dealer, bank, or other institution with or through which the transaction was effected.
You may provide this information by referring to attached copies of broker transaction confirmations or account statements that contain accurate, up-to-date information, or by referring to statements or confirmations (or other information) known to have been received by Marsico no later than 30 days after the end of the applicable calendar quarter. YOU NEED NOT PROVIDE BACK-UP STATEMENTS REGARDING TRANSACTIONS IN MARSICO FUND SHARES THAT ARE HELD AT GREAT WEST OR UMB. Marsico Compliance department obtains monthly transaction reports from Great West regarding the Marsico 401(k) accounts and from UMB regarding Marsico Fund shares you hold at UMB in accounts that you have identified.
(e) The name and address of any broker, dealer, bank, or other institution (such as a general partner of a limited partnership, or transfer agent of a company) that maintained ANY ACCOUNT in which ANY SECURITIES (Covered Securities or not) were held during the quarter for your or any related Covered Person's direct or indirect benefit, the account numbers and names of the persons for whom the accounts were held, and the approximate date when each account was established.
(f) A notice of any NEW account opened for the direct or indirect Beneficial Ownership of the Employee DURING THE PAST QUARTER. MCM's Compliance Department will send a request to relevant institutions to provide duplicate account statements and confirmations of securities transactions to Marsico with assistance from the Employee.
(g) The date that you submitted the report.
c. ANNUAL HOLDINGS REPORT: Annually, within 45 days after a date specified by the Compliance Department, each Employee must submit to Marsico a report that contains a complete listing of all accounts and of each Covered Security (consisting of Restricted-Reportable Investments and Reportable Investments as defined on pages 3 and 4, including Marsico Fund shares) in which you or related Covered Persons had any direct or indirect Beneficial Ownership as of the date.
(1) Specifically, within 45 days after the specified date, you must submit to Marsico a report that contains:
(a) the name/title and ticker symbol (or CUSIP) of each Covered Security (including all holdings of Marsico Fund shares).
(b) the number of equity shares held.
(c) the principal amount of the COVERED SECURITY.
You may provide this information in part by referring to attached copies of broker transaction confirmations or account statements that contain accurate, up-to-date information. All information contained in confirmations or account statements attached to the annual holdings report must be current as of the specified date (not more than 45 days prior to the submission date). YOU NEED NOT PROVIDE BACK-UP STATEMENTS REGARDING MARSICO FUND SHARES THAT ARE HELD AT GREAT WEST OR UMB. Regarding Marsico Fund shares, Marsico Compliance department obtains monthly transaction reports from Great West regarding the Marsico 401(k) accounts and from UMB regarding Marsico Fund shares you hold at UMB in accounts that you have identified. YOU MUST CONFIRM THAT THE INFORMATION CONTAINED IN THESE CONFIRMATIONS AND STATEMENTS OR TRANSACTION REPORTS ACCURATELY REFLECTS ALL REPORTABLE HOLDINGS FOR THE PERIOD.
(d) The name and address of any broker, dealer, bank, or other institution (such as a general partner of a limited partnership, or transfer agent of a company) with which you maintained ANY ACCOUNT IN WHICH ANY SECURITIES (COVERED SECURITIES OR NOT) were held for your or any related Covered Person's direct or indirect benefit on the effective date, the account numbers and names of the persons for whom the accounts are held, and the approximate date when each account was established.
(e) The date that you submitted the report.
(f) Certifications: Initially, annually, and following any amendments, all Employees will be required to certify that they have read and understand the Code and have complied with the requirements of the Code.
d. EXCEPTION TO REQUIREMENT TO LIST TRANSACTIONS OR HOLDINGS: You need not list any SECURITIES HOLDINGS OR TRANSACTIONS IN any account over which you had no direct or indirect influence or control, unless requested by MCM. This may apply, for example, to a Special Account. You must still identify the EXISTENCE of the account in your list of securities accounts.
Marsico may at any time request statements for any account listed on a report to assist in ensuring compliance with the Code. Please ask the Compliance Department or the Legal Department if you have questions about reporting requirements.
E.2. REVIEW OF REPORTS AND OTHER DOCUMENTS
The Compliance Department will review each report submitted pursuant to
Section E.1. by Employees for consistency with the Code, and may review account
statements or confirmations from institutions that maintain the accounts. To
ensure adequate scrutiny, a report concerning a member of the Compliance
Department will be reviewed by a different member of the Compliance Department.
F. VIOLATIONS OF THE CODE
All Employees will promptly report any violations of the Code to the Chief Compliance Officer of MCM, the Chief Compliance Officer of the Funds, or a member of the Compliance Department.(1) Reports of violations of the Code may be submitted anonymously. Voluntary cooperation with MCM's internal compliance and reporting systems may assist MCM to efficiently manage and resolve compliance issues as well as benefit Employees. Efforts to obscure Code violations may result in sanctions. EMPLOYEES WHO IN GOOD FAITH REPORT VIOLATIONS OF THE CODE OR OTHER MCM POLICIES AND PROCEDURES SHALL NOT BE SUBJECT TO ANY RETALIATION FOR THEIR CONDUCT IN REPORTING SUCH VIOLATIONS.
The Compliance Department will promptly investigate any violation or potential violation of the Code, and recommend to the Chief Compliance Officer of MCM or the Chief Compliance Officer of the Funds appropriate action to cure the violation and prevent future violations. The Compliance Department will keep a record of investigations of violations, including actions taken as a result of a violation. If an Employee or a related Covered Person violates the Code, the Employee may be subject to sanctions including identification by name to the Funds' board of directors or MCM management, withholding of salary or bonuses, or termination of employment. Violations of the Code also may violate federal or state laws and may be referred to authorities.
G. PROTECTION OF MATERIAL, NON-PUBLIC INFORMATION
MCM maintains comprehensive policies and procedures designed to prevent the misuse of material, non-public information ("Insider Trading Policy"). MCM's Insider Trading Policy is designed to ensure, among other goals, that MCM personnel act consistently with fiduciary and legal duties owed to clients, and that those personnel do not
personally profit from material, non-public information available to them at the expense of clients or other persons to whom duties are owed. MCM's Insider Trading Policy is also designed to ensure that MCM's proprietary information, including MCM securities recommendations and client securities holdings, is not disclosed improperly. Every MCM employee is required to read the Insider Trading Policy, to sign and return accompanying acknowledgements, and to retain a copy of the policy in a readily accessible place for reference.
SPECIAL PROVISION FOR INDEPENDENT FUND TRUSTEES: This provision is intended to prevent the misuse of material, non-public information when an Independent Trustee also serves as a director or officer of an operating company, if the company's securities are held by a Fund, or are under consideration for purchase or sale by the Fund. In those circumstances, the Independent Trustee may not discuss the company or the Marsico Funds' holdings (or contemplated holdings) in the company with any Marsico Employee. The Independent Trustee also should recuse himself or herself from any Board discussion or presentation regarding the securities of the company. The Independent Trustee may attend a general company meeting or other meeting, at which the Independent Trustee may discuss the company with other members of the Board, the financial community, or securities analysts. Any questions regarding this policy should be discussed with the Chief Compliance Officer of the Funds.
H.1. MISCELLANEOUS ISSUES CONCERNING BOARD SERVICE, GIFTS, AND LIMITED OFFERINGS
Some conduct that does not involve personal trading may still raise concerns about potential conflicts of interest, and is therefore addressed here.
a. SERVICE ON BOARDS: Employees may not serve on the board of directors or in a similar capacity for any for-profit company or other for-profit organization that is the type of company in which MCM might reasonably consider investing for clients without MCM's written approval. Approval generally will be granted only if MCM believes that board service is consistent with the best interests of Marsico's clients. If service on the board or in a similar capacity is authorized, you and MCM may need to follow certain procedures to ensure that you and Marsico do not obtain or misuse confidential information. MCM also may require you to show that any securities you receive from the for-profit company or organization are appropriate compensation.
b. OTHER BUSINESS ACTIVITIES/RELATIONSHIPS: Employees should consider their fiduciary responsibilities to MCM and its clients in connection with outside business activities and family members' employment arrangements. Outside business activities and employment arrangements should not interfere with the Employee's responsibilities at MCM, and Employees should be sensitive to the appearance of potential conflicts of interest. A potential conflict of interest may appear to exist when an Employee's or family member's private or personal interests could significantly interfere with the interests of MCM or its clients, including the Marsico Funds.
To help MCM manage potential conflicts of interest, please inform the Compliance Department or Legal Department of any significant business activities or family employment arrangements that might appear to raise potential conflicts of interest, including, but not limited to, business or employment relationships with a broker-dealer or other service provider to MCM, a company in which MCM invests or may invest, a client or potential client of MCM, or another firm that has a significant relationship with MCM. Any questions should be directed to the Compliance Department or Legal Department.
c. GIFTS/ENTERTAINMENT: Marsico seeks to work with service providers and clients based primarily on factors such as the quality of services provided, rather than on extraneous considerations such as gifts or relationship aspects not relevant to service quality.
ACCEPTING GIFTS OR ENTERTAINMENT
On occasion, Employees may be offered non-cash gifts or entertainment by clients, broker-dealers, other service providers or vendors, or other persons not affiliated with Marsico who may be in a position to do business with Marsico. Employees may not accept cash gifts, or extraordinary or extravagant gifts or entertainment. SUBJECT TO RESTRICTIONS ON RECEIVING GIFTS AND ENTERTAINMENT BASED ON MCM'S PROVISION OF SERVICES TO ERISA PLANS, AS DISCUSSED FURTHER BELOW, you may accept gifts of a nominal value (I.E., no more than $100 annually from one person) such as gift baskets or food items. (MCM does not consider trinkets such as pens, key chains, Lucite "tombstones", logo-emblazoned items or similar promotional items of de minimis value to be gifts.) For reasons such as to maintain good working relationships and service quality, you may accept invitations to participate in customary business meals and/or other entertainment if both you and the giver are present and the entertainment is not exclusive or extravagant (E.G., routine sporting events or theatrical productions that are not premiere events).
EMPLOYEES SHOULD NOT ACCEPT GIFTS, MEALS, OR ENTERTAINMENT FROM ANYONE BASED ON MCM'S POSITION IN PROVIDING INVESTMENT MANAGEMENT SERVICES TO ERISA PLANS (or to pooled funds on behalf of such plans), or based on the value or amount of business conducted with ERISA plans (or with pooled funds on behalf of such plans), without pre-approval by the Compliance Department. If such gifts or entertainment are inadvertently accepted, please promptly notify the Compliance Department.
You may not solicit gifts or entertainment from anyone. Please do not accept gifts or entertainment that could raise any questions or be embarrassing to you or Marsico if made public.
GIVING GIFTS OR ENTERTAINMENT
SUBJECT TO RESTRICTIONS ON GIVING GIFTS AND ENTERTAINMENT TO REPRESENTATIVES OF ERISA PLANS, TAFT HARTLEY CLIENTS (E.G. UNION CLIENTS OR PROSPECTS), AND FOREIGN PUBLIC OFFICIALS, AS DESCRIBED FURTHER BELOW, employees may not give a gift that has a fair market value greater than $100 per year to persons associated with securities or financial organizations, exchanges, broker-dealers, publicly traded companies, commodity firms, news media, or
clients or potential clients of MCM. Subject to the restrictions discussed below, you may provide reasonable entertainment to these persons if both you and the recipient are present and the entertainment is not exclusive or extravagant. Please do not give gifts or entertainment that could raise any questions or be embarrassing to you or Marsico if made public.
EMPLOYEES SHOULD NOT GIVE GIFTS, MEALS, OR ENTERTAINMENT TO ANYONE IN CONNECTION WITH MCM'S POSITION IN PROVIDING INVESTMENT MANAGEMENT SERVICES TO ERISA PLANS (or to pooled funds on behalf of such plans), or based on the value or amount of business conducted with ERISA plans (or with pooled funds on behalf of such plans). EMPLOYEES ALSO SHOULD NOT GIVE ANY GIFTS, MEALS OR ENTERTAINMENT TO TAFT-HARTLEY CLIENTS (UNION CLIENTS OR PROSPECTS) OR FOREIGN PUBLIC OFFICIALS (FOR EXAMPLE, PUBLIC OFFICIALS THAT RUN SOVEREIGN WEALTH FUNDS). If such gifts, meals or entertainment are inadvertently given, please promptly report to the Compliance Department.
MCM may request information from Employees relating to gifts/entertainment activities. Please ask the Compliance Department or the Legal Department if you have questions about gifts or entertainment.
H.2. RECORDKEEPING REQUIREMENTS
Marsico or its agents will maintain the following records at their places of business in the manner stated below. These records may be made available to the Securities and Exchange Commission for reasonable periodic, special, or other examinations:
O A copy of the Code that is in effect, and any Code that was in effect at any time within the past five years (maintained in an easily accessible place);
O A record of any violation of the Code, and of any action taken as a result of the violation (maintained in an easily accessible place for five years after the end of the fiscal year in which the violation occurs);
O A copy of each report required to be submitted by an Employee under
Section E.1., including broker transaction confirmations or account
statements (maintained for at least five years after the end of the fiscal
year in which the report is made or the information is provided, the first
two years in an easily accessible place);
O A record of all Employees within the past five years, and who are or were required to make reports under the Code (maintained in an easily accessible place);
O A record of all persons who are or were responsible for reviewing reports of Employees during the past five years (maintained in an easily accessible place);
O A copy of each report to the Board of Trustees of the Funds submitted under Section H.3. of the Code (maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place);
O A copy of each written approval granted to an Employee (including the reasons supporting such decision) relating to a Covered Person's acquisition of securities in an Initial Public Offering or a Limited Offering, and each written approval of other transactions, such as a Pre-clearance Form (maintained for at least five years after the end of the fiscal year in which the approval was granted); and
O A copy of each Employee's periodic Certificate of Compliance (acknowledging receipt of the Code and any amendments) for five years (maintained in an easily accessible place).
H.3. BOARD APPROVAL AND ANNUAL REVIEW REQUIREMENTS
This Code and any material changes must be approved by the Board of
Trustees of the Funds, including a majority of the Independent Trustees, within
six months after the adoption of the material change. Each approval must be
based on a determination that the Code contains provisions reasonably necessary
to prevent Access Persons from engaging in any conduct prohibited by Rule 17j-l
(b) under the 1940 Act, including conduct identified in Section D above.
At least annually, the Fund's Chief Compliance Officer, on behalf of MCM, will provide to the Board of Trustees of the Funds, and the Trustees will review, a written report that summarizes existing procedures concerning personal trading (including any changes in the Code), certifies that Marsico has adopted procedures reasonably necessary to prevent violations of the Code, describes any issues arising under the Code, including any material violations and sanctions imposed since the last report to the Board, and identifies any recommended changes to the Code.
MCM's Chief Compliance Officer must approve the Code on behalf of MCM. On an annual basis, MCM's Chief Compliance Officer, with the assistance of any designees, will also review the adequacy and effectiveness of the Code, and make any necessary recommendations for revisions of the Code.
MCM's Compliance Department is responsible for providing, as necessary, any training and education to Employees regarding compliance with the Code.
I. DEFINITIONS OF CERTAIN TERMS
1. "Access Person" means:
(a) Any "MCM-Supervised Person," defined as any MCM partner, officer, director (or person with similar status or functions), or employee (or other person who provides investment advice for MCM and is subject to MCM's supervision or control), if the MCM-Supervised Person:
(i) Has access to non-public information regarding any MCM client's purchase or sale of securities, or non-public information regarding the portfolio holdings of any investment company advised or sub-advised by MCM; or
(ii) Is involved in making securities recommendations to clients, or has access to such recommendations that are non-public;
(b) Any "Advisory Person of the Funds or of MCM," defined as (i) any director, officer, general partner or employee of the Funds or MCM (or of any company in a control relationship to the Funds or MCM) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Covered Securities by a Fund, or whose functions relate to the making of any recommendations with respect to those purchases or sales; and (ii) any natural person in a control relationship to the Funds or MCM who obtains information concerning recommendations made to a Fund with regard to the purchase or sale of Covered Securities by the Fund; and
(c) Any "Informed Underwriter Representative," defined as a director, officer, or general partner of the principal underwriter to the Funds who, in the ordinary course of business, makes, participates in, or obtains information regarding, the purchase or sale of Covered Securities by a Fund, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to a Fund regarding the purchase or sale of Covered Securities; provided that the Informed Underwriter Representative would not be required to meet reporting requirements under the Code (or any code of ethics maintained by the principal underwriter) unless the principal underwriter is an affiliated person of a Fund or MCM, or the Informed Underwriter Representative also serves as an officer, director, or general partner of a Fund or MCM.
(d) All directors, officers, and general partners of either MCM or the Funds are presumed to be Access Persons.
2. "Beneficial Ownership" has the same meaning as under Section 16 of the Securities Exchange Act of 1934 and Rule 16a-1(a) (2) under the Act. Under those provisions, a person generally is the beneficial owner of (or has a Beneficial Ownership interest in) any securities in which the person has or shares a direct or indirect pecuniary interest. A person's Beneficial Ownership interest ordinarily extends to securities held in the name of a spouse, minor children, relatives resident in the person's home, or unrelated persons in circumstances that suggest a sharing of financial interests, such as when the person makes a significant contribution to the financial support of the unrelated person, or shares in profits of the unrelated person's securities transactions. Key factors in evaluating Beneficial Ownership include the person's ability to benefit from the proceeds of a security, and the extent of the person's control over the security.
3. "Covered Person" -- see Section B.1.
4. "Covered Security" -- see Section B.2.
5. "Employee" means (1) any Marsico Employee, (2) any temporary staffer who has worked for Marsico continuously for more than 30 days, and (3) any other Access Person not included within (1) and (2). "Employee" does not include an INDEPENDENT Trustee of the Funds.
6. "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
7. "Limited Offering" means any offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) or Section 4(6) of the Securities Act or pursuant to Rule 504, 505, or 506 under the Securities Act. A Limited Offering generally includes any interest in a private company, partnership, limited liability company, private equity fund, venture capital fund, hedge fund, or other unregistered operating company or investment company that invests in securities, real estate, or other assets, and certain interests in stock options or other deferred compensation.
8. "Marsico Employee" means any officer, principal, or permanent employee of MCM, and any officer or permanent employee of the Funds. "Marsico Employee" does not include an INDEPENDENT Trustee of the Funds. "Marsico Employee" also does not include an inactive or semi-retired employee who receives salary or benefits, but does not actively participate in Marsico's business, have access to current information regarding the purchase or sale of Covered Securities by the Funds, or make recommendations regarding those purchases or sales.
9. "Restricted-Reportable Investment" -- see Section B.2.a.
10. "Reportable Investment" -- see Section B.2.b.
11. "Security Held or to be Acquired by a Fund" means (1) any Covered Security
that within the most recent 15 days (a) is or has been held by one of the Funds
or a mutual fund sub-advised by MCM; or (b) is being or has been considered by a
Fund or MCM for purchase by the Fund or a mutual fund sub-advised by MCM; and
(2) any option to purchase or sell, and any security convertible into or
exchangeable for, such a Covered Security.
12. "Special Account" means a managed account in which a financial adviser, trustee, or other person buys or sells Restricted-Reportable Investments for a Covered Person (or for a person in whose securities a Covered Person has a Beneficial Ownership interest), provided that the account meets the requirements described in Section D.2.f.(4).
The following forms are available in the MCM Forms public drive:
O Initial Personal Holdings Report;
O Quarterly Personal Transaction Report;
O Annual Personal Holdings Report;
O Sample Letter to Broker or Other Institution;
O Initial/Annual Certification of Compliance with Code of Ethics;
O Approval of Investment in Limited Offering;
O Approval of Investment in Initial Public Offering;
O Special Account Certification;
O Pre-clearance Form.
J. ADOPTION AND EFFECTIVE DATE
Approved by: /S/ STEVEN CARLSON
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Title: CHIEF COMPLIANCE OFFICER
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Effective as of: OCTOBER 1, 2004
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Amended: APRIL 1, 2005
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Approved by: /S/ STEVEN CARLSON
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Title: CHIEF COMPLIANCE OFFICER
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Effective Date: FEBRUARY 1, 2005
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Amendment Approved: August 8, 2008
Approved by: /s/ STEVEN CARLSON
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Title: CHIEF COMPLIANCE OFFICER
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Effective Date: SEPTEMBER 1, 2008
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Approved by: /s/ STEVEN CARLSON
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Title: CHIEF COMPLIANCE OFFICER
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Effective Date: DECEMBER 6, 2011
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Approved by: /S/ STEVEN CARLSON
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Title: CHIEF COMPLIANCE OFFICER
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Effective Date: DECEMBER 10, 2012
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DRIEHAUS CAPITAL MANAGEMENT LLC
DRIEHAUS SECURITIES LLC
DRIEHAUS MUTUAL FUNDS
DRIEHAUS CAPITAL MANAGEMENT (USVI) LLC
CODE OF ETHICS AND BUSINESS CONDUCT
STATEMENT OF GENERAL POLICY AND BUSINESS PRINCIPLES
This Code of Ethics and Business Conduct ("Code") has been adopted under Rule 17j-1 of the Investment Company Act of 1940 ("Rule 17j-1") and Rule 204A-1 of the Investment Advisers Act of 1940 ("Rule 204A-1"). Rule 17j-1 is applicable because Driehaus Capital Management LLC (the "Adviser") is the investment adviser to Driehaus Mutual Funds (the "Fund"), a registered investment company, and Driehaus Securities LLC ("DS LLC") is the Fund's principal underwriter. The Code also applies to any registered investment company that the Adviser may serve as an investment adviser or sub-adviser. The Code covers all Employees of the Adviser, DS LLC and Driehaus Capital Management (USVI) LLC (collectively the "Firm," "we" or "us"); the Fund's Disinterested Trustees and Advisory Board Members; and others as may be designated from time to time by the Firm ("Access Persons").(1) Our Employees are also subject to the Firm's policies and procedures, including the compliance manuals and employee handbooks that are readily accessible on our Firm's intranet, which may impose additional restrictions on their conduct, including personal securities transactions.
The Code is specifically and reasonably designed for how we conduct our activities and addresses the particular conflicts of interest that we may encounter. A long-standing core business principle of our Firm is our commitment to maintaining the highest legal and ethical standards in the conduct of our business. We have built our reputation for excellence on Client trust and confidence in our professional abilities and integrity. The Code seeks to prevent Employee misuse of material non-public information regarding current and prospective investments we make for our Clients, investment research we perform for our Clients and actual and proposed trading on behalf of our Clients. Together with this Code, we have adopted and implemented various internal policies and procedures to detect and prevent the misuse of material non-public information. Compliance with this Code as well as additional policies and procedures is monitored and enforced by our legal and compliance professionals, who are supported by our strong "culture of compliance."
Integral to our investment management process is "real time" internal sharing of information by the Adviser's Portfolio Managers and research analysts within the equity and credit strategies. However, information sharing of individual securities does not occur between the equity and credit strategies due to the portfolio management, order execution and organizational differences between them. The investment personnel for the equity strategies are required to systematically enter research information about the securities held by or under consideration for purchase or sale for a Client, Restricted Strategy or Restricted Account in our Global Research Database
("GRD") before placing any orders in our Order Management System ("OMS") for execution. The data in the GRD is accessible to, among others, Employees, including the Credit Strategies investment personnel, responsible for the Firm's investment and trading activities on behalf of our Clients. However, the investment personnel for the Credit Strategies are not required to use the GRD because the instruments researched and traded by them, e.g. bonds, options and swaps, cannot be entered into this system. Rather, information sharing occurs on a regular and continuous basis among the portfolio management team of the Credit Strategies. The Adviser believes that even though Credit Strategies research is not entered into the GRD, the equity strategies are not disadvantaged because of the marked differences between the strategies and their portfolio holdings. The transactions of the Credit Strategies are monitored by the Compliance Department for potential conflicts of interest with Clients and the results of such monitoring are reported to the Ethics Committee.
We believe that these information sharing and trading procedures, along with the comprehensive Employee education and training, personal securities transaction reporting, compliance monitoring and the imposition of sanctions, where appropriate, work collectively to ensure that as fiduciaries we and all Access Persons do not place our interests above our Clients' interests and comply with the applicable Federal securities laws, rules and regulations.
Any questions regarding the Code's operation should be directed to the Firm's Chief Compliance Officer ("CCO"). Throughout the Code, there are also specific references to the assistance that the CCO can provide to Access Persons. The CCO shall act in accordance with the Firm's policies and procedures, the Code, guidance from the Ethics Committee and in consultation with counsel.
1. DEFINITIONS OF TERMS USED
(a) "Access Person" means (i) any Fund Trustee, Fund officer, Advisory Board Member or Employee of the Fund or the Firm; and (ii) any natural person who is employed by an entity which controls, is controlled by or is under common control with the Fund or the Firm who obtains or has access to information concerning the purchase or sale of Covered Securities or those under consideration for purchase or sale or current holdings of the Fund or a Client.
(b) "Acknowledgment" means the initial and annual written certification by each Access Person of receipt and compliance with the Code.
(c) "Adviser" means Driehaus Capital Management LLC.
(d) "Advisory Board Member" means any individual serving as a member of an Advisory Board appointed by the Board of Trustees of the Fund.
(e) "Automatic Investment Plan" means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan.
(f) "Beneficial Interest" shall be interpreted in the same manner as it would be in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") and rules thereunder, which includes any interest in which a person, directly or indirectly, has or shares a direct or indirect pecuniary interest. A pecuniary interest is the opportunity, directly or indirectly, to profit or share in any profit derived from any transaction. Each Access Person will be assumed to have a pecuniary interest, and therefore, beneficial interest or ownership, in all securities held by the Access Person, the Access Person's spouse or domestic partner, all minor children, all dependent adult children and adults sharing the same household with the Access Person (other than mere roommates) and in all accounts subject to their direct or indirect influence or control and/or through which they obtain the substantial equivalent of ownership, such as trusts in which they are a trustee or beneficiary, partnerships in which they are the general partner, except where the amount invested by the general partner is limited to an amount reasonably necessary in order to maintain the status as a general partner, corporations in which they are a controlling shareholder, except any investment company, mutual fund trust or similar entity registered under applicable U.S. or foreign law, or any other similar arrangement. Any questions an Access Person may have about whether an interest in a security or an account constitutes beneficial interest or ownership should be directed to the Firm's CCO.
(g) "Client" means an advisory client of the Adviser. Client shall not include an Employee or Restricted Account.
(h) "Compliance11" is the Firm's vended web-based compliance and personal trading system, which is primarily used for tracking Employees' holdings, securities transactions, gifts and political contributions.
(i) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Investment Company Act of 1940 (the "Company Act") and
Section 202(a)(18) of the Investment Advisers Act of 1940 (the
"Advisers Act"), including any right to acquire such security, such as
puts, calls, other options or rights in such securities, and
securities-based futures contracts, except that it shall not include
securities which are direct obligations of the Government of the
United States, shares issued by registered open-end investment
companies other than those for which the Adviser serves as the
investment adviser or sub-adviser or DS LLC serves as principal
underwriter, bankers' acceptances, bank certificates of deposit or
commercial paper and high quality short-term debt instruments,
including repurchase agreements.
(j) "Credit Strategies" are the investment strategies of the Adviser that invest primarily in fixed income and floating rate securities, of both investment and non-investment grade credit quality, and engage in a variety of short-term trading strategies involving both fixed income and equity securities.
(k) "Disinterested Trustee" means any trustee of a Fund who is not an interested person of the Firm, is not an officer of the Fund and is not otherwise an "interested person" of the Fund as defined in the Company Act.
(l) "DS LLC" means Driehaus Securities LLC.
(m) "Employee" means any person employed by the Firm, whether on a full or part- time basis, all officers, shareholders and directors of the Firm and any natural person who is employed by an entity which controls, is controlled by or is under common control with the Fund or the Firm who obtains or has access to information concerning the purchase or sale of Covered Securities or those under consideration for purchase or sale or current holdings of the Fund or a Client.
(n) The "Ethics Committee" shall consist of at least three but no more than five members who shall be Employees. One of the members shall be the Firm's General Counsel. The Ethics Committee shall be comprised of Employees with sufficient experience and knowledge of the legal obligations and regulatory responsibilities of the Fund and the Firm. The Ethics Committee shall promptly advise the Fund's Board of Trustees of any appointment or resignation by a member of the Ethics Committee. The Ethics Committee as a whole and each member shall act in accordance with Section 11 below.
(o) "Federal Securities Laws" has the same meaning as that term is defined in Rule 204A-1(e)(4) under the Advisers Act, and includes the Securities Act of 1933 ("Securities Act"), the Exchange Act, the Company Act, the Advisers Act, Title V of the Gramm-Leach-Bliley Act, any rules adopted by the U.S. Securities and Exchange Commission (the "SEC") under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted thereunder by the SEC or the U.S. Department of the Treasury.
(p) "Fund" means Driehaus Mutual Funds.
(q) "GRD" is the Adviser's Global Research Database, a proprietary software application that Employees of the Adviser's Investment Management and Research Department are required to use to enter, update, make available and maintain research information about securities held by or under consideration for purchase or sale for a Client, Restricted Strategy or Restricted Account. The GRD data is available to Employees, including those with responsibility for investment management and research, trading, and legal and regulatory compliance.
(r) "Limited Offering" includes private placements and means an offering that is exempt from registration under Section 4(2) or Section 4(6) under the Securities Act or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities Act.
(s) "New Issue" means an offering of securities registered under the Securities Act, the issuer of which, immediately before the registration, was not required to file reports under Sections 13 or 15(d) of the Exchange Act.
(t) "Personal Benefit" includes any intended benefit for oneself or any other individual, company, group or organization of any kind whatsoever except a benefit for a Client or any entity that adopts this Code.
(u) "Restricted Account" means an account of the Adviser in which Employees own a Beneficial Interest of 25% or more.
(v) "Restricted Strategy" means an investment strategy of the Adviser in which Employees own a Beneficial Interest of 25% or more.
(w) "Segregated Account" means a Restricted Account which is subject to information barriers from internally-generated stock-specific research information, order and execution information and current holdings information regarding Covered Securities held by or under consideration for purchase or sale for a non-Segregated account or strategy of the Adviser.
(x) "Segregated Strategy" means a Restricted Strategy which is subject to information barriers from internally-generated stock-specific research information, order and execution information and current holdings information regarding Covered Securities held by or under consideration for purchase or sale for a non-Segregated account or strategy of the Adviser.
2. STANDARDS OF BUSINESS CONDUCT AND COMPLIANCE WITH LAWS
Access Persons are required at all times to comply with the Federal Securities Laws as applicable in conducting the business of the Firm or the Fund. Accordingly, a violation of the Federal Securities Laws will be a violation of this Code and may subject an Access Person to sanctions or other appropriate remedial action under the Code.
In addition, as a SEC registered investment adviser subject to the Advisers Act, the Adviser has fiduciary obligations to its Clients. Further, the Code requires that the conduct of Access Persons comply with the fundamental principles of integrity, honesty and trust.
The Code is designed to ensure that Access Persons understand and comply with their fiduciary obligations and to protect Clients by deterring misconduct. The Code also educates Access Persons about the expectations of the Firm and the Fund regarding their behavior and the Federal Securities Laws that govern their conduct, as applicable.
The Code and related policies and procedures contain provisions reasonably necessary to prevent Access Persons from engaging in acts in violation of the Code. Access Persons are required to report any violations of the Code to the CCO. The CCO is primarily responsible for monitoring compliance with the Code and reporting material violations of the Code to the Ethics Committee to ensure the Code's enforcement.
3. TRANSACTIONS WITH A FUND
No Access Person shall sell to, or purchase from, a Fund any security or other property (except merchandise in the ordinary course of business), in which such Access Person has or would acquire a Beneficial Interest, unless such purchase or sale involves shares of that Fund.
4. DISCLOSURE OF INFORMATION
No Access Person shall discuss with or otherwise inform others of any security held or to be acquired by a Client except in the performance of employment duties or in an official capacity and then only for the benefit of the Client, and in no event for Personal Benefit or for the benefit of others.
No Access Person shall release information to dealers or brokers or others (except to those concerned with the execution and settlement of a transaction) as to any changes in a Client's investments, proposed or in process, except (i) upon the completion of such changes, or (ii) when the disclosure results from the publication of a prospectus, or (iii) in conjunction with a regular report to shareholders or to any governmental authority resulting in such information becoming public knowledge, or (iv) in connection with any report to which shareholders are entitled by reason of provisions of the declaration of trust, by-laws, rules and regulations, contracts or similar documents governing the operations of the Client.
5. PREFERENTIAL TREATMENT, GIFTS AND BUSINESS ENTERTAINMENT
No Employee shall seek or accept favors, preferential treatment, or any other Personal Benefit because of his or her association with a Client, except those usual and normal benefits directly provided by the Client.
No Employee shall seek or accept any gift or other Personal Benefit of more than de minimis value, i.e. $100 per person per year, from any person or entity that does business with the Firm or Fund or is seeking to do business with the Firm or Fund. Employees are required to promptly report the receipt of any gift or other Personal Benefit to the CCO no later than thirty days after the calendar quarter during which the gift or Personal Benefit was received. Such reporting should be made through Compliance11. The CCO shall arrange to donate all gifts of more than de minimis value to charity.
Likewise, no Employee shall seek or accept any business entertainment from any person or entity that does business with the Firm or Fund or is seeking to do business with the Firm or Fund other than usual and customary business entertainment. Usual and customary business entertainment includes an occasional dinner, a ticket to a sporting event, or comparable entertainment, as long as the donor and recipient are both present at the event and the entertainment or event is not so frequent or lavish as to raise any question of propriety. Employees are required to promptly report business entertainment to the CCO no later than thirty days after the calendar quarter during which the business entertainment took place. Such reporting should be made through Compliance 11.
Any questions regarding the receipt of any gift, entertainment or other Personal Benefit should be directed to the CCO of the Firm. The CCO shall report any exceptions to the gifts and business entertainment policy to the Ethics Committee for appropriate action consistent with enforcement of the Code.
6. CONFLICTS OF INTEREST
If any Access Person is aware of a personal interest that is, or might be, in conflict with the interest of a Client, that Access Person should disclose the situation or transaction and the nature of the conflict to the CCO for appropriate consideration. The CCO may consult with the Ethics Committee or counsel with respect to any appropriate action that should be taken.
7. SERVICE AS A DIRECTOR
Employees are prohibited from serving on the boards of directors of unaffiliated for- profit or not-for-profit corporations, business trusts or similar business entities, whether or not their securities are publicly traded, absent prior written approval by the Ethics Committee, based upon a determination that the board service would not be inconsistent with the interests of the Firm and the Fund. Copies of all written approvals obtained under this paragraph must be provided to and maintained by the CCO.
8. MATERIAL NON-PUBLIC INFORMATION
Securities laws and regulations prohibit the misuse of material non-public information when trading or recommending securities.
Material non-public information obtained by any Access Person from any source must be kept strictly confidential. All material non-public information should be kept secure, and access to files and computer files containing such information should be restricted. Access Persons shall not act upon or disclose material non-public information except as may be necessary for legitimate business purposes on behalf of a Client or the Firm as appropriate. Questions and requests for assistance regarding material non-public information should be promptly directed to the CCO of the Firm.
Material non-public information may include, but is not limited to, knowledge of pending orders or research recommendations, corporate finance activity, mergers or acquisitions, and other material non-public information that could reasonably be expected to affect the price of a security.
Client account information and Fund shareholder account information are also confidential and must not be discussed with any individual whose responsibilities do not require knowledge of such information.
9. RESTRICTIONS ON PERSONAL SECURITY TRANSACTIONS
No Access Person shall knowingly take unlawful advantage of his or her position with the Firm or with the Fund for Personal Benefit, or take action inconsistent with such
Access Person's obligations to the Firm, or any Client. All personal securities transactions must be consistent with this Code and must be conducted in a manner designed to avoid any actual or potential conflict of interest or any abuse of any Access Person's position of trust and responsibility. Any transaction effected with the purpose of profiting as a result of one or more transactions effected or anticipated for a Client ("scalping" or "frontrunning") is prohibited.
(a) ALL EMPLOYEES:
No Employee shall purchase or sell a Covered Security within four calendar days of a Client trade in that Covered Security. This four day blackout restriction shall not apply to the following exceptions, unless the Ethics Committee determines that the conduct is inconsistent with the Code or the Federal Securities Laws.
1. "GRD Entries" An Employee may buy or sell a Covered Security for a Restricted Strategy or Restricted Account after the security name and research information about the security has been entered into the GRD.
2. "ERISA Account Transactions" Trades may be effected for an account of a qualified employee benefit plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, including an account maintained for the benefit of Employees.
3. "Excepted Securities" Transactions may be effected in U.S. Government securities, bankers' acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments including repurchase agreements and shares of U.S. registered open-end investment companies, non-volitional purchases and sales, such as dividend reinvestment programs or "calls" or redemptions of securities.
4. "Credit Strategies" Transactions may be effected for the Adviser's Credit Strategies, except for long-only equity transactions, which must be entered into the GRD.
5. "Short Sales" Short sale transactions may be effected and buys to cover short sale transactions may be effected.
6. "Investment Companies" Transactions may be effected in U.S. registered closed-end investment companies and foreign registered open-end and closed-end investment companies.
7. "Segregated Accounts and Segregated Strategies" Transactions may be effected for the Adviser's Segregated Accounts and Segregated Strategies.
(b) LIMITED OFFERINGS AND NEW ISSUES: No Employee shall directly or indirectly acquire a Beneficial Interest in Limited Offering securities or securities in a New Issue without the prior consent of the Ethics Committee. Consideration will be given to whether the opportunity should be reserved for a Client. The Ethics
Committee will review these proposed investments on a case-by-case basis except for those circumstances in which advance general approval may be appropriate because it is clear that conflicts are very unlikely to arise due to the nature of the opportunity for investing in the New Issue or Limited Offering. Additionally, Limited Offering securities and New Issue securities may not be purchased for Firm employee profit sharing plans and other Firm employee savings or benefits plans without the prior consent of the Ethics Committee.
(c) RELATED INSTRUMENTS: When anything in this section 9 prohibits the purchase or sale of a security, it also prohibits the purchase or sale of any related securities, such as puts, calls, other options or rights in such securities and securities-based futures contracts and any securities convertible into or exchangeable for such security.
(d) DISINTERESTED TRUSTEES AND ADVISORY BOARD MEMBERS: No Disinterested Trustee or Advisory Board Member of a Fund shall purchase or sell, directly or indirectly, any Covered Security in which he or she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership or interest when the Disinterested Trustee or Advisory Board Member knows that securities of the same class are being purchased or sold or are being considered for purchase or sale by the Fund, until such time as the Fund's transactions have been completed or consideration of such transaction is abandoned.
(e) SANCTION GUIDELINES: Unless an exception exists, if a Restricted Account or Restricted Strategy trades in violation of this section 9, the Ethics Committee will determine the appropriate sanction consistent with the Sanction Guidelines of the Code, which may include disgorgement of profits to a charity selected by the Ethics Committee. A copy of the Sanction Guidelines will be provided to the Fund's Board of Trustees annually.
10. REPORTING PROCEDURES
Unless a noted exception is applicable, each Access Person must follow these procedures for all securities or accounts in which he or she has a Beneficial Interest:
(a) REPORTS - ALL ACCESS PERSONS:
(1) BROKERAGE CONFIRMATIONS AND STATEMENTS: Each Access Person must provide to the Firm's CCO identifying information for all securities or commodities brokerage accounts in which that Access Person has a Beneficial Interest in Covered Securities. Before opening any brokerage account, each Access Person shall submit a completed Securities and Commodities Brokerage Account Report or otherwise provide the information required on such report to the CCO of the Firm. The CCO will arrange to receive trade confirmations and monthly/quarterly account statements from the Access Person's broker-dealer, bank and/or financial institution either directly in hard copy or electronically through Compliance 11.
To the extent that a security transaction in which an Access Person has any Beneficial Interest or ownership is not reported on brokerage confirmations and statements either in hard copy or through Compliance11, such transaction must be reported to the Firm's CCO as part of the quarterly transactions report set forth in section 10(a)(2).
(2) INITIAL AND ANNUAL HOLDINGS REPORTS AND QUARTERLY TRANSACTIONS REPORTS: Each Access Person must provide a holdings report within 10 days after becoming an Access Person (an "Initial Holdings Report") and annually thereafter (an "Annual Holdings Report"). The Annual Holdings Report must be current within 45 days of the date of the report, and should be made through Compliance11. Any supplemental supporting documentation should be submitted to the CCO in hard copy, if necessary.
Each Access Person must also provide a quarterly transactions report within 30 days after the close of a quarter for each transaction during the quarter in a Covered Security in which the Access Person had any Beneficial Interest and provide information for any account established by the Access Person during the quarter. The quarterly transaction reports should be made through Compliance11. Any supplemental supporting documentation should be submitted to the CCO in hard copy, if necessary.
Each report must state the title, number of shares and principal amount of each Covered Security in which the Access Person had any Beneficial Interest, the broker/dealer, bank and/or financial institution maintaining the account for the Access Person in which any securities were held for the benefit of the Access Person, and the date that the report is submitted by the Access Person. In addition, the quarterly transaction report must state the date of the transaction, the interest rate and maturity date of the Covered Security (if applicable), the nature of the transaction (i.e., purchase, sale or other), the purchase or sale price, and the date the account was established if established in the current reporting quarter.
(b) EXCEPTIONS TO REPORTING:
(1) Access Persons need not file a quarterly transaction report if the information would duplicate information that the CCO received in a broker's confirmation or account statement or that is contained in the records of the Firm, including within Compliance11.
(2) An Access Person need not make a quarterly transaction report hereunder with respect to transactions effected pursuant to an Automatic Investment Plan.
(3) A Disinterested Trustee or Advisory Board Member who would be required to make a report referenced in Section 10(a) solely by virtue of being a Trustee or Advisory Board Member is not required to make a report unless Section 10(c)(1) applies.
(4) An Access Person who is not an Employee of the Firm may provide required reports to the CCO in hard copy in lieu of using Compliance 11.
(c) REPORTS - DISINTERESTED TRUSTEES AND ADVISORY BOARD MEMBERS:
(1) A Disinterested Trustee or Advisory Board Member must provide a quarterly report to the Ethics Committee of any purchase or sale of any Covered Security in which such person has, or by virtue of such transaction acquires, any Beneficial Interest if at the time of the transaction the Disinterested Trustee or Advisory Board Member knew, or in the ordinary course of fulfilling his or her official duties as a Trustee or Advisory Board Member of a Fund should have known that, on the date of the transaction or within 15 days before or after the transaction, purchase or sale of that class of security was made or considered for the Fund. The form of the report must conform to the provisions of subsection (a)(2) above.
(2) This subsection (c) shall not apply to non-volitional purchases and sales, such as dividend reinvestment programs or "calls" or redemptions.
(d) REVIEW OF REPORTS:
The CCO of the Firm or a designee of the CCO will review reports submitted by Access Persons, except no person shall be permitted to review his or her own reports. Any report required to be filed shall not be construed as an admission by the person making such report that he/she has any direct or indirect Beneficial Interest in the security to which the report relates.
11. ETHICS COMMITTEE
The Ethics Committee will take whatever action it deems necessary and appropriate, consistent with its Sanction Guidelines, with respect to any Access Person of the Firm or the Fund other than as noted below who violates any provision of this Code, and will inform the Fund's Board of Trustees as to the nature of such violation and the action taken by the Committee. However, any information received by the Ethics Committee relating to questionable practices or transactions by a Disinterested Trustee or an Advisory Board Member of a Fund shall immediately be forwarded to the Audit Committee of the Fund for that committee's consideration and such action as it, in its sole judgment, shall deem warranted. At least once a year, each Fund, the Adviser and DS LLC must provide a written report prepared by the Ethics Committee to the Fund's Board of Trustees that describes any issues arising under the Code or procedures since the last report to the Board of Trustees, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material
violations. The report will also certify to the Board of Trustees that each Fund and the Firm each have adopted procedures reasonably necessary to prevent Access Persons from violating the Code. The Report should also address any significant conflicts of interest that arose involving the Fund and Firm's personal investment policies, even if the conflicts have not resulted in a violation of the Code.
12. WAIVERS
The Ethics Committee may, in its discretion, waive compliance with any provision of the Code after considering whether the waiver (i) is necessary or appropriate to alleviate undue hardship, or in view of unforeseen circumstances, (ii) will not be inconsistent with the purposes and policies of the Code; (iii) will not adversely affect the interests of any Client or the interests of the Firm and/or (iv) will not result in a transaction or conduct that would violate provisions of applicable laws or rules. Normally, all waiver applications must be made in advance and in writing. A written record shall be kept of all waivers granted by the Ethics Committee, including a brief summary of the reasons for the waiver.
13. CODE REVISIONS
Any material changes to this Code will be approved by the Fund's Board of Trustees prior to the effective date of such changes.
14. RECORD KEEPING REQUIREMENTS
The Firm shall maintain records, at its principal place of business, of the following: a copy of each Code in effect during the past five years; a record of any violation of the Code and any action taken as a result of the violation for at least five years after the end of the fiscal year in which the violation occurs; a copy of each report made by Access Persons as required in this Code, including any information provided in place of the reports during the past five years after the end of the fiscal year in which the report is made or the information is provided; a copy of each Fund trustee report made during the past five years; a copy of each Acknowledgment of the Code made by Access Persons during the past five years; a record of all Access Persons required to make reports currently and during the past five years; a record of all who are or were responsible for reviewing these reports during the past five years; and, for at least five years after approval, a record of any decision and the reasons supporting that decision, to approve an Access Person's purchase of a New Issue or a Limited Offering.
15. CONDITION OF EMPLOYMENT OR SERVICE
All Access Persons shall conduct themselves at all times in the best interests of Clients. Compliance with the Code is a condition of employment or continued affiliation with a Fund or the Firm. Conduct not in accordance with the Code is grounds for sanctions which may include, but are not limited to, a reprimand, a restriction on activities, disgorgement, termination of employment or removal from office. All Access Persons shall certify annually to the Ethics Committee that they have read and agree to comply in all respects with this Code and that they have disclosed or reported all personal securities transactions, holdings and accounts required to be disclosed or reported by this Code.
Effective: September 24, 2012
CODE OF ETHICS
OF THE
OPPENHEIMER FUNDS,
OPPENHEIMERFUNDS, INC.
(INCLUDING AFFILIATES AND SUBSIDIARIES)
AND
OPPENHEIMERFUNDS DISTRIBUTOR, INC.
DATED AS OF MAY 25, 2012
1. INTRODUCTION AND PURPOSE OF THE CODE OF ETHICS.
OppenheimerFunds, Inc. ("OFI") and its affiliates and subsidiaries that are registered investment advisers, owe a fiduciary responsibility to their investment advisory clients, including the Oppenheimer Funds (defined below). Accordingly, every employee of an investment adviser owes those clients a duty of undivided loyalty. Our clients entrust us with their financial well-being and expect us to act in their best interests at all times. We seek to maintain a reputation for fair dealing, honesty, candor, objectivity and unbending integrity by conducting our business in a manner consistent with our shared values and principles of trust.
The investment companies for which OFI acts as investment adviser (the "Oppenheimer Funds"), OFI, OppenheimerFunds Distributor, Inc., the principal underwriter of the Oppenheimer Funds ("OFDI"), and certain of OFI's other subsidiaries or directly controlled affiliates(1) (hereinafter, these entities are collectively referred to as "OppenheimerFunds") have adopted this Code of Ethics ("Code") in compliance with Rule 17j-1 under the Investment Company Act of 1940, as amended ("Investment Company Act"), and/or Rule 204A-1 under the Investment Advisers Act of 1940, as amended ("Advisers Act").
This Code establishes standards of conduct expected of all Employees and addresses conflicts that arise from Employees' personal trading and other activities. EVERY EMPLOYEE OF OPPENHEIMERFUNDS IS EXPECTED TO FULLY UNDERSTAND AND ADHERE TO THE POLICIES AND PROCEDURES SET FORTH IN THIS CODE. As each Employee must be aware, we work in a highly regulated industry and are governed by an ever-increasing body of federal, state, and international laws and numerous rules and regulations which, if not observed, can subject OppenheimerFunds and/or an Employee to regulatory sanctions.
The Code is designed to establish procedures for the detection and prevention of activities by which persons having knowledge of the holdings, recommended investments and investment intentions of the Oppenheimer Funds, other investment companies and other clients for which OppenheimerFunds acts as adviser or sub-adviser (collectively, "Advisory Clients") may abuse their fiduciary duties, and otherwise to deal with the type of conflict of interest situations addressed by Rule 17j-1 and Rule 204A-1.
Although the Code is intended to provide each Employee with guidance and certainty as to whether certain actions or practices are permissible, it does not cover every potential conflict an Employee may face. In this regard, OppenheimerFunds also maintains other compliance policies and procedures (including, among others, a Code of Conduct, a Gift Policy, a Policy Designed to Detect and Prevent Insider Trading and a Policy Governing Dissemination of Fund Portfolio Securities Holdings) that may be directly applicable to an Employee's specific responsibilities and duties. (Those other policies and this Code are available to all OppenheimerFunds employees through OppenheimerFunds' internal employee website (OPnet).)
Nevertheless, this Code should be viewed as a guide for each Employee and OppenheimerFunds with respect to how we must conduct our business consistent with our guiding tenet that the interests of our clients and customers must always come first.
If you have any questions about this Code, you should discuss them with the Code Administrator as promptly as possible to ensure that you remain in compliance with the Code at all times. In the event that any provision of this Code conflicts with any other OppenheimerFunds policy or procedure, the provisions of this Code shall apply. You are expected to adhere to all company policies at all times.
ALL OPPENHEIMERFUNDS EMPLOYEES ARE EXPECTED TO READ THIS CODE CAREFULLY AND OBSERVE AND ADHERE TO IT AT ALL TIMES. All OppenheimerFunds Employees have an obligation to provide notice to the Code Administrator on a timely basis if there is a change to their duties, responsibilities or title which affects their reporting status under this Code.
2. STATEMENT OF GENERAL PRINCIPLES. In general, every Employee must observe the following principles with respect to his or her personal investment activities:
(a) At all times, each Employee must place the interests of Advisory Clients first;
(b) All personal securities transactions of each Employee must be conducted in a manner consistent with this Code so as to avoid any actual or potential conflict of interest or any abuse of the Employee's position of trust and responsibility; and
(c) No Employee should take inappropriate advantage of his or her position at OppenheimerFunds, by, for example, utilizing confidential or proprietary information of OppenheimerFunds or an Advisory Client for the Employee's personal benefit.
3. STANDARDS OF BUSINESS CONDUCT.
Although the reporting requirements in Section 9 of this Code apply to all Employees, the specific trading and pre-approval provisions in sections 7 and 8 are concerned primarily with those investment activities of an "Access Person" and an "Investment Person" (as defined in Section 4) who may benefit from or interfere with the purchase or sale of portfolio securities by Advisory Clients. However, all Employees are prohibited from using information concerning the investment intentions of Advisory Clients for personal gain or in a manner detrimental to the interests of any Advisory Client. In this regard, each Employee also should refer to the separate Code of Conduct which governs certain other activities of Employees.
In addition to this Code and the separate Code of Conduct, all Employees must comply with the following general standards of business conduct:
(a) COMPLIANCE WITH LAWS AND REGULATIONS. All Employees must comply with all U.S., foreign state and local laws, rules and regulations applicable to the business or
operations of OppenheimerFunds, including, but not limited to, the U.S. federal securities laws.(2) In particular, Employees (including all Access or Investment Persons) are not permitted, in connection with the purchase or sale, directly or indirectly, of a Security Held or to Be Acquired by an Advisory Client, to:
(i) employ any device, scheme or artifice to defraud such Advisory Client;
(ii) make to such Advisory Client any untrue statement of a material fact or omit to state to such Advisory Client a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
(iii) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such Advisory Client; or
(iv) engage in any manipulative act or practice with respect to such Advisory Client.
(b) CONFLICTS OF INTEREST. As an investment adviser, OppenheimerFunds has an affirmative duty of care, loyalty, honesty, and good faith to act in the best interests of its Advisory Clients. Compliance with this duty can be achieved by trying to avoid conflicts of interest and by fully disclosing all material facts concerning any conflict that does arise with respect to any client. All Employees must try to avoid situations that have even the appearance of conflict or impropriety. (See also the section titled "Conflicts of Interest" in the separate Code of Conduct.)
(c) CONFLICTS AMONG CLIENT INTERESTS. Conflicts of interest may arise when OppenheimerFunds or its Employees have reason to favor the interests of one client over another client (E.G., larger accounts over smaller accounts, accounts having higher management fees rates or providing performance fees, over accounts not having such fees, accounts in which Employees have made material personal investments, accounts of close friends or relatives of Employees). Such inappropriate favoritism of one client over another client by an investment adviser is expressly prohibited and would constitute a breach of fiduciary duties. Conflicts of interest may not always be clear-cut. Any Employee who becomes aware of a potential conflict involving an Advisory Client account should bring it to the attention of the Compliance Department or the Legal Department. (See also the section titled "Conflicts of Interest" in the separate Code of Conduct.)
(d) COMPETING WITH CLIENT TRADES. All Employees are prohibited from using knowledge about pending or currently considered securities transactions for clients to profit
personally, directly or indirectly, as a result of such transactions, including by purchasing or selling such securities. This means that no Employee may purchase or sell a security for his or her personal account with actual knowledge that an order to buy or sell the same security has been made for an Advisory Client or is being considered for an Advisory Client until such information is made publicly available. Conflicts raised by personal securities transactions also are addressed more specifically in Sections 5-8 of this Code.
(e) CONFIDENTIALITY OF ADVISORY CLIENT TRANSACTIONS. Until disclosed in a public report to shareholders or to the SEC in the normal course, all information concerning Securities "Being Considered for Purchase or Sale" by any Advisory Client shall be kept confidential by all Employees. Following such a transaction, such information may only be disclosed by an Employee in accordance with OppenheimerFunds' Policy Governing Dissemination of Fund Portfolio Securities Holdings or any other related policies adopted by OppenheimerFunds from time to time. (See also the section titled "Confidentiality" in the Code of Conduct.)
(f) DISCLOSURE OF PORTFOLIO HOLDINGS OF THE OPPENHEIMER FUNDS. Until publicly disclosed, an Oppenheimer Fund's portfolio holdings are proprietary, confidential business information. All Employees are subject to OppenheimerFunds' and the Funds' separate "Policy Governing Dissemination of Fund Portfolio Securities Holdings" which sets forth the conditions under which an Employee may disclose information about an Oppenheimer Fund's portfolio holdings. In general, the policy is designed to assure that information about portfolio holdings is distributed in a manner that conforms to applicable laws and regulations and to prevent that information from being used in a manner that could negatively affect a fund's investment program or otherwise enable third parties to use that information in a manner that is not in the best interests of a Fund. Generally, any non-public portfolio holding information may only be distributed pursuant to a confidentiality agreement approved by OppenheimerFunds' Legal Department.
(g) INSIDER TRADING. All Employees are subject to OppenheimerFunds' Policy Designed to Detect and Prevent Insider Trading which is considered an integral part of this Code. In general, all Employees are prohibited from trading, either personally or on behalf of others, in any security while in possession of material, nonpublic information concerning that security. Material, nonpublic information not only relates to an issuer's securities but also includes, without limitation, securities recommendations of the OppenheimerFunds and portfolio holdings and transactions involving an Oppenheimer Fund. Accordingly, Employees are prohibited from purchasing or selling an Oppenheimer Fund's shares based on material, nonpublic information concerning such fund. Employees are also prohibited from communicating material, nonpublic information to others in violation of federal or state law.
You must immediately notify the Legal and Compliance Departments if you expect to receive material, nonpublic information concerning any security or you have or may have come into possession of such information. Specifically, you must not (i) disclose the information to anyone, except officers of the Compliance or Legal Departments, (ii) purchase or sell the relevant securities or (iii) recommend that others purchase or sell the securities to which the information relates.
(h) PERSONAL SECURITIES TRANSACTIONS. All Employees must strictly comply with OppenheimerFunds' policies and procedures regarding personal securities transactions. As explained in further detail throughout this Code, the Code sets forth the certain standards for personal trading by persons subject to its provisions. For example, no Employee may purchase or sell a security for his or her personal account with actual knowledge that an order to buy or sell the same security has been made for an Advisory Client or is being considered for an Advisory Client, until such information is made publicly available. In general, persons who may have greater access to investment and trading information (I.E., Access Persons and Investment Persons) are subject to greater restrictions on their trading. (See also the section titled "Personal Investments" in the Code of Conduct.)
(i) INTERNAL REPORTING OF VIOLATIONS. All Employees must report matters involving violations of this Code promptly to the Code Administrator (and to OppenheimerFunds' Chief Compliance Officer if different than the Code Administrator). You can report a violation on a confidential or anonymous basis. OppenheimerFunds does not permit retaliation against employees for reports submitted in good faith. Reports of violations will be investigated and appropriate actions will be taken by the Code Administrator or the Code of Ethics Oversight Committee. Please refer to the separate Code of Conduct and "Whistleblower" procedures for additional information.
(j) RESTRICTIONS ON OUTSIDE BUSINESS ACTIVITIES. Any Employee's outside business activities may create a potential or actual conflict of interest with the best interests of OppenheimerFunds or its Advisory Clients or may interfere with an Employee's duties and responsibilities to OppenheimerFunds. Accordingly, no Employee may serve as a director, trustee, officer, owner or partner of any other for-profit business organization or as a director, trustee or officer of a non-profit organization (E.G., school board, hospital, professional or social organization), without prior written approval of the Employee's department manager or supervisor AND the prior written approval of the General Counsel of OppenheimerFunds, the Code Administrator or the General Counsel's or Code Administrator's designees. (See also the section titled "Conflicts of Interest" in the Code of Conduct for additional information on Outside Business Activities.)
(k) RESTRICTIONS ON GIFTS FROM BUSINESS ASSOCIATES. All Employees are subject to OppenheimerFunds separate Gift Policy which is considered an integral part of this Code. In general, Employees must limit any gifts or entertainment received from or given to any person or entity that does business with or on behalf of OppenheimerFunds or an Advisory Client. (Please refer to the Gift Policy for specific guidelines and information.)
4. DEFINITIONS - As used herein:
"ADVISORY CLIENT" means any Oppenheimer Fund, other investment company or other client for which OppenheimerFunds acts as adviser or sub-adviser.
"ACCESS PERSON" means any officer, director, general partner, Investment
Person, trustee or certain other Employee (as described immediately below) of:
OppenheimerFunds, any of the Oppenheimer Funds, any other entity adopting this
Code; or any persons directly controlled by OppenheimerFunds who directly or
indirectly control (as defined in the Investment Company Act) the activities of
such persons.
An Access Person also means any natural person in a control (as defined in the Investment Company Act) relationship to any Oppenheimer Fund or OppenheimerFunds (or any company in a control relationship to an Oppenheimer Fund or OppenheimerFunds) who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of Securities by the Fund.
Notwithstanding the definitions above, for purposes of the personal account
requirements under Section 6, the restrictions on trading under Section 7, the
reporting requirements under Section 9 and the certification requirements under
Section 10 of this Code, an "Independent Director" of an Oppenheimer Fund is NOT
considered an Access Person.
An Employee also is an Access Person if:
(i) in connection with his or her regular functions or duties, that Employee makes, participates in, or obtains information regarding, the purchase or sale of a Security by an Advisory Client, or whose functions relate to the making of any recommendations with respect to such purchases or sales.
(ii) the Employee has access to timely information relating to investment management activities, research and/or client portfolio holdings and those who in the course of their employment regularly receive access to trading activity of Advisory Clients; or
(iii) the Employee has been notified in writing by the Code Administrator (or a designee) that the Employee has been designated as an Access Persons by the Code Administrator by virtue of the nature of the Employee's duties and functions.
"BENEFICIAL INTEREST" means the opportunity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, to share at any time in any economic interest or profit derived from an ownership of or a transaction in a Security.
You are deemed to have a Beneficial Interest in the following:
(i) Any Security owned individually by you;
(ii) Any Security owned jointly by you with others (for example, joint accounts, spousal accounts, partnerships, trusts and controlling interests in corporations);
(iii) Any Security in which a Family Member has a Beneficial Interest if the Security is held in an account over which you have decision making authority (for example, you act as trustee, executor, or guardian or you provide investment advice);
(iv) Accounts held by a Family Member. This presumption may be rebutted by convincing evidence that the profits derived from transactions in the Securities will not provide you with any economic benefit;
(v) Your interest as a general partner or manager/member in Securities held by a general or limited partnership or a limited liability company;
(vi) Your interest as a member of an "investment club" or an organization that is formed for the purpose of investing a pool of monies in Securities;
(vii) Your ownership of Securities as trustee of a trust in which either you or a Family Member has a vested interest in the principal of income of the trust or your ownership of a vested interest in a trust;
You do not have a beneficial interest in Securities held by a corporation, partnership, limited liability company, or other entity in which you hold an equity interest unless you are a controlling equity holder or you have or share investment control over the Securities held by the entity.
If you are unsure if an account is within the definition of Personal Account or whether you would be deemed to have a beneficial interest in an account, please contact the Code Administrator.
"CODE ADMINISTRATOR" is the person appointed by OppenheimerFunds as responsible for the day-to-day administration of the Code.
"CODE OF CONDUCT" is a separate set of guidelines that defines the standards to which all Employees of OppenheimerFunds and its subsidiaries and affiliates are expected to adhere during the course of their employment with, and when conducting business on behalf of, OppenheimerFunds.
"CODE OF ETHICS OVERSIGHT COMMITTEE" is the committee of OFI having the responsibilities described in sections 12 and 13 of this Code.
"DISCRETIONARY ACCOUNT" means a Personal Account in which you have completely turned over decision-making authority to a professional money manager (who is not a Family Member or not otherwise covered by this Code) and you have no direct or indirect influence or control over the account. (Such Discretionary Accounts are often referred to as "professionally managed," "controlled" or "managed" accounts.)
"EMPLOYEE" means any person deemed to be an employee of OppenheimerFunds or a "supervised person" of OppenheimerFunds for purposes of the Advisers Act. For purposes of this Code, a director of OFI is not considered an Employee solely by reason of being a director of OFI.
"EXCHANGE-TRADED FUNDS" or "ETFS" are typically open-end funds or unit investment trusts listed on a stock exchange.
"FAMILY MEMBER" means your spouse, minor children and other members of your immediate family (children, stepchildren, grandchildren, parents, step parents, grandparents, siblings, in-laws and adoptive relationships) who share your household. In addition, you are deemed to have a Beneficial Interest in accounts maintained by your domestic partner (an unrelated adult with whom you share your home and contribute to each other's support).
In a situation in which the status of a "Family Member" is in question, the person shall be presumed to be a "Family Member" for purposes of this Code. It is the Employee's burden to affirmatively rebut the presumption to the Code Administrator that the person should not be deemed to be a "Family Member" within this definition.
"INDEPENDENT DIRECTOR" means any director or trustee of an Oppenheimer Fund who is not an "interested person" (as that term is defined by Section 2(a)(19) of the Investment Company Act) of the Fund. Notwithstanding the definition of an Access Person above, for purposes of this Code, an Independent Director is NOT considered an Access Person.
"INITIAL PUBLIC OFFERING" means an offering of securities registered under the Securities Act of 1933, as amended ("1933 Act"), the issuer of which immediately before the registration was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934.
"INVESTMENT PERSON" means an Access Person who also is (i) a Portfolio
Manager, (ii) a securities analyst or trader who provides information and advice
to a Portfolio Manager or who helps execute a Portfolio Manager's decisions,
(iii) any other person who, in connection with his or her duties, makes or
participates in making recommendations regarding an Advisory Client's purchase
or sale of securities, (iv) any Employee who works directly with a Portfolio
Manager or in the same department as the Portfolio Manager or (v) any natural
person in a control relationship to an Oppenheimer Fund or OppenheimerFunds who
obtains information concerning recommendations made to the Oppenheimer Fund with
regard to the purchase or sale of Securities by the Oppenheimer Fund.
In addition to the above definitions, an Employee is an "Investment Person" if the Employee has been notified in writing by the Code Administrator (or a designee) that the Employee has been designated as an "Investment Person" by the Code Administrator by virtue of the nature of the Employee's duties and functions.
"OPPENHEIMERFUNDS" means (for purposes of this Code) Oppenheimer Funds, Inc.; Centennial Asset Management Corporation; OFI Institutional Asset Management, Inc.; HarbourView Asset Management Corporation; OFI Private Investments, Inc.; Oppenheimer Real Asset Management, Inc.; and OppenheimerFunds Distributor, Inc.
"OPPENHEIMER FUND" means any investment company registered under the Investment Company Act for which OppenheimerFunds serves as the investment adviser or for which OFDI serves as the principal underwriter.
"PERSONAL ACCOUNT" means any account owned by, or in the name of, an OppenheimerFunds Employee or Access Person in which Securities may be held or any such account in which an Employee (including an Access or Investment Person) has a Beneficial Interest.
"PORTFOLIO MANAGER" means an Access Person who has direct responsibility and authority to make investment decisions affecting a particular Advisory Client.
"PRIVATE PLACEMENT" means an offering that is exempt from registration pursuant to Section 4(2) or Section 4(6) of the 1933 Act or pursuant to rules 504, 505 or 506 under the 1933 Act.
"SECURITY" means, except as noted below, generally any investment, instrument, asset or holding, whether publicly or privately traded, and any option, future, forward contract, listed depository receipts (E.G., ADRs, ADSs, GDRs) or other obligation involving securities or index thereof, including an instrument whose value is derived or based on any of the above ("derivative"). A Security also includes any instrument that is convertible or exchangeable into a security or which confers a right to purchase a security.
For purposes of the Code, the term "Security" specifically includes shares of any Oppenheimer Fund or an exchange-traded fund.
For purposes of this Code, the term "Security" does NOT include:
(i) Shares of a registered open-end investment company (other than an Oppenheimer Fund or ETF), shares of a money market fund that holds itself out as a money market fund under Rule 2a-7 of the Investment Company Act, or shares of unit investment trusts that invest exclusively in registered open-end investment companies;
(ii) Direct obligations of the U.S. government (E.G., Treasury securities) or any derivative thereof;
(iii) Investment grade short-term debt instruments, such as bank certificates of deposit, banker's acceptances, repurchase agreements, and commercial paper;
(iv) Insurance contracts, including life insurance or annuity contracts;
(v) Direct investments in real estate, private business franchises or similar ventures; or
(vi) Physical commodities (including foreign currencies) or any derivatives thereof.
"SECURITY HELD OR TO BE ACQUIRED" by an Advisory Client means any Security that, within the most recent 15 days (i) is or has been held by the Advisory Client or (ii) is being considered by the Advisory Client or its investment adviser for purchase by the Advisory Client. A "Security Held or to Be Acquired" also includes any option to purchase or sell, and any security convertible into or exchangeable for, a Security.
A security is "BEING CONSIDERED FOR PURCHASE OR SALE" from the time an order is given by or on behalf of the Portfolio Manager to the order room of an Advisory Client until the time all orders with respect to that security are completed or withdrawn.
"SUB-ADVISER" means an investment adviser that acts as an investment sub-adviser to a portfolio advised by OppenheimerFunds and is not affiliated with OppenheimerFunds.
"SUPERVISED PERSON" means any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of OppenheimerFunds, or other person who provides investment advice on behalf of OppenheimerFunds and is subject to the supervision and control of OppenheimerFunds.
5. SHORT-TERM TRADING IN OPPENHEIMER FUNDS.
OppenheimerFunds policy is to prevent disruptive short-term trading in the Oppenheimer Funds. Accordingly, when purchasing, exchanging, or redeeming shares of Oppenheimer Funds, all Employees must comply in all respects with the policies and standards set forth in the funds' prospectuses, including specifically the restrictions on market timing activities, exchanges and redemption policies.
Any Employee who redeems shares of an Oppenheimer Fund purchased within the preceding 30 days (a "short-term trade") must report that short-term trade to the Code Administrator no more than two business days after the redemption. The Employee may be required to relinquish any profit made on a short-term trade and will be subject to disciplinary action if the Employee fails to report the short-term trade in a timely manner or the Code Administrator determines that the short-term trade was detrimental to the interests of the Oppenheimer Fund or its shareholders. For purposes of this paragraph, a redemption includes a redemption by any means, including an exchange from the Fund.
This policy does not cover purchases, redemptions or exchanges (i) into or from money market funds, or (ii) effected on a regular periodic basis through systematic plans, such as automatic monthly redemptions to a checking or savings account.
6. REQUIREMENTS FOR ALL PERSONAL ACCOUNTS.
Every Employee must obtain pre-approval before opening a new Personal Account with a financial firm or institution (E.G., broker, dealer, adviser, or any other professional money manager), including accounts opened by Family Members. Pre-approval is not required prior to opening any account that does not have the ability to hold Securities (I.E., a traditional checking account) or an internal OppenheimerFunds account.
An Employee may maintain Personal Accounts with the financial firm of his or her choice, provided the firm is able to provide copies of the Employee's account statements to the Code Administrator and such statements are being provided. However, the Code Administrator or the Code of Ethics Oversight Committee may require any Employee to maintain his or her Personal Accounts with specified firms or prohibit any Employee from maintaining his or her Personal Accounts with specified firms.
7. ACCESS PERSONS--PROHIBITED TRANSACTIONS IN SECURITIES.
A. AN ACCESS PERSON IS PROHIBITED FROM:
(i) purchasing any Security in an Initial Public Offering or Private Placement, without pre-approval from the Code Administrator. If an Access Person seeks pre-approval for the acquisition of a Security in a Private Placement or an Initial Public Offering, the Access Person shall set forth in detail the rationale for the transaction.
(ii) purchasing or selling any interest in a collective investment vehicle that is exempt from registration under the 1933 Act, including, but not limited to, hedge funds, private funds or similar investment limited partnerships, without pre-approval from the Code Administrator;
(iii) selling a security short, except a short sale as a hedge against a long position in the same security if such short sale has been identified to and pre-approved by the Code Administrator; and
(iv) purchasing or selling in his or her Personal Account options or futures, other than options and futures related to broad-based indices, U.S. Treasury securities, currencies and long portfolio positions in the same or a substantially similar security.
B. TRANSACTIONS EXEMPT FROM THESE PROHIBITIONS AND PRE-CLEARANCE REQUIREMENTS. The following transactions by Access Persons are exempt from the prohibitions of this Section 7 and do not require pre-clearance:
(i) Purchases or sales of Securities made in a Discretionary Account;
(ii) Involuntary purchases or sales of Securities in a Personal Account, such as Securities received pursuant to a dividend reinvestment plan or a stock split or through a gift or bequest; or
(iii) Purchases of Securities in a Personal Account that result from the exercise of rights acquired from an issuer as part of a pro rata distribution to all holders of a class of Securities of such issuer and the sale of such rights.
(iv) Transactions described in Section 7.A. (i) -- (iv) by a director who is not otherwise an employee of OFI; provided, that such a director does not have actual knowledge that an order to buy or sell the same securities described in Section 7.A. (i) -- (iv) has been made for an Advisory Client or is being considered for an Advisory Client until such information is made publicly available.
C. DURATION OF PRE-APPROVALS. Pre-approval remains in effect until the end of the next business day on which such pre-approval is granted or as otherwise specified by the Code Administrator.
8. INVESTMENT PERSONS--PROHIBITED TRANSACTIONS IN SECURITIES.
A. PRE-APPROVAL. Every Investment Person must obtain pre-approval of every Securities transaction in his or her Personal Account, except as noted below in this section 8.C.
B. AN INVESTMENT PERSON IS PROHIBITED FROM:
(i) purchasing any Security in an Initial Public Offering or Private Placement, without pre-approval from the Code Administrator. Any Investment Person who has purchased a Security in a Private Placement or an Initial Public Offering for his or her Personal Account must disclose that investment to the Code Administrator before he or she participates in the subsequent consideration of an investment in Securities of the same or a related issuer for an Advisory Client. An independent review of the Advisory Client's proposed investment shall be conducted by the Code Administrator and/or Investment Persons who do not have an interest in the issuer.
(ii) purchasing or selling any interest in a collective investment vehicle that is exempt from registration under the 1933 Act, including, but not limited to, hedge funds, private funds or similar investment limited partnerships, without pre-approval from the Code Administrator;
(iii) selling a security short, except a short sale as a hedge against a long position in the same security if such short sale has been identified to and pre-approved by the Code Administrator; and
(iv) purchasing or selling in his or her Personal Account options or futures, other than options and futures related to broad-based indices, U.S. Treasury securities, currencies and long portfolio positions in the same or a substantially similar security.
C. TRANSACTIONS EXEMPT FROM THESE PROHIBITIONS AND PRE-APPROVAL REQUIREMENTS. The following transactions by an Investment Person are exempt from the prohibitions of this Section 8 and do not require pre-approval:
(i) DISCRETIONARY ACCOUNT. Purchases or sales of Securities made in a Discretionary Account do not require pre-approval. Any Investment Person claiming to have a Discretionary Account must first provide a written explanation to the Code Administrator describing the circumstances or arrangements of the Discretionary Account and reasons why the Investment Person believes the account should be considered a Discretionary Account. The Code Administrator may require pre-approval of any Discretionary Account.
(ii) TRANSACTIONS OF ANY OPEN-END NON-OPPENHEIMER FUND. A purchase or sale of shares of any open-end non-Oppenheimer Fund or open- end Oppenheimer Fund that the Investment Person does not serve in the capacity, or perform the functions that warrant him or her to be identified as an Investment Person, does not require pre- approval. Pre-approval is required for transactions in an open-end investment company for which OppenheimerFunds is the investment sub-adviser and the Investment Person serves in the capacity, or perform the functions, that warrant him or her to be identified as an Investment Person.
(iii) Exchange-traded funds.
(iv) Securities issued by the U.S. government, its agencies, instrumentalities and government-sponsored enterprises do not require pre-approval;
(v) Bankers' acceptances, bank certificates of deposit, commercial paper, and short-term debt instruments (including repurchase agreements), provided such debt instruments have a maturity at the date of issuance of less than 366 days and are rated in one of the two highest rating categories by a nationally recognized statistical rating organization do not require pre-approval;
(vi) Involuntary purchases or sales of Securities in a Personal Account, such as Securities received pursuant to a dividend reinvestment plan or a stock split or through a gift or bequest do not require pre-approval; or
(vii) Purchases of Securities in a Personal Account that result from the exercise of rights acquired from an issuer as part of a pro rata distribution to all holders of a class of Securities of such issuer and the sale of such rights do not require pre-approval.
D. SEVEN-DAY BLACKOUT PERIOD. No Investment Person may purchase or sell any Security for his or her Personal Account within seven calendar days before or seven calendar days after the same Security is purchased or sold by an Advisory Client for whom the Investment Person serves in the capacity, or performs the functions, that warrant him or her to be identified as an Investment Person. Provided however, the Code Administrator may exclude from this provision trades for an Advisory Client that are programmatic in nature and do not represent a substantive investment decision with respect to any particular Security (E.G., a program trade to sell pro-rata portions of each Security in an Advisory Client's portfolio). The Code Administrator shall maintain a record of such transactions.
If an Investment Person obtains pre-approval pursuant to this Section 8 for a transaction in a Security, and a transaction in the same Security for an Advisory Client for which that Investment Person acts as an Investment Person takes place within a period of seven calendar days following the Investment Person's transaction, the Investment Person's transaction may be reviewed further by the Code Administrator or the Code of Ethics Oversight Committee to determine the appropriate action, if any. For example, the Code Administrator or the Committee may recommend that the Investment Person be subject to a price adjustment to ensure that he or she did not receive a better price than the Advisory Client.
E. DE MINIMIS EXCEPTION TO THE SEVEN-DAY BLACKOUT PERIOD. Purchases and sales of any Security (other than ETFs) up to $10,000 in the aggregate in any 30-day period do not require pre-approval. This exception is not applicable to the 60-day holding period described below in Section 8.F. Additionally, purchases and sales of any Security (other than ETFs) may not be netted within the 30-day period. For example, a stock purchase effected on January 1st in the amount of $5,000 followed by a $4,000 purchase of the same stock on January 15th would be considered permissible transactions under this de minimis exception and therefore not subject to the seven-day blackout period. However, a subsequent sale on January 20th in the amount of $3,000 would require pre-approval for the reason that the January 1st and 15th purchases and the January 20th sale of the same stock in the aggregate exceeds $10,000 within a 30-day period.
F. SHORT-TERM TRADING (60 DAYS). No Investment Person may purchase and sell, or sell and purchase, in his or her Personal Account any Security within any period of sixty (60) calendar days, except:
(i) Transactions in Securities that are exempt from the pre-approval requirements as described above in Section 8.C.
(ii) a Security sold at a loss, if the trade has been pre-approved by the Code Administrator.
The 60-day holding period will be calculated according to a "last-in, first-out" methodology.
G. DURATION OF PRE-APPROVALS. Pre-approval remains in effect until the end of the next business day on which such pre-approval is granted or as otherwise specified by the Code Administrator.
9. REPORTING REQUIREMENTS.
All OppenheimerFunds Employees have an obligation to provide notice to the Code Administrator on a timely basis if there is a change to their duties, responsibilities or title that affects their reporting status under this Code.
A. ALL EMPLOYEES (WHO ARE NOT ACCESS PERSONS OR INVESTMENT PERSONS)
(i) DUPLICATE CONFIRMS. Each Employee shall arrange for duplicate copies of confirmations of all transactions and/or periodic account statements of all Personal Accounts to be sent directly to the Code Administrator. Account statements are not required if a Personal Account does not have the ability to hold Securities (I.E., a traditional checking account).
(ii) INITIAL AND ANNUAL REPORTS. Each Employee must initially and on an annual basis thereafter, report in writing to the Code Administrator all holdings and all transactions in Securities occurring in his or her Personal Account and any new Personal Account established during the most recent year (such information to be current as of a date no more than 45 days before the report is submitted). Each initial and annual report must contain the following information:
o Name(s) in which the Personal Account is registered and the date the Personal Account was established;
o Title and type of security, number of shares, principal amount, interest rate and maturity (as applicable) of each security held in the Personal Account;
o Name of the broker, dealer or bank with which the Personal Account is maintained; and
o The date the report is submitted.
Reports submitted pursuant to this Code may contain a statement that the report is not to be construed as an admission that the Employee has or had any direct or indirect Beneficial Interest in any Security to which the report relates.
B. ACCESS PERSONS (INCLUDING INVESTMENT PERSONS)
(i) DUPLICATE CONFIRMS. Each Access Person or Investment Person shall arrange for duplicate copies of confirmations of all transactions and/or periodic account statements of all Personal Accounts to be sent directly to the Code Administrator. Account statements are not required if a Personal Account does not have the ability to hold Securities (I.E., a traditional checking account).
(ii) QUARTERLY REPORTS. Each Access Person or Investment Person must report in writing to the Code Administrator, within 30 days after the end of each calendar quarter, all transactions in Securities occurring in the quarter in his or her Personal Account and any new Personal Account established during the most recent calendar quarter. If there were no such transactions or new accounts, the report should state "None".
An Access Person or Investment Person is deemed to be in compliance with these reporting requirements if all the information required is contained in trade confirmations and/or periodic account statements previously provided to the Code Administrator for the time period covered by the quarterly report.
Each quarterly report must contain the following information with respect to each reportable transaction:
o Name(s) in which the Personal Account is registered and the date the Personal Account was established;
o Date and nature of the transaction (purchase, sale or any other type of acquisition or disposition);
o Title and type of security, number of shares, principal amount, interest rate and maturity (if applicable) of each Security and the price at which the transaction was effected;
o Name of the broker, dealer or bank with or through whom the Account was established or through which the transaction was effected; and
o The date the report is submitted.
(iii) INITIAL AND ANNUAL REPORTS. Each Access Person or Investment Person shall, within 10 days after becoming an Access Person or Investment Person, and at least annually thereafter, provide a written holdings report to the Code Administrator with the following information (such information to be current as of a date no more than 45 days before the report is submitted):
o Name(s) in which the Personal Account is registered and the date the Personal Account was established;
o Title and type of security, number of shares, principal amount, interest rate and maturity (as applicable) of each security held in the Personal Account;
o Name of the broker, dealer or bank with which the Personal Account is maintained; and
o The date the report is submitted.
Reports submitted pursuant to this Code may contain a statement that the report is not to be construed as an admission that the Access Person has or had any direct or indirect Beneficial Interest in any Security to which the report relates.
(iv) SECURITIES EXEMPT FROM REPORTING REQUIREMENTS. Holdings of and transactions in the types of Securities listed below are exempt from the reporting requirements of the Code and do not have to be included in reports submitted to the Code Administrator.
(a) Involuntary purchases or sales of Securities in a Personal Account, such as Securities received pursuant to a dividend reinvestment plan or a stock split or through a gift or bequest; or
(b) Purchases of Securities in a Personal Account that result from the exercise of rights acquired from an issuer as part of a pro rata distribution to all holders of a class of Securities of such issuer and the sale of such rights.
(c) Securities issued by the U.S. instrumentalities and government-sponsored enterprises; government, its agencies,
(d) Bankers' acceptances, bank certificates of deposit, commercial paper, short-term debt instruments (including repurchase agreements) provided such debt instruments have a maturity at the date of issuance of less than 366 days and are rated in one of the two highest rating categories by a nationally recognized statistical rating organization; or
(e) Shares of any open-end non-Oppenheimer fund except an open-end investment company for which OppenheimerFunds serves as the investment sub-adviser or any ETF. (Any trade in an ETF does have to be reported.)
(v) OUTSIDE DIRECTORS. A director of OFI who is not otherwise an
employee of OFI shall have satisfied the reporting requirements
under this Section 9 if (i) such a director is in compliance with
the reporting requirements under a code of ethics of an OFI
"affiliated person", adopted in compliance with Rule 204A-1 under
the Advisers Act and Rule 17j-1 under the Investment Company Act,
to which such a director is subject (an "Affiliate Code"), and
(ii) the Code Administrator receives a certification from such an
OFI "affiliated person" that the director has satisfied the
Affiliate Code's reporting requirements and the director either
did not have any reportable violations under the Affiliate Code
during the period covered by the certification or any such
violations are reported in such certification. Solely for
purposes of this Section 9.B.(v), the term "affiliated person"
shall have the meaning ascribed to such term under Section
2(a)(3) of the Investment Company Act.
10. CERTIFICATIONS (FOR ALL EMPLOYEES).
(a) Every Employee shall acknowledge that he or she has received the Code of Ethics and understands that he or she is subject to its requirements.
(b) Every Employee shall acknowledge and certify at least
annually that he or she: (i) has read and understands the
Code of Ethics; (ii) is subject to its requirements; and
(iii) has complied with the requirements of the Code of
Ethics.
(c) Every Employee shall certify annually that he or she has reported all transactions in and holdings of Securities in Personal Accounts required to be reported pursuant to the Code.
11. INDEPENDENT DIRECTORS OF OPPENHEIMER FUNDS.
An Independent Director of an Oppenheimer Fund is required to report only those transactions in his or her Personal Account in a Security (excluding, for purposes of this subparagraph, open-end Oppenheimer Funds) that at the time such Director knew, or in the ordinary course of fulfilling his or her duties would have had reason to know, was purchased or sold or was Being Considered for Purchase or Sale by an Advisory Client during the fifteen (15) calendar day period immediately before or after the date of the Independent Director's transaction. No report will be required for any quarter in which an Independent Director has only exempt transactions to report.
Sanctions for any violation of this Code of Ethics by an Independent Director of an Oppenheimer Fund or a Director of OFI will be determined by a majority vote of other Independent Directors of such Fund or other Directors of OFI, as applicable.
12. PENALTIES AND SANCTIONS.
(a) DISGORGEMENT. Any profits realized or losses avoided on trades prohibited by Sections 7-8 shall be subject to disgorgement.
(b) SANCTIONS. Any violation of this Code shall be subject to the imposition of such sanctions by the Code Administrator as the Code Administrator deems appropriate under the circumstances to achieve the purposes of this Code, provided, however, if the sanctions includes suspension or termination of employment, such suspension or termination must be further approved by the Code of Ethics Oversight Committee and the chief executive officer of the relevant company.
Such sanctions may include, but will not necessarily be limited to, one or more of the following: a letter of censure; restitution of an amount equal to the difference between the price paid or received by the affected Advisory Client(s) and the more advantageous price paid or received by the offending person; the suspension or termination of personal trading privileges; or the suspension or termination of employment.
(c) LEGAL ACTION. OppenheimerFunds reserves the right to take any legal action it deems appropriate against any Employee who violates any provision of this Code and to seek to hold Employees liable for any and all damages (including, but not limited to, all costs and attorney fees) that OppenheimerFunds may incur as a direct or indirect result of any such Employee's violation of this Code or related law or regulation.
(d) REVIEW PROCESS. An Employee may request review by the Code of Ethics Oversight Committee of a decision or determination made by the Code Administrator pursuant to this Code. The Committee, in its sole discretion, may elect to consider or reject the request for review.
13. DUTIES OF THE CODE OF ETHICS OVERSIGHT COMMITTEE.
The Code of Ethics Oversight Committee is responsible for establishing policies and procedures for the administration of the Code, considering and approving amendments to the Code, and reviewing and considering any decisions made by the Code Administrator upon request of an Employee or involving suspension or termination of employment. The Committee may be assisted by counsel in fulfilling its duties if deemed appropriate. The membership of the Code of Ethics Oversight Committee shall consist of OFI's personnel as may be appointed by the chief executive officer of OFI from time to time. Any Committee member may be removed from the Committee at the sole discretion of the chief executive officer.
14. DUTIES OF THE CODE ADMINISTRATOR.
The Code Administrator shall have the following responsibilities:
(a) Maintaining a current list of the names of all Access Persons and Investment Persons with an appropriate description of their title or employment;
(b) Furnishing all Employees and Access Persons with a copy of this Code and initially and periodically informing them of their duties and obligations thereunder;
(c) Designating, as desired, appropriate personnel to review transaction and holdings reports submitted by Access Persons;
(d) Reviewing and considering pre-approval requests from Access Persons and Investment Persons and setting forth in detail the rationale for any approvals granted to such Access Persons or Investment Persons;
(e) Maintaining or supervising the maintenance of all records required by this Code;
(f) Reviewing listings of all transactions effected by any Access Person within fifteen (15) days of the date on which the same security was held, purchased or sold by an Advisory Client;
(g) Issuing any interpretation of this Code that may appear consistent with the objectives of this Code;
(h) Conducting such investigations as shall reasonably be required to detect and report any apparent violations of this Code to the Code of Ethics Oversight Committee and to the Directors of the affected Oppenheimer Funds;
(i) Submitting a quarterly report to the Board of Directors of each potentially affected Oppenheimer Fund of any violations of this Code and the sanction imposed as a result; any material interpretations issued by and any material exemptions or waivers found appropriate by the Code Administrator; and any other significant information concerning the appropriateness of this Code.
(j) Submitting a written report at least annually to the Board of Directors of each Oppenheimer Fund that:
(i) describes any issues arising under the Code since the last report to the Board, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations;
(ii) summarizes existing procedures concerning personal investing and any changes in the procedures made during the previous year;
(iii) identifies any recommended changes in existing restrictions or procedures based upon experience under the Code, evolving industry practices or developments in applicable laws or regulations;
(iv) reports with respect to the implementation of this Code through orientation and training programs and on-going reminders; and
(v) certifies that each Oppenheimer Fund, OppenheimerFunds and OFDI, each have adopted procedures reasonably necessary to prevent Access Persons from violating the Code.
15. RECORDKEEPING.
The Code Administrator shall maintain and cause to be maintained in an easily accessible place, the following records:
(a) A copy of any Code adopted pursuant to Rule 17j-1 under the Investment Company Act or Rule 204A-1 under the Advisers Act which has been in effect during the most recent five (5) year period;
(b) A record of any violation of any such Code, and of any action taken as a result of such violation, within five (5) years from the end of the fiscal year of OppenheimerFunds in which such violation occurred;
(c) A copy of all acknowledgements by Access Persons during the most recent five (5) year period;
(d) A copy of each report made by a Access Person, as well as trade confirmations and/or account statements that contain information not duplicated in such reports, within five (5) years from the end of the fiscal year of OppenheimerFunds in which such report is made or information is provided, the first two (2) years in an easily accessible place;
(e) A copy of each report made by the Code Administrator within five
(5) years from the end of the fiscal year of OppenheimerFunds in which such
report is made or issued, the first two (2) years in an easily accessible
place;
(f) A list, in an easily accessible place, of all persons who are, or within the most recent five (5) year period have been Access Persons or were required to make reports pursuant to Rules 17j-1 and 204A-1 and this Code or who are or were responsible for reviewing these reports; and
(g) A record of any decision, and the reasons supporting the decision, to permit an Access Person or Investment Person to acquire a Private Placement or Initial Public Offering security, for at least five (5) years after the end of the fiscal year in which permission was granted.
16. AMENDMENTS.
Any material changes to this Code must be approved by the board of directors of each company adopting this Code, and, if this Code is adopted as the Code of Ethics of the Oppenheimer Funds, by the board of directors or trustees of each Oppenheimer Fund, including a majority of the Independent Directors or Trustees. Approval of any material change to this Code by the board of directors or trustees of the Oppenheimer Funds must be obtained within six months after the change has been adopted by OppenheimerFunds.
17. EXEMPTIONS.
Investment Persons may apply for an exemption from this Code's restrictions under Sections 8.D--"Seven-Day Blackout Period" and 8.F--"Short-Term Trading (60 Days)". Exemptions made pursuant to this Section 17 are subject to the prior written approval of OppenheimerFunds' Chief Compliance Officer and OppenheimerFunds' General Counsel. An Investment Person seeking an exemption pursuant to this Section 17 must submit a written request to OppenheimerFunds' Chief Compliance Officer (or his designee) setting forth in detail the extraordinary circumstances that form the basis for the request (E.G., unanticipated and emergency financial need, such as medical expenses, dependent care or unforeseen household or family developments). OppenheimerFunds' Chief Compliance Officer (or his designee) shall promptly forward such requests to OppenheimerFunds' General Counsel (or his designee). In evaluating an exemption made pursuant to this Section 17, OppenheimerFunds' Chief Compliance Officer and OppenheimerFunds' General Counsel shall consider whether granting such an exemption:
(i) is consistent with the provisions of this Code and applicable laws and regulations; and
(ii) will not disadvantage an Advisory Client or result in a conflict of interest.
Exemptions that have been approved by each of OppenheimerFunds' Chief
Compliance Officer and OppenheimerFunds' General Counsel pursuant to this
Section 17 must be documented by OppenheimerFunds' Chief Compliance Officer and
reported to the Code of Ethics Oversight Committee and the New York and Denver
Boards of the Oppenheimer Funds.
The New York and Denver Boards of the Oppenheimer Funds
OppenheimerFunds, Inc.
OppenheimerFunds Distributor, Inc.
Centennial Asset Management Corporation
Oppenheimer Real Asset Management, Inc.
OFI Institutional Asset Management, Inc.
HarbourView Asset Management Corporation
OFI Private Investments, Inc.
OFI Trust Company
CLARIVEST ASSET MANAGEMENT LLC
CODE OF CONDUCT AND
REGULATORY COMPLIANCE MANUAL
DECEMBER 2012
TABLE OF CONTENTS
DEFINITIONS ................................................................ 2
CODE OF CONDUCT ............................................................ 5
MAINTENANCE OF CODE OF CONDUCT AND REGULATORY COMPLIANCE MANUAL ............ 7
CODE OF ETHICS ............................................................. 10
QUARTERLY TRANSACTION REPORTING FORM .................................. 25
QUARTERLY ACCOUNT OPENING/CLOSING REPORTING FORM ...................... 26
INITIAL REPORTING -- SECURITIES ACCOUNTS .............................. 27
INITIAL REPORTING -- SECURITIES HOLDINGS .............................. 28
ANNUAL REPORTING -- SECURITIES ACCOUNTS ............................... 29
ANNUAL REPORTING -- SECURITIES HOLDINGS ............................... 30
REQUEST FOR APPROVAL OF OUTSIDE ACTIVITY FORM ......................... 31
ENTERTAINMENT REPORT .................................................. 32
EMPLOYEE ENTERTAINMENT LOG ............................................ 33
POLITICAL CONTRIBUTION REVIEW FORM .................................... 34
POLITICAL CONTRIBUTION APPROVAL FORM .................................. 35
CONTRIBUTION COORDINATION APPROVAL FORM ............................... 36
CLIENT PRIVACY ............................................................. 37
SAFEGUARDING CLIENT RECORDS AND NON-PUBLIC PERSONAL INFORMATION ....... 41
MAINTENANCE AND DISSEMINATION OF DISCLOSURE DOCUMENTS AND FILINGS .......... 45
DUTY TO SUPERVISE .......................................................... 53
REVIEW OF THIRD-PARTY SERVICE PROVIDERS .................................... 55
ACCOUNT OPENING AND CLOSING PROCEDURES ..................................... 57
CLIENT COMPLAINTS .......................................................... 60
CLIENT COMPLAINT LOG .................................................. 62
ORAL COMPLAINT MEMORANDUM ............................................. 63
ADVERTISING AND MARKETING .................................................. 64
APPROVAL TO CONDUCT FORMAL SPEAKING ENGAGEMENTS ....................... 75
MEDIA COMMUNICATIONS ....................................................... 76
PRESS RELEASES AND ARTICLE REPRINTS ........................................ 79
SOLICITORS AND LOBBYISTS ................................................... 82
SOLICITORS VERIFICATION LETTER ........................................ 87
MAINTENANCE OF BOOKS AND RECORDS ........................................... 89
ELECTRONIC COMMUNICATIONS .................................................. 92
TRADING .................................................................... 98
ORDER DOCUMENTATION PROCEDURES ........................................ 104
INVESTING/TRADING ERRORS ................................................... 112
POSSIBLE TRADE ERRORS ................................................. 117
TRADE ERROR RELEASE FORM .............................................. 118
TRADE ERROR REPORTING AND RESOLUTION FORM ............................. 120
PORTFOLIO MANAGEMENT AND REVIEWS ........................................... 121
CONTINGENCY AND DISASTER RECOVERY PLAN ..................................... 124
PROXY VOTING ............................................................... 125
ANTI-MONEY LAUNDERING ...................................................... 131
I. TYPES OF ACCOUNTS ................................................ 131
III. ASSET FREEZES AND BLOCKING OF ACCOUNTS PROCEDURES ................ 134
MANAGED ACCOUNT AML CERTIFICATION ..................................... 136
IDENTIFICATION INFORMATION OF CLIENTS ................................. 137
AML FORM FOR THE REPORTING OF SUSPICIOUS ACTIVITY ..................... 138
EXAMPLES OF POTENTIAL MONEY LAUNDERING ACTIVITIES ..................... 139
SECURITY VALUATION POLICY .................................................. 140
CUSTODY AND BILLING ........................................................ 144
OTHER COMPLIANCE MATTERS ................................................... 147
CODE OF CONDUCT AND REGULATORY COMPLIANCE MANUAL ACKNOWLEDGEMENT FORM ...... 150
CODE OF ETHICS AND REGULATORY COMPLIANCE MANUAL CERTIFICATION .............. 151
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The following defined terms are used throughout this Code of Conduct and Regulatory Compliance Manual, while other terms are defined within specific policies and procedures:
1. 34 ACT -- Securities Exchange Act of 1934.
2. 33 ACT -- Securities Act of 1933.
3. ACCESS PERSON -- all of ClariVest's Employees who (1) have access to nonpublic information regarding any Client's purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any Reportable Fund, or (2) is involved in making securities recommendations to Clients, or who has access to such recommendations that are nonpublic. ClariVest's outside directors are not Access Persons because they do not have the access or involvement described in the first sentence of this definition.
4. ADVISERS ACT -- Investment Advisers Act of 1940.
5. AUTOMATIC INVESTMENT PLAN -- A program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan.
6. BENEFICIAL OWNERSHIP -- As set forth under Rule 16a-1(a)(2), which determines whether a person is subject to the provision of Section 16 of the 34 Act, and the rules and regulations thereunder, generally the term beneficial owner shall mean any person who, directly or indirectly, has or shares a direct or indirect "pecuniary interest" (i.e., some economic benefit) in the Security. This may also include securities held by members of an Employee's immediate family sharing the same household; provided however, this presumption may be rebutted. The term immediate family means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law and includes adoptive relationships. Any report of beneficial ownership required hereunder shall not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the securities to which the report relates.
7. BROKER-DEALER -- refers to broker-dealers with whom ClariVest has a trading relationship (unless the context implies otherwise).
8. CCO -- Tiffany Ayres, ClariVest's Chief Compliance Officer.
9. CEO -- Stacey Nutt, ClariVest's Chief Executive Officer.
10. CFO -- Jeff Jacobson, ClariVest's Chief Financial Officer.
11. COO -- Jeff Jacobson, ClariVest's Chief Operations Officer.
12. CLIENTS -- ClariVest's separate managed accounts, mutual funds and Investment Funds.
13. CONTRIBUTION -- A gift, subscription, loan, advance, deposit of money, or anything of value made to an Official, political party or political action committee, as applicable.
14. COVERED ASSOCIATE -- (a) ClariVest's general partner, managing member or executive officer, or other individual with a similar status or function; (b) any Employee; (c) any political action committee controlled by ClariVest or by any of its Covered Associates; or (d) members of an Employees' immediate family sharing the same household. Immediate family means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law. Adoptive relationships are included.
15. COVERED INVESTMENT POOL -- (a) any investment company registered under the IC Act that is an investment option of a plan or program of a Government Entity or (b) any investment company that would be an investment company under IC Act section 3(a) but for the exclusion provided by IC Act section 3(c)(1), 3(c)(7) or 3(c)(11).
16. EAGLE -- Eagle Asset Management Inc.
17. EMPLOYEES -- ClariVest's officers and employees.
18. FEDERAL SECURITIES LAWS -- Means the 33 Act, 34 Act, the Sarbanes-Oxley Act of 2002, IC Act, Advisers Act, Title V of the Gramm-Leach-Bliley Act, any rules adopted by the Commission under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted thereunder by the SEC or the Department of the Treasury.
19. FRONT-RUNNING -- A practice generally understood to be investment advisory personnel personally trading ahead of client accounts.
20. FUND(S) -- Mutual Fund(s) and open-end funds.
21. GOVERNMENT ENTITY -- Any state or local government, any of its agencies or instrumentalities, or any public pension plan or other collective government fund, including any participant-directed plan such as a 403(b), 457 or 529 plan.
22. IAR -- Investment advisory representative, which is an Employee that must individually register with a state(s).
23. IC ACT -- Investment Company Act of 1940.
24. IPO -- An "Initial public offering" is an offering of securities registered under the 33 Act, the issuer of which, immediately before the registration, was not subject to the reporting requirements of section 13 or 15(d) of the 34 Act.
25. INSIDER TRADING -- Although not defined in securities laws, insider trading is generally described as trading either personally or on behalf of others on the basis of material Non-Public Information or communicating material Non-Public Information to others in violation of the law.
26. INVESTMENT FUND -- means any U.S. or non-U.S. investment fund or pool of which ClariVest serves as general partner (including any such investment fund or pool in which the only investors are ClariVest, any affiliate of ClariVest or any Employee).
27. INVESTOR -- an investor in an Investment Fund.
28. LIMITED OFFERING -- An offering that is exempt from registration under the 33 Act pursuant to section 4(2) or section 4(6) or pursuant to Rules 504, 505, or 506 of Regulation D.
29. MANUAL -- ClariVest's Code of Conduct and Regulatory Compliance Manual.
30. MATERIAL INFORMATION -- Information for which there is a substantial likelihood that an investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities.
31. MUTUAL FUND(S) -- Any 1940s Act mutual fund that ClariVest may establish.
32. NON-PUBLIC INFORMATION -- Information that has not been available to the investing public.
33. NON-PUBLIC PERSONAL INFORMATION -- Personally identifiable financial information, including any information a client provides to obtain a financial product or service; any information about a client resulting from any transaction involving a financial product or service; or any information otherwise obtained about a client in connection with providing a financial product or service to that client; and any list, description, or other grouping of Clients (and publicly available information pertaining to them) that is derived using any personally identifiable financial information that is not publicly available information. Examples of Non-Public Personal Information include: name, address, phone number (if unlisted), social security and tax identification numbers, financial circumstances and income, and account balances.
34. NATURAL PERSON -- A living, breathing human being, as opposed to a legal entity.
35. OFFICIAL -- An incumbent, candidate or successful candidate for elective office of a Government Entity.
36. REPORTABLE FUND -- Any fund for which ClariVest serves as the investment adviser as defined in section 2(a)(20) of the IC Act, or any fund whose investment adviser or principal underwriter controls ClariVest, is controlled by ClariVest, or is under common control with ClariVest, including any Mutual Fund.
37. REPORTABLE SECURITY -- Any Security, with five (5) exceptions: 1. Transactions and holdings in direct obligations of the Government of the United States; 2. Money market instruments -- bankers' acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments; 3. Shares of money market funds; 4. Transactions and holdings in shares of other types of Funds, which are not Reportable Funds; and 5. Transactions in units of a unit investment trust if the unit investment trust is invested exclusively in Funds which are not Reportable Funds.
38. RIC -- An investment company registered under the IC Act.
39. SCALPING -- A practice generally understood to be investment advisory personnel personally benefiting from small gains in short-term personal trades in securities being traded in advisory accounts.
40. SEC -- The United States Securities and Exchange Commission.
41. SECURITIES ACCOUNT -- brokerage account in which any Securities are held.
42. SECURITY -- Means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing.
43. SRO -- Self-Regulatory Organization (such as the Financial Industry Regulatory Authority ("FINRA")).
December 2012
As Employees of ClariVest, we are retained by our Clients to manage a part of their financial affairs and to represent their interests in many matters. As fiduciaries, we owe our Clients our undivided loyalty -- our Clients trust us to act on their behalf, and we hold ourselves to the highest standards of fairness in all such matters.
We expect all Employees to act in an ethical manner when dealing with the public, Clients, prospects, ClariVest, and their fellow Employees.
We expect all Employees to adhere to the highest standards with respect to any potential conflicts of interest with Client accounts - simply stated, no Employee should benefit over the account of any Client.
We expect all persons associated with ClariVest to preserve the confidentiality of information that they may obtain in the course of our business and to use such information properly and not in any way adverse to our Clients' interests, subject to the legality of such information. ClariVest's Employees will not disclose confidential information of ClariVest and its Clients to Eagle personnel without the prior approval of the CCO. Dual employees of ClariVest and Eagle will not disclose confidential information of Eagle and its clients to ClariVest personnel without the prior approval of Eagle's chief compliance officer.
We expect our Employees to conduct their personal financial affairs in a prudent manner, avoiding any action that could compromise their ability to deal objectively with our Clients.
You are encouraged to speak to the CCO, or in his/her absence, the CEO if you believe that changes to the Manual may be appropriate. In addition, please do not hesitate to contact either of the individuals listed above if you feel any of ClariVest's disclosure documents, including its Form ADV, advisory contracts or offering materials are inaccurate, incomplete or out-of-date.
You are required to complete the Code of Conduct and Regulatory Compliance Manual Acknowledgement Form (attached herein), both initially upon the commencement of your employment with ClariVest and annually thereafter, to acknowledge and certify that you have received, reviewed, understand and shall comply, or have complied with, the policies and procedures as set forth in the Manual. In addition, all Employees must be aware of and comply with the following undertakings:
o be familiar with the policies and procedures set forth in this Manual;
o upon the request of the CCO, provide ClariVest with an initial and annual written certification that you have read and understand, and will comply with, the policies and procedures set forth in this Manual and any other compliance materials distributed to you by the CCO;
o notify the CCO promptly in the event you have any reason to believe that you may have failed to comply with (or become aware of another person's failure to comply with) the policies and procedures set forth in this Manual;
o notify the CCO promptly if you become aware of any practice that arguably involves ClariVest in a conflict of interest with any of its advisory accounts, including registered investment companies and Investment Funds;
o cooperate to the fullest extent reasonably requested by the CCO so as to enable: (i) the CCO to discharge his/her respective duties under the Manual and (ii) ClariVest to comply with the securities laws to which it is subject; and
o notify the CCO promptly if you become aware of any part of any disclosure document that you believe may be inaccurate, incomplete or out of date in any respect.
Violations of this Code of Conduct may warrant sanctions at the discretion of management. In any situation where you are unsure about the application of this Code of Conduct or any of the policies, you are encouraged to discuss the situation confidentially with your supervisor or any officer, including the CCO.
This Manual and the policies and procedures set forth herein supersede all prior manuals, policy statements and procedures and other communications on the subjects discussed herein. In developing the Manual, ClariVest considered the material risks associated with activities engaged in by ClariVest. Accordingly, each policy contains a discussion of the risks considered when developing the policy and procedures. This risk evaluation process is an ongoing one, and the Manual will be periodically reviewed to ensure that ClariVest maintains policies and procedures to address such risks.
ClariVest may amend this Manual and/or adopt interpretations of the policies and procedures contained in the Manual as it deems appropriate with the approval of the CCO. All material amendments to, and new interpretations of, the Manual shall be conveyed to Employees.
Rule 206(4)-7 under the Advisers Act requires advisers to develop an internal compliance program and to maintain a written set of policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. The policies and procedures must be reviewed no less frequently than annually to determine their overall adequacy and effectiveness.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with maintaining the Manual. This analysis includes risks such as:
o ClariVest having a dominant person (or persons) that could seek to obtain the power to override controls to achieve personal gain.
o Employees not feeling comfortable bringing a compliance matter to the attention of management.
o ClariVest fails to review its policies and procedures at least annually.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's compliance program.
TESTING
ClariVest will consider the following two (2) kinds of tests:
o QUALITY CONTROL OR TRANSACTIONAL TESTING -- Compliance tests that review and analyze information on a contemporaneous transaction-by-transaction basis in order to identify shortcomings. Two examples of transactional testing are: 1. reviewing brokerage statements submitted by an Employee; and 2. reviewing the quality of execution on a single client trade.
o FORENSIC OR PERIODIC TESTING -- Compliance tests that review and analyze information over time in order to identify unusual patterns to determine if the outcomes of advisory activities are consistent with expectations. Dissimilar to transactional testing, forensic testing does not just look at single transactions; instead, multiple transactions are reviewed by "looking-back" to identify patterns. Examples of forensic testing are: 1. reviewing all of the personal trading forms submitted by an Employee over the past year to determine the adequacy and effectiveness of the personal trading policies and procedures; 2. reviewing the quality of execution on clients' trades that were effected over the past quarter or year to determine the adequacy and effectiveness of the trading policies and procedures; and 3 reviewing the performance dispersions between managed accounts to detect trading dissimilarities and potential problems with trade allocations.
The scope and purpose of the testing is dependent on the activity that is addressed in each of the policies and procedures. Additionally, ClariVest intends on strengthening its compliance program through the analysis and review of the results obtained through its testing processes.
POLICY
ClariVest shall review this Manual no less frequently than annually to ensure the adequacy of the policies and procedures contained herein. In addition, ClariVest shall periodically test the effectiveness of its policies and procedures as required by Rule 206(4)-7. The reviews will include, in part, specific consideration of the following:
o Any compliance matters that arose during the previous year;
o Any changes in the business activities of ClariVest (or any affiliated entities); and
o Any changes to applicable laws, rules or regulations that might suggest a need to revise the Manual.
All required changes to the Manual resulting from the reviews and/or other considerations shall be finally approved and made by the CCO.
PROCEDURES
1. The CCO shall be responsible for coordinating the reviews (at least annually, and on an as-needed or other periodic basis) of the Manual and ClariVest's policies and procedures. Documentation of the reviews shall be kept in written format and made available to individuals as required by law, and other parties that ClariVest deems appropriate.
2. ClariVest has engaged Shartsis Friese LLP and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. as counsel to assist ClariVest in executing these policies as requested.
3. Any changes to the Manual shall be made by the CCO or a designee appointed by the CCO. All final changes shall be approved by the CCO. However, on an ongoing basis, the CCO shall coordinate consideration of proposed material changes to, and material breaches of, the policies and procedures set forth in this Manual.
4. The CCO is designated with the full power to enforce the policies and procedures set forth in the Manual. The CCO shall report any known material violations of the Manual to ClariVest's CEO, or in the case of material violations by the CEO, to the COO.
5. All questions regarding the Manual shall be directed to the CCO.
RESPONSIBILITY
The CCO is responsible for the successful implementation of the policies and procedures contained in the Manual (including determining who must receive and abide by this Manual, e.g., temporary Employees, etc.). The CCO is also charged with a myriad of additional responsibilities that include, among other things, the following:
o Advising Employees on the importance of compliance;
o Instilling a compliance-oriented culture at ClariVest;
o Training Employees on compliance issues and responding to inquiries from Employees regarding compliance matters;
o Ensuring that any Employees with compliance responsibilities are competently performing their job functions;
o Ensuring that ClariVest's compliance program remains robust, comprehensive and current, and properly identifies conflicts of interests;
o Ensuring the timely review of compliance issues;
o Identifying conflicts of interests and other areas that may expose ClariVest to increased regulatory and compliance risk;
o Ensuring the adequate attention and funding of ClariVest's compliance function; and
o Becoming ClariVest's point-of-contact with the SEC and other regulatory authorities.
GENERAL
The Code of Ethics is predicated on the principle that ClariVest owes a fiduciary duty to its Clients.(1) Accordingly, Employees must avoid activities, interests and relationships that run contrary (or appear to run contrary) to the best interests of Clients. At all times, ClariVest will:
o PLACE CLIENT INTERESTS AHEAD OF CLARIVEST'S -- As a fiduciary, ClariVest will serve in its Clients' best interests. In other words, Employees may not benefit at the expense of advisory Clients.
o ENGAGE IN PERSONAL INVESTING THAT IS IN FULL COMPLIANCE WITH CLARIVEST'S CODE OF ETHICS -- Employees must review and abide by ClariVest's Personal Securities Transaction and Insider Trading Policies.
o AVOID TAKING ADVANTAGE OF YOUR POSITION -- Employees must not accept investment opportunities, gifts or other gratuities from individuals seeking to conduct business with ClariVest, or on behalf of an advisory client, unless in compliance with the Gift Policy below.
o MAINTAIN FULL COMPLIANCE WITH THE FEDERAL SECURITIES LAWS -- Employees must abide by the standards set forth in Rule 204A-1 under the Advisers Act and Rule 17j-1 under the IC Act.
Any questions with respect to ClariVest's Code of Ethics should be directed to the CCO and/or the CEO or outside counsel. As discussed in greater detail below, Employees must promptly report any violations of the Code of Ethics to the CCO. All reported Code of Ethics violations will be treated as being made on an anonymous basis.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with administering the Code of Ethics. This analysis includes risks such as:
o Access persons engaging in various personal trading practices that wrongly use Non-Public Information. (These practices include but are not limited to trading ahead of Clients and passing Non-Public Information on to spouses and other persons over whose accounts the access person has control.)
o Access persons being able to front run Clients' trades and systematically move profitable trades to a personal account and let less profitable trades remain in Clients' accounts.
o Personal trading that may detract from the ability of one or more Employees to perform services for Clients.
o Employees taking advantage of their position by accepting excessive gifts or other gratuities (including access to IPO investments) from individuals seeking to do business with ClariVest.
o The personal trading of Employees does not comply with certain provisions of Rule 204A-1 under the Advisers Act (and Rule 17j-1 of the IC Act), or with the provisions of the Code of Ethics.
o Access persons not being aware of what constitutes insider information.
o Employees serving as trustees and/or directors of outside organizations without prior approval. (This could present a conflict in a number of ways, for example, if ClariVest wants to recommend the organization for investment or if the organization is one of ClariVest's service providers.)
o Employees using firm property, including research, supplies, and equipment, for personal benefit.
o ClariVest or its "Covered Associates" make political contributions or coordinate political contributions in violation of Rule 206(4)-5.
o Employees use social networking sites in a manner that could be construed as marketing on behalf of ClariVest.
o Dual employees not being aware of their responsibilities as dual employees.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's Code of Ethics.
GUIDING PRINCIPLES & STANDARDS OF CONDUCT
All Employees of ClariVest shall:
o Act in an ethical manner with the public, Clients, prospective clients, employers, Employees, colleagues in the investment profession, and other participants in the global capital markets;
o Place the integrity of the investment profession, the interests of Clients, and the interests of ClariVest above one's own personal financial interests;
o Adhere to the fundamental standard that you should not take inappropriate advantage of your position;
o Avoid any actual or potential conflict of interest;
o Conduct all personal securities transactions in a manner consistent with this policy;
o Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities;
o Practice, and encourage others to practice, in a professional and ethical manner that will reflect favorably on the Employee, ClariVest and the profession; and
o Comply with applicable provisions of the Federal Securities Laws.
1. PERSONAL SECURITY TRANSACTION POLICY
In order for ClariVest to minimize compliance risks such as Scalping, Front-Running or the appearance of a conflict of interest with the trading conducted for ClariVest Clients, Employees of ClariVest are prohibited from engaging in transactions in publicly-traded Reportable Securities that are equities or derivatives of equities (such as options, puts, calls, etc.) in which the person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership, except for (a) transactions in ETFs and derivatives of ETFs, (b) exempt securities described below in "Reportable and Exempt Securities" or (c) exempt transactions described below in "Exceptions from Reporting Requirements". Subject to the following paragraph, employees are permitted to invest in privately-held Reportable Securities and publicly-traded Reportable Securities that are not equities or derivatives of equities (such as municipal bonds, etc.).
Employees may not participate in initial public offerings, and must have written pre-clearance from the CCO for securities transactions involving limited offerings. (See "PRE-CLEARANCE" below for additional information.) For purposes of this policy a limited offering shall be a security that has a market capitalization of less than $500 million or security that is exempt from registration under the Securities Act of 1933. The CCO shall (a) obtain from the Employee full details of the proposed transaction; and (b) conclude
that the security does not fit the investment strategy recommended by ClariVest and if so, that no Clients have any foreseeable interest in ClariVest purchasing such security on their behalf. The CCO may request a copy of any offering materials (subscription agreement, etc.) associated with the Limited Offering.
REPORTABLE AND EXEMPT SECURITIES
Commodities, futures and options traded on a commodities exchange, including currency futures are not considered securities. However, futures and options on any group or index of securities shall be considered securities.
BENEFICIAL OWNERSHIP
Employees are considered to have beneficial ownership of securities if they have or share a direct or indirect pecuniary interest in the securities. Employees have a pecuniary interest in securities if they have the ability to directly or indirectly profit from a securities transaction.
The following are examples of indirect pecuniary interests in securities:
o Securities held by members of Employees' immediate family sharing the same household. Immediate family means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law. Adoptive relationships are included;
o Employees' interests as a general partner in securities held by a general or limited partnership; and
o Employees' interests as a manager/member in the securities held by a limited liability company.
Employees do not have an indirect pecuniary interest in securities held by entities in which they hold an equity interest unless they are a controlling equity holder or they share investment control over the securities held by the entity.
The following circumstances constitute beneficial ownership by Employees of securities held by a trust:
o Ownership of securities as a trustee where either the Employee or members of the Employees' immediate family have a vested interest in the principal or income of the trust;
o Ownership of a vested beneficial interest in a trust; and
o An Employee's status as a settlor/grantor of a trust, unless the consent of all of the beneficiaries is required in order for the Employee to revoke the trust.
For purposes of clarification, in no event will an account or pooled vehicle managed by ClariVest be subject to the Personal Security Transaction Policy, including by virtue of the fact that ClariVest receives a performance or incentive fee with respect to such account or vehicle.
REPORTING
QUARTERLY TRANSACTION REPORTS
Each Employee will work with the CCO to ensure that such Employee's broker-dealers send ClariVest's CCO duplicate trade confirmations and/or account statements of the Employee when possible, at a minimum, no later than thirty (30) days after the end of each calendar quarter.
Except as set forth in the following sentence, each Employee of ClariVest shall provide the CCO with quarterly transaction reports that disclose all transactions in Reportable Securities in which the person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership (except for exempt transactions listed in the section below entitled "Exceptions from Reporting Requirements"). The quarterly transaction reports from Employees shall contain disclosure of any transactions not reflected in a brokerage statement delivered to the CCO within thirty (30) days of quarter end. The quarterly transaction reports are due within thirty (30) days of quarter end and shall contain a confirmation by the Employee that the Employee has not engaged in any prohibited securities transaction. See Attachment A.
Employees shall also report on a quarterly basis, not later than 30 days after the end of the calendar quarter, the name of ANY brokerage account established by the Employee during the quarter in which any securities were held during the quarter for the direct or indirect benefit of the Employee, the date the account was established, and the date the report was submitted. Employees shall also report any brokerage account closed by the Employee during such quarter. See Attachment B.
The quarterly transaction reports and quarterly account opening/closing reports submitted by Employees are reviewed by the Chief Compliance Officer to confirm compliance with the Code of Ethics.
INITIAL AND ANNUAL HOLDINGS REPORTS
New ClariVest Employees are required to report all of their Reportable Securities holdings and Securities Accounts not later than 10 days after the commencement of their employment (See Attachment C for a copy of the Initial Securities Accounts Report and Attachment D for a copy of the Initial Holdings Report). These reports must be current as of a date not more than 45 days prior to the date the person becomes subject to this Code. Employees are permitted to retain any Reportable Securities held by them as of their hire date. If any Employee chooses to hold such Reportable Securities, it must obtain prior written approval from the CCO should he/she ever want to sell any publicly-traded Reportable Security that is an equity or derivative of an equity (other than ETFs or derivatives of ETFs). (See "PRE-CLEARANCE" below for additional information.) The initial holdings reports and initial securities accounts reports submitted by Employees are reviewed by the Chief Compliance Officer to confirm compliance with the Code of Ethics.
Existing Employees are required to provide ClariVest with a complete list of Reportable Securities holdings and Securities Accounts on an annual basis, on or before February 14 of each year. The report shall be current at least as of December 31 , which is a date no more than 45 days from the final date the report is due to be submitted. (See Attachment E for a copy of the Annual Securities Accounts Report and Attachment F for a copy of the Annual Holdings Report). The annual holdings reports and annual securities accounts reports submitted by Employees are reviewed by the Chief Compliance Officer to confirm compliance with the Code of Ethics.
In the event that an Employee submits brokerage or custodial statements to satisfy the initial and/or annual holdings report requirement, the Employee must be certain that such statements include the information found on the applicable Attachments.
EXCEPTIONS FROM REPORTING REQUIREMENTS
An Employee is not required to submit: 1) a transaction or initial and annual
holdings report with respect to securities held in accounts over which the
Employee had no direct or indirect influence or control (i.e., any transactions
occurring in an account that is managed on a fully-discretionary basis by an
unaffiliated money manager and over which such employee has no direct or
indirect influence or control), and 2) a transaction report with respect to
transactions effected pursuant to an automatic investment plan (such as a
401(k)). The CCO will determine on a case-by-case basis whether an account
qualifies for either of these exceptions.
TRADING AND REVIEW
ClariVest strictly forbids Front-Running client accounts, which is a practice generally understood to be Employees personally trading ahead of proposed client transactions. In order to minimize the risk of Front-Running, ClariVest prohibits personal securities transactions in most publicly-traded Reportable Securities as described above under "Personal Security Transaction Policy". The CCO will closely monitor Employees' investment patterns to confirm compliance with these restrictions. The CFO will monitor the CCO's personal securities transactions for compliance with the Personal Security Transaction Policy.
If ClariVest discovers that an Employee is personally trading contrary to the policies set forth above, the Employee shall meet with the CCO and CEO to review the facts surrounding the transactions.
PRE-CLEARANCE
The following procedures shall apply to any situation in which an Employee must obtain pre-clearance for a trade. Employees shall request pre-clearance in writing (which includes requests by e-mail). Once pre-clearance is granted to an Employee, such Employee may only transact in that security for the time period specified by the CCO. If the Employee wishes to transact in that security on any other day, they must again obtain pre-clearance from the CCO or another individual designated.
REPORTING VIOLATIONS AND REMEDIAL ACTIONS
ClariVest takes the potential for conflicts of interest caused by personal investing very seriously. As such, ClariVest requires its Employees to promptly report any violations of the Code of Ethics to the CCO.
If any violation of ClariVest's Personal Security Transaction Policy is determined to have occurred, the CCO may impose sanctions and take such other actions as he/she deems appropriate, including, without limitation, requiring that the trades in question be reversed, requiring the disgorgement of profits or gifts, issuing a letter of caution or warning, issuing a suspension of personal trading rights or suspension of employment (with or without compensation), imposing a fine, making a civil referral to the SEC, making a criminal referral, and/or terminating employment for cause or any combination of the foregoing. All sanctions and other actions taken shall be in accordance with applicable employment laws and regulations. Any profits or gifts forfeited shall be paid to the applicable client(s), if any, or given to a charity, as the CCO shall determine is appropriate.
No person shall participate in a determination of whether he or she has committed a violation of this Policy or in the imposition of any sanction against himself or herself; provided that such person may be given an opportunity to provide any explanations or additional information that the CCO may or may not consider in making his/her determination.
2. INSIDER TRADING POLICY
Section 204A of the Advisers Act requires every investment adviser to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, Non-Public Information by any person associated with such investment adviser. In accordance with Section 204A, ClariVest has instituted the following procedures to prevent the misuse of Non-Public Information.
Securities laws have been interpreted to prohibit the following activities:
o Trading by an insider while in possession of material Non-Public Information; or
o Trading by a non-insider while in possession of material Non-Public Information, where the information was disclosed to the non-insider in violation of an insider's duty to keep it confidential; or
o Communicating material Non-Public Information to others in breach of a fiduciary duty.
WHOM DOES THE POLICY COVER?
This policy covers all of ClariVest's Employees who (1) have access to nonpublic information regarding any Client's purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any Reportable Fund, or (2) is involved in making securities recommendations to Clients, or who has access to such recommendations that are nonpublic. This policy also covers any transactions in any securities participated in by family members, trusts or corporations directly or indirectly controlled by such persons. In addition, the policy applies to transactions engaged in by corporations in which the Employee is an officer, director or 10% or greater stockholder and a partnership of which the Employee is a partner unless the Employee has no direct or indirect control over the partnership.
Note that this policy does not cover ClariVest's outside directors, who do not have the access or involvement described in the first sentence of this subsection.
WHAT INFORMATION IS MATERIAL?
Individuals may not be held liable for trading on inside information unless the
information is material. Information is generally viewed to be "material" where:
(i) there is a substantial likelihood that a reasonable investor would consider
the information important in making an investment decision; (ii) the
disclosure of the information would be viewed by the reasonable investor as
having significantly altered the 'total mix' of information made available; or
(iii) the disclosure of the information is reasonably certain to have a
substantial effect on the market price of the security. Advance knowledge of
the following types of information is generally regarded as Material:
o Dividend or earnings announcements
o Write-downs or write-offs of assets
o Additions to reserves for bad debts or contingent liabilities
o Expansion or curtailment of company or major division operations
o Merger, joint venture announcements
o New product/service announcements
o Discovery or research developments
o Criminal, civil and government investigations and indictments
o Pending labor disputes
o Debt service or liquidity problems
o Bankruptcy or insolvency problems
o Tender offers, stock repurchase plans, etc.
o Recapitalization
Information provided by a company could be material because of its expected effect on a particular class of a company's securities, all of the company's securities, the securities of another company, or the securities of several companies. The misuse of material Non-Public Information applies to all types of securities, including equity, debt, commercial paper, government securities and options.
Material Information does not have to relate to a company's business. For example, Material Information about the contents of an upcoming newspaper column may affect the price of a security, and therefore be considered material.
WHAT INFORMATION IS NON-PUBLIC?
In order for issues concerning inside trading to arise, information must not only be material, but also Non-Public.
Once material, Non-Public Information has been effectively distributed to the investing public, it is no longer classified as material, Non-Public Information. However, the distribution of Non-Public Information must occur through commonly recognized channels for the classification to change. In addition, the information must not only be publicly disclosed, there must be adequate time for the public to receive and digest the information. Lastly, Non-Public Information does not change to public information solely by selective dissemination.
Employees must be aware that even where there is no expectation of confidentiality, a person may become an insider upon receiving material, Non-Public Information. Whether the "tip" made to the Employee makes him/her a "tippee" depends on whether the corporate insider expects to benefit personally, either directly or indirectly, from the disclosure.
The "benefit" is not limited to a present or future monetary gain; it could be a reputational benefit or an expectation of a quid pro quo from the recipient by a gift of the information. Employees may also become insiders or tippees if they obtain material, Non-Public Information from acquaintances, at social gatherings, by overhearing conversations, etc.
SELECTIVE DISCLOSURE
Employees must never disclose proposed/pending trades to any client or other individual/entity outside of ClariVest (other than the entity trading the security for ClariVest), except in connection with the transition of a client's funds into or out of a ClariVest strategy. Additionally, ClariVest must be careful when disclosing the composition of Clients' portfolios without obtaining consent from the CCO. Federal Securities Laws may specifically prohibit the dissemination of such information and doing so may be construed as a violation of ClariVest's fiduciary duty to Clients. Selectively disclosing the portfolio holdings of a client's portfolio to certain investors/outside parties may also be viewed as ClariVest engaging in a practice of favoritism. Including information regarding Clients' portfolio holdings in marketing materials and ClariVest's website is subject to the CCO's approval in accordance with ClariVest's Marketing policy and procedures. All inquiries that are received by Employees to disclose portfolio holdings must be reported to the CCO or CEO before such holdings are provided. In determining whether or not to approve the dissemination of holdings information, the CCO will consider, among other things, how current the holdings information is. However, without a confidentiality agreement in place, the CCO will not approve the dissemination of holdings information that is less than one (1) month old (except for limited holdings information (such as top-ten holdings) or information provided in connection with an upcoming account funding or transition, which may be disseminated before it is one (1) month old). The CCO can approve the dissemination of holdings information from a representative account (without an indication of which client account it is) that is less than one (1) month old if (A) the recipient signs a confidentiality agreement with respect to those holdings and (B) the CCO determines that the recipient has a valid business purpose for requesting the holdings information.
ClariVest will provide Clients with certain information relating to the holdings or performance of their accounts, as requested. All Clients are provided with the opportunity to request such information to ensure that no selective disclosure of such information has occurred.
PROCEDURES TO FOLLOW IF AN EMPLOYEE BELIEVES THAT HE/SHE POSSESSES MATERIAL, NON-PUBLIC INFORMATION
If an Employee has questions as to whether they are in possession of material, Non-Public Information, they must inform the CCO as soon as possible. From this point, the Employee, CCO and/or CEO will conduct research to determine if the information is likely to be considered important to investors in making investment decisions, and whether the information has been publicly disseminated.
Given the severe penalties imposed on individuals and firms engaging in inside trading, Employees:
o Shall not trade the securities of any company in which they are deemed insiders who may possess material, Non-Public Information about the company.
o Shall not engage in personal securities transactions of any company, except in accordance with ClariVest's Personal Security Transaction Policy and the securities laws.
o Shall not discuss any potentially material, Non-Public Information with colleagues, except as specifically required by their position.
o Shall not proceed with any trading, etc. of a company if they possess material, Non-Public Information about that company until the CCO informs the Employee of the appropriate course of action.
ClariVest's CCO will periodically review a sampling of employee emails and instant messages to look for evidence of violations of this policy. If the CCO locates evidence of such activity, she will inform the COO and/or CEO and discuss the appropriate response. The CCO will maintain documentation regarding any such violations.
3. RESTRICTIONS ON SPREADING FALSE OR MISLEADING RUMORS
Market events in 2008 highlighted the potential impact of false rumors on stock prices, and regulators including the SEC responded by reminding market participants that they are prohibited from intentionally spreading false rumors to impact the financial condition of an issuer.
ClariVest employees are prohibited from spreading rumors that they know are false or misleading with the intention of impacting a security price and/or profiting from its dissemination; for example, by shorting a stock and saying the company is in danger of collapse. If an employee obtains information that it believes may be false or misleading, the employee will notify the CCO before conducting any trading based on that information.
ClariVest's CCO will periodically review a sampling of employee emails and instant messages to look for evidence of violations of this policy. If the CCO locates evidence of such activity, she will inform the COO and/or CEO and discuss the appropriate response. The CCO will maintain documentation regarding any such violations.
4. SERVING AS OFFICERS, TRUSTEES AND/OR DIRECTORS OF OUTSIDE ORGANIZATIONS
Employees may, under certain circumstances, be granted permission to serve as directors, trustees or officers of outside organizations. These organizations can include public or private corporations, partnerships, charitable foundations and other not-for-profit institutions. Employees may also receive compensation for such activities.
As an outside board member or officer, an Employee may come into possession of material Non-Public Information about the outside company, or other public companies. It is critical that a proper information barrier be in place between ClariVest and the outside organization, and that the Employee does not communicate such information to other Employees in violation of the information barrier.
Similarly, ClariVest may have a business relationship with the outside organization or may seek a relationship in the future. In those circumstances, the Employee must not be involved in the decision to retain or hire the outside organization.
Employees are prohibited from engaging in such outside activities without the prior approval from the CCO. See Attachment G. Approval will be granted on a case by case basis, subject to proper resolution of potential conflicts of interest. Outside activities will be approved only if any conflict of interest issues can be satisfactorily resolved and all of the necessary disclosures are made on Part II of Form ADV.
5. DIVERSION OF FIRM BUSINESS OR INVESTMENT OPPORTUNITY
Except in their role as a dual employee of Eagle, no Employee may acquire, or receive personal gain or profit from, any business opportunity that comes to his or her attention as a result of his or her association with ClariVest and in which he or she knows ClariVest might be expected to participate or have an interest in participating, without disclosing in writing all necessary facts to the CCO, offering the particular opportunity to ClariVest, and obtaining written authorization to participate from the CCO.
Any personal or family interest of an Employee in any ClariVest business activity or transaction must be immediately disclosed to the CCO. For example, if an Employee becomes aware that a transaction being considered or undertaken by ClariVest may benefit, either directly or indirectly, an Employee or a family member thereof, the Employee must immediately disclose this possibility to the CCO.
6. LOANS
No Employee may borrow funds from or become indebted to a client of ClariVest, except with respect to customary personal loans (e.g., home mortgage loans, automobile loans, lines of credit, etc.), unless the arrangement is disclosed in writing and receives prior approval from the CCO. No Employee may use ClariVest's name, position in a particular market or goodwill to receive any benefit on loan transactions without the prior express written consent of the CCO.
7. DEALINGS WITH GOVERNMENT AND INDUSTRY REGULATORS
The following policy is subject in all respects to the policies and procedures regarding pay to play practices set forth below in this Code of Ethics. ClariVest's policy forbids payments of any kind by it, its Employees or any agent or other intermediary to any government official or candidate, self-regulatory official, corporation or other similar person or entity, within the United States or abroad, for the purpose of obtaining or retaining business, or for the purpose of influencing favorable consideration of any application for a business activity or other matter. This policy covers all types of payments, even to minor government officials and industry regulators, regardless of whether the payment would be considered legal under the circumstances. This policy encourages Employees to avoid even the appearance of impropriety in their dealings with industry and government regulators and officials. No Employee can hold a public office if it in any way conflicts with ClariVest's business.
It is expected and required that all Employees fulfill their personal obligations to governmental and regulatory bodies. Those obligations include the filing of appropriate federal, state and local tax returns, as well as the filing of any applicable forms or reports required by regulatory bodies.
All Employees are required to cooperate fully with management in connection with any internal or independent investigation and any claims, actions, arbitrations, litigations, investigations or inquiries brought by or against ClariVest.
8. IMPROPER USE OF CLARIVEST PROPERTY
No Employee may utilize the investment management property of ClariVest or utilize the services of ClariVest, its principals or Employees, for his or her personal benefit or the benefit of another person or entity (except in connection with ClariVest's business), without approval of the CCO. For this purpose, "investment management property" means both tangible and intangible property, including ClariVest funds, information, business plans, business opportunities, confidential research, intellectual property or proprietary processes, and ideas for new research or services.
Except for immaterial use, no Employee may utilize other property of ClariVest or utilize the services of ClariVest, its principals or Employees, for his or her personal benefit or the benefit of another person or entity, without approval of the CCO (except in connection with ClariVest's business). For this purpose, "other property" means both tangible and intangible property, including premises, equipment and supplies.
Notwithstanding the foregoing, as part of the pending affiliation between ClariVest and Eagle, ClariVests Institutional Client relations employee and the members of ClariVest's investment team are dual employees of ClariVest and our expected affiliate Eagle. As dual employees, these individuals perform services for both ClariVest and Eagle. When they are performing services for ClariVest and its Clients, these employees are subject to the supervision and control of ClariVest. When they are performing services for Eagle and its clients, these employees are subject to the supervision and control of Eagle.
In performing services for Eagle and its clients, the investment team dual employees will be using property of ClariVest, including our investment processes, to manage certain Large Cap Core and Large Cap
Growth products of Eagle. ClariVest has approved of this use of our property, and will receive compensation from Eagle in connection therewith.
The Large Cap Core and Large Cap Growth products that these investment team dual employees will manage for Eagle will be rebalanced and traded on a different time-table than the ClariVest Large Cap Core and Large Cap Growth products. The CIO will oversee this process to ensure that they are rebalanced and traded on different schedules. If there is a need to trade a security at the same time by both the ClariVest and Eagle products, the CIO will oversee this to ensure that the volume is split between the two entities. We believe this structure minimizes any potential conflicts of interest between the Eagle Large Cap Core and Large Cap Growth product, and the ClariVest Large Cap Core and Large Cap Growth products.
9. PROTECTION OF CLARIVEST'S NAME
Employees should at all times be aware that ClariVest's name, reputation and credibility are valuable assets and must be safeguarded from any potential misuse. Care should be exercised to avoid the unauthorized use of ClariVest's name in any manner that could be misinterpreted to indicate a relationship between ClariVest and any other entity or activity.
10. EMPLOYEE INVOLVEMENT IN LITIGATION OR PROCEEDINGS
Employees must advise the CCO immediately if they become involved in or threatened with litigation or an administrative investigation or proceeding of any kind, are subject to any judgment, order or arrest, or are contacted by any regulatory authority.
11. GIFTS AND ENTERTAINMENT
EMPLOYEES' RECEIPT OF BUSINESS MEALS, SPORTING EVENTS AND OTHER ENTERTAINMENT - Employees may attend business meals, sporting events and other entertainment events at the expense of a giver, as long as the expense is reasonable, not lavish or extravagant in nature and the Employee is accompanied by the giver. In the event that the estimated cost of the meal, event, etc. is greater than $250 per person, the Employee must obtain prior approval from the CCO of his/her attendance at the meal, event, etc. See Attachment H. If the event is highly publicized such that the tickets may be selling in excess of their face value, the Employee must consider the market value for the reporting requirements. In evaluating whether or not to approve an Employee's attendance at an entertainment event greater than $250 per person, the CCO will consider the potential conflict of interest between ClariVest and its clients associated with the event. For example, the conflict associated with an entertainment event with a data vendor (where ClariVest pays for the data services) is likely low. As a result, an entertainment event with such a vendor may be appropriate where the same entertainment event with a broker-dealer, for example, (where clients pay the broker-dealer's commissions) may not be appropriate.
GIVING AND RECEIVING GIFTS - Employees may not accept from or give to an entity gifts over $100 (either one single gift, or in aggregate on an annual basis). Reasonable gifts received on behalf of the Company shall not require reporting. Examples of reasonable gifts include holiday gift baskets and lunches brought to ClariVest's offices by service providers.
GIFTS GIVEN TO TAFT-HARTLEY FUNDS - Employees are reminded that notwithstanding this policy, ClariVest may manage Taft-Hartley funds and any gratuity provided by ClariVest to labor unions or union representatives that have an "interest" in the Taft-Hartley fund (including the members covered by the Taft-Hartley fund) in excess of $250 in aggregate per fiscal year are required to be reported on Attachment H and Department Labor Form LM-10 within 90 days following the end of ClariVest's fiscal year. Accordingly, ClariVest will monitor all gratuities as discussed and make the appropriate filings on DOL Form LM-10.
The Department of Labor has issued further guidance on the filing of Form LM-10 through its website (www.dol.gov). Below are the relevant web-pages regarding the filing of Form LM-10:
o FORM LM-10 http://www. dol.gov/esa/regs/compliance/olms/GPEA_Forms/lm%20- %2010p. pdf#search='Form%20LM10'
o INSTRUCTIONS TO FORM LM-10 http://www. dol.gov/esa/regs/compliance/ olms/GPEA_Forms/LM-10%20instructions.pdf
o FREQUENTLY ASKED QUESTIONS http://www.dol.gov/esa/regs/compliance/olms/LM10_FAQ.htm
The CCO shall track all reportable entertainment and gifts via Attachment I.
12. TRAVEL EXPENSES
Employees may charge against appropriate ClariVest accounts normal and reasonable travel and travel-related expenses incurred for a ClariVest business purpose. Such expenses may include meals and incidentals, travel costs (air, train, etc.), lodging expenses, business phone calls and other miscellaneous travel related expenses. When incurring such expenses, Employees must use reasonable judgment and generally be aware of escalating travel costs. While ClariVest has not prescribed limits on such expenses, ClariVest may reiterate its policy with Employees as necessary.
ClariVest will pay for travel expenses (airline, hotel, meals and incidentals) related to Employees' attendance at conferences, company visits, etc. In the event that any such expenses are included as part of the event (i.e. a broker-dealer charters a jet for numerous investment firms, including ClariVest, to visit a company, etc.), ClariVest shall determine the reasonableness of such expenses and may choose to approximate the value of such expenses and forward the third-party a reimbursement check. ClariVest has adopted this policy in order to avoid any perceived conflict of interest associated with our relationships with outside service providers.
13. POLITICAL CONTRIBUTIONS
POLICY STATEMENT ON CONTRIBUTIONS
ClariVest complies with SEC Rule 206(4)-5 regarding "pay-to-play" practices by investment advisers. ClariVest will not make any Contributions. No Contributions may be made by Covered Associates without the prior approval of the CCO or, in the CCO's absence, the COO.
Rule 206(4)-5(d) makes it unlawful for any investment adviser covered by the rule and its Covered Associates to do anything indirectly which, if done directly, would result in a violation of this section. ClariVest will require its Employees to certify annually that they have not done anything indirectly which, if done directly, would result in a violation of Rule 206(4)-5.
POLITICAL CONTRIBUTION REVIEW AND APPROVAL FORMS
Before becoming an Employee, the prospective Employee must identify to the CCO all relevant Contributions in the previous two years (these would include contributions by the Employee and its immediate family and controlled-PACs, each as described in the definition of "Covered Associate"). The form of the Political Contribution Review Form is attached as Attachment J.
Thereafter, each Employee must complete a Political Contribution Approval Form (attached as Attachment K) and receive authorization before any additional Contributions by a Covered Associate. A Covered Associate may be given permission for Contributions totaling up to $350 per election to an Official for whom the individual is entitled to vote, and up to $150 per election to an Official for whom the
individual is not entitled to vote, but approval on a Political Contribution Approval Form is required. Contributions to political parties and political action committees will generally be approved, but approval on a Political Contribution Approval Form is required.
Annually, each Employee must certify to ClariVest that (1) such Employee has informed the members of his/her immediate family sharing the same household of the pay to play policies and procedures set forth in ClariVest's Code of Ethics, (2) such Employee (and its immediate family and controlled-PACs, each as described in the definition of "Covered Associate") has complied with this policy, and (3) such Employee has requested and received all required approvals for each Contribution in the past year, or give ClariVest a report disclosing all Contributions made during that year. These certifications are part of ClariVest's annual Compliance Manual certification attached hereto.
CONTRIBUTION APPROVALS
No Contributions may be made without the prior written approval of the CCO. The CCO must obtain the prior written approval of the COO before making any Contributions. The CCO (or, in the CCO's absence, the COO) will notify the Covered Associate of approval or denial of clearance to make a Contribution. If a Covered Associate receives approval to make a Contribution, such Covered Associate must make that Contribution within the time period specified by the CCO (or COO). If the Contribution is not made within such time period, the Covered Associate must request approval again.
REVIEW OF CONTRIBUTIONS
ClariVest will review all Contributions made by its Covered Associates to monitor compliance with this policy. ClariVest reserves the right to require a Covered Associate to cancel and request a reimbursement of, at the Covered Associate's expense, any Contribution if ClariVest believes such Contribution might violate this policy or appears improper. Except as required to enforce this policy or to participate in any investigation concerning violations of applicable law, ClariVest will keep all such information confidential.
RESTRICTIONS ON SOLICITING OR COORDINATING CONTRIBUTIONS
ClariVest and its Covered Associates may not solicit or coordinate (1) Contributions for an Official of a Government Entity to which ClariVest is providing (or seeking to provide) advisory services or (2) any Contribution to a political party of a state or locality where ClariVest is providing or seeking to provide advisory services. ClariVest's Covered Associates must obtain pre-approval before they solicit or coordinate (1) Contributions for an Official of a Government Entity or (2) any Contribution to a political party of a state or locality. The form to use for this purpose is attached as Attachment L.
RECORDKEEPING
ClariVest's CCO will keep records of:
o ClariVest's Covered Associates, including their name, title(s), and business and residence address (excluding the individuals set forth in part (d) of the definition of "Covered Associate", as they are not covered by the SEC's definition of "covered associate")
o All Government Entities that ClariVest has provided services to in the past five years (but not prior to September 13, 2010). Starting September 13, 2011, this will include Government Entities that are investors in Covered Investment Pools
o All Contributions made to an Official of a Government Entity in chronological order (including the name and title of the contributor and recipient, the amount, the date, and whether the contribution was subject to rule 206(4)-5's exception for certain returned contributions)
o All Contributions made to a political party in chronological order (including the name and title of the contributor and recipient, the amount, the date, and whether the contribution was subject to rule 206(4)-5's exception for certain returned contributions)
o All Contributions made to a PAC in chronological order (including the name and title of the contributor and recipient, the amount, the date, and whether the contribution was subject to rule 206(4)-5's exception for certain returned contributions)
14. SOCIAL NETWORKING
Although the SEC has not engaged in any formal rule-making with respect to the use of social networking websites by advisers, it is possible that the use of these sites could be deemed advertising depending on the content, context and recipient of the information disclosed on such a site. ClariVest is adopting this policy to minimize the risk that the use of these sites could be deemed advertising by ClariVest.
Employees are not restricted from accessing social networking sites such as Facebook, Twitter, LinkedIn or blogs from their work computers. However, any access by Employees from their work computers should be limited to reasonable, immaterial use. Moreover, use of social networking sites is subject to ClariVest's Employee Handbook, including, without limitation, the Operations Policies addressing Use of Communication Systems and Internet Code of Conduct.
Employees are prohibited from using social networking sites to engage in marketing or advertising of ClariVest's products or services. Employees may not post any information on any social networking site regarding ClariVest, its Clients or investments without pre-approval, other than the company name, the Employee's title and employment dates, information contained on ClariVest's website, and information contained in the Employees' approved bio. (An Employee may obtain a copy of their approved bio from the CCO upon request.) If an Employee would like to post any additional information regarding ClariVest, its Clients or investments on a social networking site, they must obtain pre-approval from the CCO before posting. To be clear, Employees are not required to obtain pre-approval of their resumes before submitting them in a one-on-one communication with a prospective employer or job search firm.
Quarterly, the CCO will search Facebook, LinkedIn and Google+ for employee profiles and will review the information contained therein to confirm it complies with the foregoing policy.
15. DISCLOSURE
ClariVest shall describe its Code of Ethics in Part 2A of Form ADV and, upon request, furnish Clients with a copy of the Code of Ethics.
The requirement to report on issues to ClariVest's Clients, including fund and ERISA Client's Boards, under this Code and securities regulations may include significant conflicts of interest that arise involving the personal investment policies, even if the conflicts have not resulted in a violation of this Code. For example, ClariVest may be required to report to a Client's Board if a Portfolio Manager is a director of a company whose securities are held by the client's portfolio.
If the CCO determines that a material violation of this Code has occurred, he or she shall promptly report the violation, and any enforcement action taken, to ClariVest's senior management. If ClariVest's senior management determines that such material violation appears to involve a fraudulent, deceptive or manipulative act, ClariVest will report its findings to the fund's Board of Directors or Trustees pursuant to Rule 17j-1.
RECORDKEEPING
ClariVest shall maintain records in the manner and to the extent set forth below, which records shall be available for appropriate examination by representatives of regulatory authorities or ClariVest's management.
o A copy of this Code of Ethics and any other code which is, or at any time within the past five years has been, in effect shall be preserved in an easily accessible place;
o A record of any violation of this Code of Ethics and of any action taken as a result of such violation shall be preserved in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs;
o A record of all written acknowledgements (annual certifications) as required by the Manual for each person who is currently, or within the past five years was, an Employee of ClariVest.
o A copy of each report made pursuant to this Code of Ethics by an Employee, including any information provided in lieu of reports, shall be preserved by the Company for at least five years after the end of the fiscal year in which the report is made or the information is provided, the first two years in an easily accessible place;
o A list of all persons who are, or within the past five years have been, required to make reports pursuant to this Code of Ethics, or who are or were responsible for reviewing these reports, shall be maintained in an easily accessible place;
o The Company shall preserve a record of any decision, and the reasons supporting the decision, to approve the acquisition of any Limited Offering by Employees for at least five years after the end of the fiscal year in which the approval is granted, the first two years in an easily accessible place.
o [17j-1] A copy of each finding presented to the Board of a fund shall be preserved by ClariVest for at least five years after the end of the fiscal year in which the record is made, the first two years in an easily accessible place.
RESPONSIBILITY
The CCO will be responsible for administering the Code of Ethics. All questions regarding the policy should be directed to the CCO. ClariVest shall provide the Code of Ethics and all amendments to all "supervised" employees, and such employees must annually acknowledge in writing their receipt and understanding of the Code of Ethics and such amendments.
[17j-1] In the event a material change is made to the Personal Trading Policy of the Code of Ethics, the CCO shall inform the CCO of any fund which is a Client of such material change to enable the fund CCO to ensure that such material change is approved by such fund's Board no later than six months after adoption of the material change.
ATTACHMENT A
REPORTING EMPLOYEE NAME:________________________________________________________
FOR QUARTER END: _______________________________________________________________
I CERTIFY ALL THE INFORMATION IN THE FOLLOWING FORM IS TRUE AND I DID NOT PARTICIPATE IN ANY PROHIBITED SECURITIES TRANSACTION PER THE CODE OF ETHICS FOR THE SPECIFIED QUARTER.
SIGNATURE:________________________________________ DATE: _______________________
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TYPE (E.G., TICKER
EQUITY; OR
NUMBER FIXED CUSIP PRINCIPAL BUY (ACQUIRE)/ INTEREST RATE/ BROKER, DEALER
OF SHARES SECURITY NAME INCOME) (IF APP.) AMOUNT SELL (DISPOSE) MATURITY PRICE DATE OR BANK
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In accordance with ClariVest's Code of Ethics, please provide a list of all reportable securities transactions that have occurred during the previous calendar quarter in any account in which you maintain a pecuniary interest; provided that you are not required to report (1) transactions reflected in brokerage statements provided to the CCO within 30 days of the end of the calendar quarter or (2) transactions for which you obtained pre-approval.
DELIVER TO THE CHIEF COMPLIANCE OFFICER WITHIN 30 DAYS OF THE
END OF EACH CALENDAR QUARTER.
USE ADDITIONAL SHEETS IF NECESSARY.
ATTACHMENT B
QUARTERLY ACCOUNT OPENING/CLOSING REPORTING FORM
REPORTING EMPLOYEE NAME:___________________________________
FOR QUARTER END: __________________________________________
In accordance with ClariVest's Code of Ethics, please provide a list of all Securities Accounts that have opened/closed during the previous calendar quarter in which you maintain a pecuniary interest.
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DATE OF ACCOUNT OPENED OR
NAME OF BROKER, DEALER OR BANK ACCOUNT TITLE ACCOUNT NUMBER ESTABLISHMENT CLOSED?
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I certify that this form fully discloses all of the newly opened accounts and closed accounts in which I have a pecuniary interest. Nothing in this report should be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the securities to which the report relates.
___________________________________
Print Name Reviewed by: ___________________________
___________________________________ ________________ Date of Review: ________________________
Signature Date
Exception(s) Noted: ____No _____Yes
If Yes, Describe: ______________________
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ATTACHMENT C
INITIAL REPORTING -- SECURITIES ACCOUNTS
Employee______________________________________________________ (PRINT NAME)
Information submitted current as of __________________________ (PRINT DATE)
In accordance with ClariVest's Code of Ethics, please provide a list of all Securities Accounts in which you have a pecuniary interest.
I certify that this form fully discloses all of the Securities Accounts in which I have a pecuniary interest.
______________________________________________ ____________________________ Signature Date --------------------------------------------- Reviewed by:____________________________ Date of Review: ________________________ Exception(s) Noted: ____No _____Yes If Yes, Describe: ______________________ --------------------------------------------- |
ATTACHMENT D
INITIAL REPORTING -- SECURITIES HOLDINGS
In accordance with ClariVest's Code of Ethics, please provide a list of all reportable securities in which you have a pecuniary interest. This includes securities held by broker-dealers and other custodians, at your home, in safe deposit boxes, and by an issuer.
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NUMBER SECURITY NAME TYPE TICKER OR PRINCIPAL AMOUNT
OF SHARES (E.G., EQUITY; CUSIP
FIXED INCOME) (IF APPLICABLE)
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USE ADDITIONAL SHEETS AS NECESSARY.
I certify that this form fully discloses all of the reportable securities in which I have a pecuniary interest. Nothing in this report should be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the reportable security to which the report relates.
_____________________________________________ ______________________________ Signature Date ----------------------------------------- |
Reviewed by: ____________________________
Date of Review: _________________________
Exception(s) Noted: ____No _____Yes
If Yes, Describe: _______________________
ATTACHMENT E
ANNUAL REPORTING -- SECURITIES ACCOUNTS
Employee _____________________________________________________ (PRINT NAME)
Information submitted current as of __________________________ (PRINT DATE)
In accordance with ClariVest's Code of Ethics, please provide a list of all Securities Accounts in which you have a pecuniary interest.
______________________________________________________ _______________________ Signature Date ------------------------------------------------- Reviewed by: ___________________________ Date of Review: ________________________ Exception(s) Noted: ____No _____Yes If Yes, Describe: ______________________ ------------------------------------------------- |
ATTACHMENT F
ANNUAL REPORTING -- SECURITIES HOLDINGS
In accordance with ClariVest's Code of Ethics, please provide a list of all reportable securities in which you have a pecuniary interest. This includes reportable securities held by broker-dealers and other custodians, at your home, in safe deposit boxes, and by an issuer.
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NUMBER SECURITY NAME TYPE TICKER OR PRINCIPAL AMOUNT
OF SHARES (E.G., EQUITY; CUSIP
FIXED INCOME) (IF APPLICABLE)
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USE ADDITIONAL SHEETS AS NECESSARY.
I certify that this form fully discloses all of the reportable securities in which I have a pecuniary interest. Nothing in this report should be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the reportable security to which the report relates.
_____________________________________________________ _______________________ Signature Date ----------------------------------------- |
Reviewed by: ________________________
Date of Review: ________________________
Exception(s) Noted: ____No _____Yes
If Yes, Describe: ______________________
ATTACHMENT G
REQUEST FOR APPROVAL OF OUTSIDE ACTIVITY FORM
Name and address of company or organization: ___________________________________
Nature of organization's primary business or purpose: __________________________
Is this a public company? (YES/NO) If YES, stock symbol: _______________________
Complete description of anticipated role with organization: ____________________
Describe any compensation you will receive: ____________________________________
If this request for approval is granted:
o I agree to notify the Chief Compliance Officer of any change in the above information.
o I agree, for private or not-for-profit organizations, to seek approval to retain my position, as described above, if the organization decides to offer securities to the public, or ceases to maintain its not-for-profit status.
o I am aware of no other EMPLOYEES who are officers or directors of the organization noted above.
o I agree to adhere to the inside trading policies of both ClariVest Asset Management LLC ("ClariVest") and the organization, and not to communicate any material Non-Public information in my possession regarding the organization to ClariVest's investment advisory or research staff.
o I will avoid participation in discussions regarding service, investment management, or other arrangements with ClariVest or its affiliates, and will recuse myself from voting on any such matters.
Signature of Employee: __________________________________ Date: ________________
Approved By:_____________________________________________ Date:_________________
ATTACHMENT H
ENTERTAINMENT REPORT
Employee(s) Receiving/Giving the Entertainment:
Approximate Total Dollar Amount of Entertainment: $__________________
Is the Receiver of the Entertainment an Individual or Entity that is associated with a Taft-Hartley Fund?
Yes _________ No __________
Has Employee Received/Given Additional Entertainment from Receiver/Giver within the Past 12 Months? If Yes, list the Entertainment received/given and the approximate Value of the Entertainment:
Relationship of Receiver/Giver to ClariVest and/or Employee(s):
Reason (if known) the Entertainment will be given by/given to ClariVest and/or Employee(s):
COMPLIANCE USE ONLY
____ Approved _____ Not Approved Person Approving ____________________________
Signature _____________________________________ Date: _________________________
Reasons Supporting Decision to Approve/Not Approve: ____________________________
ATTACHMENT I
EMPLOYEE ENTERTAINMENT LOG
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APPROXIMATE RELATIONSHIP OF
EMPLOYEE DOLLAR RECEIVER/GIVER TO
GIVING/RECEIVING DESCRIPTION OF AMOUNT OF RECEIVER/GIVER CLARIVEST AND/OR
DATE ENTERTAINMENT ENTERTAINMENT ENTERTAINMENT OF ENTERTAINMENT EMPLOYEE
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--------------------------------------------------------- REASON ENTERTAINMENT WAS GIVEN BY/GIVEN TO COMPLIANCE CLARIVEST AND/OR EMPLOYEE APPROVAL (YES/NO) --------------------------------------------------------- |
ATTACHMENT J
POLITICAL CONTRIBUTION REVIEW FORM
Prospective Employee_______________________________________________ (PRINT NAME)
Information submitted current as of __________________________ (PRINT DATE)
In accordance with ClariVest's Code of Ethics, please provide a list of all Contributions you (or your immediate family and controlled-PACs, each as described in the definition of "Covered Associate") has made in the past 2 years.
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NAME AND TITLE OF NAME AND TITLE AMOUNT DATE ENTITLED TO [Compliance Use only]
CONTRIBUTOR (including any VOTE FOR Subject to exception for
city/county/state or RECIPIENT ? certain returned
other political contributions under
subdivision) OF Rule 206(4)-5(b)(3)?
RECIPIENT
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I certify that this form fully and accurately discloses all of the Contributions that I (or my immediate family and controlled-PACs, each as described in the definition of "Covered Associate") have made in the past 2 years.
_____________________________________________________ _____________________ Signature Date ------------------------------------------ |
Reviewed by: ___________________________
Date of Review: ________________________
Exception(s) Noted: ____No _____Yes
If Yes, Describe: ______________________
ATTACHMENT K
POLITICAL CONTRIBUTION APPROVAL FORM
Employee______________________________________________________ (PRINT NAME)
Information submitted current as of __________________________ (PRINT DATE)
In accordance with ClariVest's Code of Ethics, below is a list of all Contributions that I (or someone in my immediate family or a controlled-PAC, each as described in the definition of "Covered Associate") would like to make.
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NAME AND TITLE OF NAME AND TITLE AMOUNT DATE ENTITLED TO [Compliance Use only]
CONTRIBUTOR (INCLUDING ANY VOTE FOR Subject to exception for
CITY/COUNTY/STATE OR RECIPIENT? certain returned
OTHER POLITICAL contributions under
SUBDIVISION) OF Rule 206(4)-5(b)(3)?
RECIPIENT
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I certify that this form fully and accurately discloses all requested information regarding the Contribution that I (or or someone in my immediate family or a controlled-PAC, each as described in the definition of "Covered Associate") would like to make.
__________________________________________________ ________________________ Signature Date --------------------------------------------- Reviewed by: _____________________________ Date of Review: __________________________ Approval Granted?: ____No _____Yes If Yes, Describe: ________________________ __________________________________________ __________________________________________ |
ATTACHMENT L
CONTRIBUTION COORDINATION APPROVAL FORM
Employee______________________________________________________ (PRINT NAME)
Information submitted current as of __________________________ (PRINT DATE)
In accordance with ClariVest's Code of Ethics, I (or someone in my immediate family or a controlled-PAC, each as described in the definition of "Covered Associate") would like to solicit or coordinate (1) Contributions for an Official of a Government Entity or (2) any Contribution to a political party of a state or locality, as described below:
I certify that this form fully and accurately discloses all requested information regarding the activity that I (or or someone in my immediate family or a controlled-PAC, each as described in the definition of "Covered Associate") would like to engage in.
___________________________________________________ _________________________ Signature Date --------------------------------------------- |
Reviewed by: _____________________________
Date of Review: __________________________
Approval Granted?: ____No _____Yes
If Yes, Describe: ________________________
ISSUE
The SEC's Regulation S-P (Privacy of Consumer Financial Information), which was adopted to comply with Section 504 of the Gramm-Leach-Bliley Act, requires investment advisers to disclose to Clients who are Natural Persons its policies and procedures regarding the use and safekeeping of client records and information.
The adopting release to Regulation S-P includes a footnote that addresses the application of the Privacy rules to certain unregistered entities. Footnote number twelve in the adopting release states:
THE REGULATION ALSO APPLIES TO ANY UNREGISTERED BROKER, DEALER OR FUND IN
THE UNITED STATES. SEE SECTION 248.1. IN ACCORDANCE WITH THE G-L-B ACT,
HOWEVER, REGULATION S-P DOES NOT APPLY TO ANY INVESTMENT ADVISER THAT IS
NOT REGISTERED WITH THE COMMISSION. SEE G-L-B ACT [section][section]
505(A)(5) (COMMISSION HAS JURISDICTION OVER BROKER-DEALERS, FUNDS, AND
REGISTERED ADVISERS); 505(A)(7) (FEDERAL TRADE COMMISSION HAS JURISDICTION
OVER FINANCIAL INSTITUTIONS NOT SUBJECT TO THE SPECIFIC JURISDICTION OF THE
FEDERAL FUNCTIONAL REGULATORS).
According to this footnote, the funds may be subject to the Federal Trade
Commission privacy requirements, which can be found at:
http://www.ftc.gov/os/2002/05/67fr36585.pdf.
Information is collected from Clients at the inception of their accounts and occasionally thereafter, primarily to determine accounts' investment objectives and financial goals and to assist in providing Clients with requested services. While ClariVest strives to keep client information up to date, Clients are requested to monitor any information provided to them for errors.
Additionally, the SEC has adopted amendments to Rule 30 under Regulation S-P which require financial institutions to adopt written policies and procedures to properly dispose of sensitive consumer information. The amendments are designed to protect consumers against the risks associated with unauthorized access to information and mitigate the possibility of fraud and related crimes, including identity theft.
Separately, Massachusetts recently adopted the Massachusetts Standards for the Protection of Personal Information (the "Standards"). The Standards require the development of a written comprehensive information security program, and require certain actions to be taken. Because the Standards only apply with respect to the personal information of natural persons who are residents of the State of Massachu-setts, ClariVest is not currently adopting policies and procedures to comply with these requirements. However, if in the future ClariVest obtains a client that is a natural person resident in Massachusetts, ClariVest will at that time adopt the necessary policies and procedures.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with protecting client information. This analysis includes risks such as:
o Information about activities of ClariVest and its Clients that is required to be maintained not being accurately recorded and stored and not protected from unauthorized access, alteration, and destruction.
o Information about Clients not being maintained or used in ways that ensures such information is safe from unauthorized use.
o Disclosures made to Clients about how their personal information is used and protected from unauthorized use is false and misleading.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's privacy policy.
POLICY
ClariVest will not disclose client records and information including Non-Public Personal Information and Consumer Report Information (collectively, "Client Information") to anyone without the consent of the client except as required to perform the requested services for the client, unless such disclosure is permitted or required by law.
For purposes of this policy, "Non-Public Personal Information" means:
o personally identifiable financial information, including any information a client provides to obtain a financial product or service; any information about a client resulting from any transaction involving a financial product or service; or any information otherwise obtained about a client in connection with providing a financial product or service to that client; in each case that is not publicly available; and
o any list, description, or other grouping of Clients (and publicly available information pertaining to them) that is derived using any personally identifiable financial information that is not publicly available information.
Examples of Non-Public Personal Information include: name, address, phone number (if unlisted), social security and tax identification numbers, financial circumstances and income, and account balances.
For purposes of this policy, "Consumer Report Information" means:
o any record about an individual, whether in paper, electronic or other form, that is a Consumer Report or is derived from a Consumer Report; and
o any compilation of such records listed in the bullet above.
For purposes of this policy, "Consumer Report" means:
o the information set forth in Section 603(d) of the Fair Credit Reporting Act (15 U.S.C. 1681a(d)) ("FCRA"), which includes any written, oral, or other communication of any information by a consumer reporting agency bearing on the consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for (A) credit or insurance to be used primarily for personal, family, or household purposes; (B) employment purposes; or (C) any other purpose authorized under Section 604" of FCRA.
POLICY AND PROCEDURES
1. ClariVest shall not sell Client Information to anyone.
2. ClariVest will restrict access to Client Information to individuals within ClariVest or third-party service providers who require the information in the ordinary course of servicing Clients' accounts. Client Information is used only for business purposes.
3. ClariVest has developed procedures to safeguard client records and information (See Attachment A).
4. Client Information may only be given to third-parties under the following circumstances:
o To broker-dealers to open a client's brokerage account or trade for a client account;
o To other firms as directed by Clients, such as accountants, lawyers, etc.;
o To specified family members (as authorized by law and/or the client);
o To third-parties as needed to provide necessary services, such as back-office providers, proxy voting providers and compliance auditors; and
o To regulators and others, when required by law.
5. At times, Client Information may be reviewed by ClariVest's outside service providers (i.e. -- accountants, lawyers, consultants, etc.). ClariVest will review the entities' privacy policies to ensure that Client Information is not misappropriated or used in a manner that is contrary to ClariVest's privacy policies.
6. ClariVest shall provide a privacy notice (See Attachment B) to Clients upon inception of the relationship and annually thereafter. The privacy notice shall be furnished to Clients in a written format and ClariVest will maintain a record of the dates when the privacy notice is provided to Clients.
7. In the event of a change in the privacy policy, ClariVest will provide its Clients with a sufficient amount of time to opt out of any disclosure provisions.
8. Any suspected breaches to the privacy policy must be reported to the CCO and/or the CEO.
9. If an Employee receives a complaint regarding a potential identity theft issue (be it from a Client or other party), the Employee should immediately notify the CCO. The CCO will thoroughly investigate any valid complaint, and maintain a log of all complaints as well as the result of any investigations.
10. In the event that unintended parties receive access to Client Information, ClariVest will promptly notify those Clients of the privacy breach. With respect to California Clients, this is a specific requirement.
11. Extraneous documents containing any Client Information or sensitive consumer information shall be burned, shredded, or destroyed (this includes documents earmarked for recycling). In addition, any Client Information saved in a storage medium that is being sold or disposed of, must be removed from the medium. In the event that ClariVest maintains contracts with service providers for services involving the disposal or destruction of consumer report information, the contracts must explicitly require the "proper" disposal of documents containing Client Information. Please refer to the "Document Destruction" procedure in the MAINTENANCE OF BOOKS AND RECORDS policy.
RESPONSIBILITY
The CCO will monitor for compliance with ClariVest's Privacy Policy and Procedures and will coordinate the dissemination of the Privacy Notice.
ATTACHMENT A
SAFEGUARDING CLIENT RECORDS AND NON-PUBLIC PERSONAL INFORMATION
ClariVest shall strive to: (a) ensure the security and confidentiality of consumer, customer and former customer records and information; (b) protect against any anticipated threats or hazards to the security or integrity of consumer, customer and former customer records and information; and (c) protect against unauthorized access to or use of consumer or customer records or information that could result in substantial harm or inconvenience to any customer. Accordingly, the following procedures will be followed:
A. CONFIDENTIALITY. Employees shall maintain the confidentiality of information acquired in connection with their employment with ClariVest, with particular care taken regarding Non-Public Personal Information. Employees shall not disclose Non-Public Personal Information, except to persons who have a bona-fide business need to know the information in order to serve the business purposes of ClariVest and/or Clients. ClariVest does not disclose, and no Employee may disclose, any Non-Public Personal Information about a Client or former Client other than in accordance with these procedures.
B. INFORMATION SYSTEMS. ClariVest has established and maintains its information systems, including hardware, software and network components and design, in order to protect and preserve Non-Public Personal Information.
PASSWORDS AND ACCESS. Employees are required to use complex passwords for access to their work computers. Employees are also required to use passwords for access to certain specific programs and files. Non-Public Personal Information shall be maintained, to the extent possible, in computers that are protected by means of a password system secured against unauthorized access. Employees are required to use complex passwords on any personal/home computer that has confidential client information stored on it or that is used to VPN into a work computer.
Access to specific ClariVest databases and files shall be given only to Employees and third-party service providers who have a bona-fide business need to access such information. Passwords shall be kept confidential and shall not be shared except as necessary to achieve such business purpose. User identifications and passwords shall not be: stored on computers without access controls, written down, or stored in locations where unauthorized persons may discover them. All access and permissions for terminated Employees shall be removed from the network system promptly upon notification of the termination.
Employees may not "record" any password used for ClariVest systems (including a personal/home computer that has confidential client info on it or that is used to VPN into a work computer). This includes saving passwords in an electronic format, writing them down on a physical piece of paper, or any other form. Employees may not give their passwords to anyone except (1) Aerus, if necessary, and (2) with respect to personal/home computers, to family, friends, etc. Employees can write down a simple hint as a reminder of a password, but it needs to be something no one else can figure out. (An Employee may write down part of the password as the hint, but this can include no more than 3 of the characters.)
To avoid unauthorized access, Employees shall close out programs and/or lock their terminals when they leave the office for an extended period of time and overnight. Terminals shall be locked when not in use during the day and laptops shall be secured when leaving ClariVest premises. Confidentiality shall be maintained when accessing the ClariVest network remotely through the implementation of appropriate firewalls and encrypted transmissions.
With respect to personal/home computers, employees are required to set up their anti-virus software to update virus definitions daily. This applies to any personal/home computer that has confidential client info on it or that is used to VPN into a work computer. Employees are also required to limit any confidential client information that is maintained on personal/home computers.
Employees are required to certify quarterly that their personal/home computers are in compliance with ClariVest's policies and procedures (i.e., that they have the required or approved anti-virus software, that software is set to update virus definitions daily, the employee limits confidential client info on the personal/home computers and the employee uses a complex password for any personal/home computer that has confidential client info on it or that is used to VPN into your work computer.)
SYSTEM FAILURES. ClariVest will maintain appropriate programs and controls (which may include anti-virus protection and firewalls) to detect, prevent and respond to attacks, intrusions or other systems failures.
ELECTRONIC MAIL. As a rule, Employees shall treat e-mail in the same manner as other written communications. However, Employees shall assume that e-mail sent from ClariVest computers is not secure and shall avoid sending e-mails that include Non-Public Personal Information to the extent practicable. E-mails that contain Non-Public Personal Information (whether sent within or outside ClariVest) shall have the smallest possible distribution in light of the nature of the request made.
DISPOSAL. Electronic media, on which Non-Public Personal Information is stored, shall be formatted and restored to initial settings prior to any sale, donation, or transfer of such equipment.
C. DOCUMENTS. Employees shall avoid placing documents containing Non-Public Personal Information in office areas where they could be read by unauthorized persons, such as in photocopying areas or conference rooms. Documents that are being printed, copied or faxed shall be attended to by appropriate employees. Documents containing Non-Public Personal Information which are sent by mail, courier, messenger or fax, shall be handled with appropriate care. Employees may only remove documents containing Non-Public Personal Information from the premises for bona-fide work purposes. Any Non-Public Personal Information that is removed from the premises must be handled with appropriate care and returned to the premises as soon as practicable.
D. DISCUSSIONS. Employees shall avoid discussing Non-Public Personal Information with, or in the presence of, persons who have no need to know the information. Employees shall not discuss Non-Public Personal Information in public locations, such as elevators, hallways, public transportation or restaurants.
E. ACCESS TO OFFICES AND FILES. Access to offices, files or other areas where Non-Public Personal Information may be discussed or maintained is limited, and Employees shall enter such locations for valid business purposes only. Meetings with Clients shall take place in conference rooms or other locations where Non-Public Personal Information will not be generally available or audible to others. Visitors shall generally not be allowed in the office unattended.
F. OLD INFORMATION. Non-Public Personal Information that is no longer required to be maintained shall be destroyed and disposed of in an appropriate manner.
G. IDENTITY THEFT. An identity thief can obtain a victim's personal information through a variety of methods. Therefore, Employees shall take the following actions to prevent identity theft:
a) When providing copies of information to others, Employees shall make sure that non-essential information is removed and that Non-Public Personal Information which is not relevant to the transaction is either removed or redacted.
b) The practice of DUMPSTER DIVING provides access for a would-be thief to a victim's personal information. Therefore, when disposing of paper documents, paperwork containing Non-Public Personal Information shall be shredded, burned or otherwise destroyed.
c) To avoid a fraudulent address change, requests must be verified before they are implemented.
d) Employees may be deceived by PRETEXT CALLING, whereby an "information broker" or "identity thief" posing as a client, provides portions of the client's Non-Public Personal Information (i.e., social security number) in an attempt to convince an employee to provide additional information over the phone, which can be used for fraudulent purposes. Employees shall make every reasonable precaution to confirm the identity of the client on the phone before divulging Non-Public Personal Information.
e) ClariVest prohibits the display of Social Security Numbers on any documents that are generally available or widely disseminated (i.e., mailing lists, quarterly reports, etc.).
Employees could be responsible for identity theft through more direct means. Insider access to information could permit a dishonest Employee to sell consumers' personal information or to use it for fraudulent purposes. Such action is cause for disciplinary action at ClariVest's discretion, up to and including termination of employment as well as referral to the appropriate civil and/or criminal legal authorities.
ATTACHMENT B
NOTICE OF PRIVACY POLICY
This notice is being provided to you in accordance with the SEC's rule regarding the privacy of consumer financial information ("Regulation S-P"). Please take the time to read and understand the privacy policies and procedures that we have implemented to safeguard your Non-Public Personal information.
INFORMATION WE COLLECT
ClariVest Asset Management LLC and the investment funds it manages must collect certain personally identifiable financial information about clients and investors to provide financial services. The personally identifiable financial information that we gather during the normal course of doing business with you may include:
1. information we receive from you on applications or other forms;
2. information about your transactions with us, our affiliates, or others;
3. information collected through an Internet "cookie" (an information collecting device from a web server); and
4. information we receive from a consumer reporting agency.
INFORMATION WE DISCLOSE
We do not disclose any Non-Public Personal information about our customers, investors or former customers or investors to anyone without the customer's prior consent, except as permitted or required by law, or as necessary to provide services to you. In accordance with Sections 248.13 through 248.15 of Regulation S-P, we may disclose all of the information we collect, as described above, to certain nonaffiliated third parties such as, but not limited to, attorneys, accountants, auditors, client and investor service specialists and persons or entities that are assessing our compliance with industry standards. We enter into contractual agreements with all nonaffiliated third parties that prohibit such third parties from disclosing or using the information other than to carry out the purposes for which we disclose the information.
CONFIDENTIALITY AND SECURITY
We restrict access to Non-Public Personal information about you to those Employees and third-party service providers who need to know that information to provide financial products or services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information.
ISSUE
The SEC requires investment advisers to maintain and distribute certain disclosure documents. These disclosure documents must be kept current and accurate, and should be disseminated in conjunction with required regulations.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with its maintenance of disclosure documents and submission of regulatory filings. This analysis includes risks such as:
o Information about ClariVest that is disclosed to Clients and/or regulators being outdated and/or inaccurate.
o Prospective advisory Clients not having accurate information on which to base their decision on whether to retain ClariVest for advisory services.
o Existing Clients not being made aware of all material facts relating to a legal or disciplinary action against ClariVest.
o Regulatory forms not being filed in a timely manner.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy of maintaining and disseminating disclosure documents and regulatory filings.
POLICY
ClariVest will update and disseminate its disclosure documents to Clients on a timely basis and ensure the timely and accurate submission of regulatory filings to the appropriate federal and state securities regulators.
1. FORM ADV
Entities applying for registration with the SEC as an investment adviser are required to complete and file a Form ADV, which is an application form for such registration. The adviser is required to file Part 1A and Part 2A (the "brochure") of this form electronically through the Investment Adviser Registration Depository (IARD). Part 2B (the "brochure supplement") of Form ADV is maintained in the registered investment adviser's files, and the investment adviser is not required to file Part 2B with the SEC. The SEC assigned ClariVest the 801-66386 registration number, and the IARD assigned ClariVest the 139785 registration number.
REQUIREMENTS REGARDING THE MAINTENANCE AND DISSEMINATION OF FORM ADV
o Rule 204-1(b) of the Advisers Act requires advisers to promptly file
an amendment to Form ADV to correct certain information should it
become inaccurate and/or have the ability to mislead those to whom it
must be delivered. An amendment must be filed promptly if the
information provided in response to Items 1,3,9 (except 9.A.(2),
9.B.(2), 9.E. and 9.F.), or 11 of Part 1A, Items 1, 2.A. through 2.F.
or 2.I. of Part 1B becomes inaccurate in any way. An amendment must be
filed promptly if the information provided in response to Items 4,8,
or 10 of Part 1A or Item 2.G. of Part 1B becomes materially
inaccurate. An amendment must be filed promptly if the information
provided in Part 2A becomes materially inaccurate. (Refer to the
instructions appearing in the Form ADV application booklet for further
guidance).
o Each adviser currently registered with the Commission whose fiscal year ends on or after December 31, 2010 must include in its next annual updating amendment to its Form ADV a new Part 2A. (Rule 204-1(c)) Upon filing its new brochure with the Commission, an adviser must (i) begin to deliver the new brochure to new clients and prospective clients in lieu of its old brochure in accordance with its obligations under rule 204-3, and (ii) deliver to its existing clients within 60 days of when an adviser is required to file it. (Rule 204-3(g)).
o Rule 204-3 requires an investment adviser to deliver a brochure and one or more brochure supplements to each client or prospective client that contains all information required by Part 2 of Form ADV. The brochure must be delivered before or at the time an adviser enters into an investment advisory contract with that client. Annually thereafter (within 120 days after the end of the fiscal year), if there are material changes in the brochure since the last annual updating amendment, the adviser must deliver (without charge):
(i) A current brochure, or
(ii) The summary of material changes to the brochure as required by Item 2 of Form ADV, Part 2A that offers to provide the current brochure without charge, accompanied by the website address (if available) and an e-mail address (if available) and telephone number by which a client may obtain the current brochure, and the website address for obtaining information about the adviser through the Investment Adviser Public Disclosure (IAPD) system.
o The brochure supplement (Part 2B) must be delivered to each client or prospective client for a supervised person before or at the time that supervised person begins to provide advisory services to the client; provided, however, that if investment advice for a client is provided by a team comprised of more than five supervised persons, a current brochure supplement need only be delivered to that client for the five supervised persons with the most significant responsibility for the day-to-day advice provided to that client.
o An adviser must deliver the following to each client promptly after the creation of an amended brochure or brochure supplement, as applicable, if the amendment adds disclosure of an event, or materially revises information already disclosed about an event, in response to Item 9 of Part 2A of Form ADV or Item 3 of Part 2B of Form ADV (Disciplinary Information), respectively, (i) the amended brochure or brochure supplement, as applicable, along with a statement describing the material facts relating to the change in disciplinary information, or (ii) a statement describing the material facts relating to the change in disciplinary information.
RESPONSIBILITY
The CCO is responsible for ensuring that ClariVest's Form ADV, Parts 1A, 2A and 2B, are properly maintained and disseminated. Accordingly, the CCO will periodically review the Form ADV to ensure that it is accurate and complete. Such a review is most pertinent given changes in: securities laws; industry practices; and ClariVest's advisory product and services. The CCO may discuss disclosure issues with Employees to ensure that current disclosures are consistent with ClariVest's practices. Employees are encouraged to review ClariVest's disclosure documents and bring to the CCO's attention any disclosures that may require amendment/updating.
2. SCHEDULE 13F
Schedule 13F is a form that must be filed by an institutional investment manager exercising investment discretion over accounts having in the aggregate more than $100 million in equity securities on the last trading date of any month in a given calendar year. This schedule is required pursuant to Rule 13f-1 of the 34 Act and must be filed with the SEC within 45 days of the end of the calendar year and 45 days after the last day of each of the first three calendar quarters of the subsequent calendar year. Schedule 13F must be filed electronically on the SEC's EDGAR Filing System.
RESPONSIBILITY
The CCO is responsible for ensuring that the appropriate Form 13F filings and amendments are made with the SEC.
3. FORM 13H
Rule 13h-1 requires a "large trader," defined as a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month, to identify itself to the SEC and make certain disclosures to the SEC on Form 13H. Upon receipt of Form 13H, the SEC will assign to each large trader an identification number that will uniquely and uniformly identify the trader, which the large trader must then provide to its registered broker-dealers. After the initial Form 13H filing, all large traders must submit an Annual Filing within 45 days after the end of each full calendar year. Additionally, if any of the information contained in a Form 13H filing becomes inaccurate for any reason, a large trader must file an Amended Filing no later than the end of the calendar quarter in which the information became stale. Form 13H must be filed electronically on the SEC's EDGAR Filing System.
RESPONSIBILITY
The CCO is responsible for ensuring that the appropriate Form 13H filings and amendments are made with the SEC. The Operations Manager is responsible for providing ClariVest's LTID to the broker-dealers through whom ClariVest trades.
4. SCHEDULE 13D
Section 13(d) of the 34 Act generally requires a beneficial owner of more than 5 percent of a class of equity securities registered under the 34 Act (i.e., equity securities of publicly traded companies) to file a Schedule 13D with the issuer, the SEC, and those national securities exchanges where the securities trade within ten days of the transaction resulting in beneficial ownership exceeding 5 percent. "Beneficial ownership" is defined broadly, and an investment adviser may be deemed to be the beneficial owner of shares held in client accounts (and shares held in proprietary client accounts) if it has or shares either of the following:
o Voting power, which includes the power to vote or direct the voting of the shares; or
o Investment power, which includes the power to dispose or direct the disposition of such security.
An amended Schedule 13D must be filed promptly (i.e., within 1-2 business days) if there are any material changes to the disclosures set forth in the Schedule 13D, including, without limitation, any acquisition or disposition of securities in an amount equal to one percent or more of the class of outstanding securities. Any acquisitions of securities that may require a Schedule 13D filing should be brought to the attention of the CCO immediately.
RESPONSIBILITY
The CCO is responsible for ensuring that the appropriate Schedule 13D filings and amendments are made with the SEC.
5. SCHEDULE 13G
In general, a registered investment adviser may file a Schedule 13G instead of a Schedule 13D when its beneficial ownership exceeds 5 percent of a class of outstanding registered equity securities and it holds the securities passively (i.e., without the purpose of changing or influencing control of the issuer). Schedule 13G generally must be filed with the SEC within forty-five (45) days after the end of the calendar year in which the registered investment adviser's beneficial ownership exceeded the 5 percent threshold. In addition, a registered investment adviser choosing to file Schedule 13G must notify any person (e.g., a client) on whose behalf it holds, on a discretionary basis, over 5 percent of a class of outstanding equity securities of any transaction or acquisition that the other person may have to report.
Amendments to Schedule 13G generally are required within forty-five days after the end of the calendar year to report any changes (whether or not material) to the disclosures set forth in the Schedule 13G. However, a registered investment adviser filing on Schedule 13G also must file an amended Schedule 13G within ten days after the end of any month in which its direct or indirect beneficial ownership of a class of registered equity securities exceeds 10 percent of the outstanding securities in that class. After such a filing is submitted, a subsequent filing is required within 10 days after the end of any month in which an adviser's aggregate beneficial ownership increases or decreases by 5 percent or more of the outstanding securities in the class.
If a registered investment adviser no longer holds the securities passively (i.e., the registered investment adviser holds the securities with the purpose of changing or influencing control of the issuer), the registered investment adviser must file a Schedule 13D within 10 calendar days of the change in investment purpose.
For administrative ease, the Firm typically will make a joint filing of a Schedule 13G with the Investment Funds ClariVest manages and control persons. When making such joint filings, however, ClariVest will not be able to take advantage of the relaxed Schedule 13G filing requirements described above if (1) any Investment Fund it manages has Beneficial Ownership of more than 5% of a security and ClariVest and the Investment Fund or other clients are a "group," because an Investment Fund is not one of the types of persons entitled to those relaxed filing requirements, or (2) a control person of ClariVest holds more than 1% of the class of securities. To determine a control person's interest, that person's direct ownership of the securities must be aggregated with that person's indirect ownership interests.
RESPONSIBILITY
The CCO is responsible for ensuring that the appropriate Schedule 13G filings and amendments are made with the SEC. The CCO must consult with investment personnel to determine the appropriateness of filing either Schedule 13G or Schedule 13D. Factors considered in making the determination generally focus on ClariVest's level of interaction/influence on the company's management, specific to whether or not ClariVest is attempting to change or influence the company's management. Factors considered by the CCO and investment personnel may include the level of communication between the company and ClariVest and the existence of regular and/or sporadic formal written correspondence between the company and ClariVest, and the contents of such correspondence.
6. FORM PF
ClariVest must file a Form PF electronically via the IARD system if it has at least $150,000,000 of regulatory assets under management ("AUM") attributable to "private funds" and is registered (or required to be registered) either with the SEC as an investment adviser or with the CFTC as a commodity pool operator or commodity trading adviser. A "private fund" is a fund (such as the Investment Funds) that would be an investment company under the IC Act, but for the exemptions under IC Act sections 3(c)(1) or 3(c)(7).
To determine the minimum reporting threshold, ClariVest must aggregate the net asset value of (a) parallel funds it advises, (b) parallel managed accounts it advises, excluding accounts that individually or in the aggregate exceed the size of its private funds, (c) parallel funds and managed accounts managed by the adviser's related persons, and (d) private funds that are part of the same master-feeder structure (without double counting).
The timing requirements for filing and the information required on Form PF depend on ClariVest's classification. If ClariVest has at least $1,500,000,000 in regulatory AUM attributable to hedge funds as of the last day of any month in the fiscal quarter preceding its most recently completed fiscal quarter (excluding any regulatory AUM that is "separately operated"), it is treated as a "Large Hedge Fund Adviser" and has more frequent and more detailed filing obligations. If ClariVest is required to file a Form PF, the filing deadlines are as follows (the chart below assumes that the Firm has a December 31 fiscal year end):
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General Requirement Initial: April 30, 2013
Update: Within 120 days after each subsequent year end.
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Large Hedge Fund Advisers with Initial: March 1, 2013
$1,500,000,000 to $5,000,000,000 of Update: Within 60 days after each subsequent calendar quarter.
regulatory AUM
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Large Hedge Fund Advisers with Initial: August 29, 2012
over $5,000,000,000 of regulatory Update: Within 60 days after each subsequent calendar quarter.
AUM
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7. FORM SLT
The U.S. Department of the Treasury's Form SLT (Aggregate Holdings of Long-Term Securities by U.S. and Foreign Residents), is designed to gather monthly information about holdings of certain securities ("Reportable Securities"). ClariVest will discuss Form SLT filing requirements with its accountants if (a) it is the investment adviser to a non-U.S. Investment Fund or (b) a U.S.-based Investment Fund holds securities that are issued by non-U.S. issuers and are not held by a U.S. custodian (for example, an Investment Fund holds an investment in a Brazilian security that is not held by a U.S. custodian). If ClariVest has less than $1 billion in assets under management it generally will not be required to file Form SLT.
7. REPORTS OF DIRECTORS, OFFICERS, AND PRINCIPAL SHAREHOLDERS (SECTION 16)
Persons who are directors, officers or directly or indirectly the beneficial
owner of more than 10% of any class of equity Securities registered under
Section 12 of the 34 Act are generally required to file reports with the SEC
under Section 16 of the 34 Act ("Section 16"). The CCO will maintain a current
list of Employees subject to the filing requirements of Section 16 ("Reporting
Persons").
Prior to an Employee, or an immediate family member living in the same household as the Employee, becoming a Reporting Person, the Employee must report his/her status (or the status of the immediate family member) with the CCO and file a Form 3 with the SEC within 10 days after the event by which the individual became a Reporting Person. The CCO may assist the Reporting Person in the preparation and filing of all Form 3's for ClariVest's Reporting Persons, unless the Reporting Person informs the CCO that he/she will undertake to complete the filing (and the CCO permits such person to perform the filing).
If a Reporting Person makes any purchases or sales of Securities of an issuer for which the Reporting Person is subject to Section 16, or there is otherwise an event required to be reported on Form 4, the Reporting Person shall report the transaction on Form 4 and file it with the SEC within two business days following the date of the transaction.
The Reporting Person is also responsible for the filing of any Form 5, which is used to report Section 16 exempt transactions and other transactions not previously reported on a Form 3 or Form 4. A Form 5 must be filed within 45 days after the end of the fiscal year in which such transaction took place.
For Employees, upon providing pre-clearance to purchase or sell Securities, the
CCO will check the status of the person as a Reporting Person with respect to
the Securities at issue and notify such person if the transaction is subject to
Section 16 reporting requirements. The CCO will inform the Reporting Person if
a Section 16 filing must be made, and the CCO will not grant pre-clearance
approval until the appropriate filing has been completed.
RESPONSIBILITY
Employees are responsible for monitoring the requirements of Section 16 of the 34 Act and ensuring that the appropriate Forms 3, 4 and 5 filings and amendments are made with the SEC, as may be required. Employees must immediately notify the CCO following their designation as Reporting Persons.
8. STATE LICENSING, NOTIFICATION AND REGISTRATION
STATE REQUIREMENTS
ClariVest may be required to provide one or more state securities authorities with copies of its SEC filings ("notice filings"). ClariVest's notice filings will be sent electronically to the states that are checked on Item 2.B. of Part 1A of Form ADV. Generally speaking, if ClariVest either maintains a place of business in, or has more than five (5) Clients in a particular state, then it must notice file in that particular state.(3)
ClariVest may not solicit or render investment advice for any client domiciled in a state where ClariVest is not properly registered or conditionally exempt or excluded from registration. ClariVest will file with the SEC, and notice file in numerous states due to the location of additional places of business and residence of its Clients. ClariVest will review its state notice filing requirements as part of its account opening process.
REGISTRATION OF INVESTMENT ADVISER REPRESENTATIVES
Under Section 203A, states are permitted to impose individual licensing requirements for any person that is LOCATED IN THE STATE and provides investment advice on behalf of a SEC registered investment adviser and who is also subject to the supervision and control of the investment adviser ("Supervised Person"). However, a Supervised Person is exempt from any state licensing requirements so as long as most of the clients are either institutional clients or Natural Person clients with a net worth in excess of $2 million or who have placed $1 million under the adviser's management.
State licensing may be required if the Supervised Person manages accounts for Natural Persons that have less than $1 million or such Natural Person's net worth is less than $2 million ("Retail Client"). Section 203A permits a Supervised Person to manage a limited number of Retail Clients without having to register in a state. A Supervised Person can manage the greater of:
o 5 Retail Clients; or
o Up to 10% of its total clients are Retail Clients.
For example, if a Supervised Person has four total clients then the Supervised Person can manage up to five Retail Clients without being subject to state licensing requirements. To use another example, assume the Supervised Person had a total of 70 clients. The Supervised Person can accept up to seven Retail Clients without being subject to state licensing requirements.
RESPONSIBILITY
ClariVest will monitor its Clients and determine when a Supervised Person should be registered. ClariVest will complete the necessary filing when registration is required. In addition, depending on the state, the Supervised Person may have to satisfy certain examination requirements as a requisite to registration. The following examinations, or exam waivers, are recognized by states as satisfying the examination requirements; (i) Series 65 examination, (ii) Series 7 examination plus the Series 66 examination (requires an active broker-dealer agent registration), or the following professional designations are widely recognized as acceptable substitutes for the examinations, CFP, CFA, ChFC, PFS or CIC. In a few instances, some states may recognize other examinations, such as the Series 2, Series 6, Series 63, in combination with the exams noted above, or other professional designations, such as an active CPA license, may be acceptable.
9. FILINGS WITH THE FEDERAL RESERVE
LARGE POSITION REPORTING
A report of positions in specific Treasury security issues that exceed the large position threshold specified by the U.S. Treasury Department (minimum $2 billion) must be filed with the Federal Reserve Bank of New York. Reports are also filed in response to notices issued by the U.S. Department of the Treasury if such threshold is met. ClariVest monitors positions in specific Treasury security issues held by ClariVest that might trigger Large Position Reporting requirements and ClariVest is responsible for deciding when such reports must be filed on ClariVest's behalf.
TREASURY AUCTION FILING
Treasury security reports need only be filed with the Federal Reserve Bank in connection with the purchase of government securities in a Treasury Auction. Confirmations must be filed by any customer who is awarded a par amount of $500 million or more in U.S. government securities in a Treasury auction. The confirmation must include the reportable net long position, if any. ClariVest monitors U.S. government securities purchased by ClariVest in a Treasury auction that might trigger Treasury Auction filings and ClariVest is responsible for deciding when such reports must be filed on ClariVest's behalf.
RESPONSIBILITY
The CCO is responsible for ensuring that Treasury security reports are filed with the Federal Reserve Bank as necessary.
ISSUE
Section 203(e) of the Advisers Act states, in part, that the SEC may prohibit investment advisers from engaging in investment advisory activities for a period not exceeding twelve months, or in egregious cases, revoke the registration of the investment adviser for a failure to properly supervise its Employees. The severity of the sanction is determined on a case-by-case basis; however, past SEC enforcement actions have observed the reasonableness of compliance procedures as an affirmative defense against a claim of failure to supervise.
ClariVest's management recognizes its duty to supervise the actions of its Employees. This Manual assists management in carrying out this task by providing guidance in completing advisory activities and setting forth the ethical issues to be considered by the Company. ClariVest shall carefully review the following activities (note that this list is not all-exhaustive):
o Setup of new accounts
o Securities pricing and valuation
o Preparation of investment advisory agreements
o Maintenance of client files
o Portfolio management
o Client trading, including best execution and trade allocations
o Client correspondence
o Personal trading activities of Employees
o Client complaint inquiries
o Form ADV amendments
o Regulatory registration issues
o Marketing and advertising
o Adherence to the Code of Conduct
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with its supervisory structure. This analysis includes risks such as:
o Employees engaging in activities that violate the securities laws and/or ClariVest's internal policies.
o Employees knowingly or unknowingly engaging in activities that violate this Compliance Manual or could adversely affect the reputation of ClariVest.
o The actions of an Employee causing the SEC to prohibit ClariVest from engaging in investment advisory activities for a specified time period or permanently if ClariVest failed to properly supervise its Employees.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy to effectively supervise its Employees.
POLICY
The following Employees with supervisory responsibilities will reasonably supervise the activities of their subordinate Employees:
PORTFOLIO MANAGEMENT AND RESEARCH -- The Portfolio Managers retain the overall responsibility for the supervision of ClariVest's investment team.
TRADING -- Each Portfolio Manager is responsible for the successful completion of the trading function for his/her products.
ADMINISTRATION -- The COO/CFO is responsible for ClariVest's administration and back-office functions, including daily operations and accounting.
COMPLIANCE -- The CCO is responsible for the supervision of ClariVest's compliance functions.
In order to minimize the risk that employees unknowingly engage in activities that violate this Compliance Manual, ClariVest conducts periodic training of Employees on the topics covered by this Manual. Employees are included in training sessions when the topic(s) covered are relevant to the performance of their job duties at ClariVest.
PROCEDURES
As noted above, supervision over certain responsibilities is generally delegated to various Employees within ClariVest. Such delegation of responsibilities must occur to ensure that ClariVest provides Clients with a high level of service.
ClariVest expects that its Employees will report to their supervisors any issues arising in which they may be unfamiliar or may otherwise require the assistance and judgment of supervisory personnel. Employees must also report any activities that run contrary to the Code of Conduct and that may adversely affect the reputation of ClariVest. All activities reported by Employees may be done anonymously in order to protect the reputations of the Employees involved. ClariVest shall fully review the matter and implement any necessary corrective or disciplinary action. ClariVest requires the full commitment of its Employees to the tenets set forth in the Code of Conduct; Employees that elect to ignore and/or violate the tenets shall be disciplined, including the possible termination of their association with ClariVest.
RESPONSIBILITY
Employees with supervisory responsibilities are required to supervise the activities of their subordinates and report any material issues to their direct supervisor and/or CEO.
ISSUE
ClariVest utilizes unaffiliated third-parties to assist it in providing investment advisory services to Clients. In entering into agreements with such parties, ClariVest will ensure that the parties are completing the contracted services. Failure by the third-party service providers to meet their obligations could not only subject ClariVest to a precarious situation, but could subject Clients to unnecessary risks associated with the inadequate or failed completion of the contracted services.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with its reliance on services provided by third-parties. This analysis includes risks such as:
o Third-party service providers failing to adequately meet their contractual obligation and therefore exposing Clients to unnecessary risk.
o Service agreements being outdated and inaccurate.
o ClariVest failing to obtain a service agreement containing confidentiality language where the third party service provider will have access to confidential information.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy to evaluate its relationships with, and the services provided by, third-party service providers.
POLICY
ClariVest must conduct appropriate initial due diligence of service providers, depending on the nature of the services provided (i.e., whether they are critical to the investment management function, whether they are easily replaceable) and the information to which the service provider will have access (whether they have access to confidential client information, ClariVest information, etc.). ClariVest must also supervise any service providers retained by the firm to assist in the furnishing of advisory services to Clients.
PROCEDURES
Employees responsible for the evaluation of outside service providers must:
1. Determine the exact services to be provided by the service provider and ensure that descriptions of the services to be provided are included in ClariVest's agreement with the service provider.
2. Obtain an executed written agreement with the service provider that includes the services being provided to ClariVest under the terms of the agreement. The written agreement shall contain appropriate confidentiality language in circumstances where the service provider will have access to confidential client information.
3. Employees that utilize the service are kept apprised of the required components of the service and ClariVest's expectations of the service. In addition, the overall quality of the service shall be discussed with Employees that utilize the service.
4. As necessary, the Employee responsible for managing the relationship with the service provider shall follow-up on any issues associated with the service provider. If an Employee has any reason to believe that the service provider is failing to meet the terms of its agreement with ClariVest, the Employee must report the issue to the CCO or COO.
5. ClariVest informally reviews its agreements with service providers upon contract renewal. Any recommended contract terminations with service providers must be discussed with the appropriate personnel utilizing the service.
RESPONSIBILITY
Employees consuming the services of outside service providers are responsible for ensuring that a reasonable quality of services is being provided to ClariVest. The CCO and COO are responsible for informally reviewing the arrangements upon contract renewal, and conducting follow-up inquiries as necessary.
ISSUE
Mistakes in the account opening and closing processes could result in the inefficient management of Client accounts. To ensure that accounts for ClariVest's Clients are opened and closed in an efficient manner, the Company has adopted these policies and procedures.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with its account opening and closing processes for its separately managed accounts. These risks include:
o Client investment objectives and restrictions are not adequately documented and implemented.
o A Client who terminates his or her account may not receive a pro rata fee refund if fees have been pre-paid.
o Client or Investor background information, correspondence, or other relevant documentation is not maintained in accordance with the books and records rule.
o Employee functions in the account opening and closing processes are not clear.
o New Clients do not receive proper disclosures, such as the privacy policy, solicitor relationship, etc.
ClariVest has established the following guidelines to monitor ClariVest's policy with respect to its account opening and closing procedures, and to help mitigate these risks.
POLICY
Client accounts shall be opened and closed in accordance with the procedures noted below. These procedures have been developed in an attempt to minimize the operational and compliance risks associated with the account opening and closing processes, thereby minimizing any potential negative impact on the Company's Clients.
SUMMARY PROCEDURES FOR OPENING A NEW CLIENT ACCOUNT
1. Accounts will not be managed unless the investment advisory agreement authorizes ClariVest to have discretion over the account and the COO or Operations Manager has confirmed the account opening.
2. If applicable, ClariVest and new Clients must complete forms to authorize the transfer of Client assets to a new custody account. ClariVest will discuss with the Client the merit of selling a portion or all of the assets prior to the transfer, and transferring cash to the new account. Such factors as ClariVest's knowledge of the new Client's investments are taken into account. If some or all assets are to be sold prior to the transfer, the new Client must instruct the custodian or transition manager to make the appropriate sales.
3. ClariVest and new Clients must complete new account forms as required by the custodian chosen by the new Client. ClariVest must have the authorization to trade on behalf of the Client and may also have the ability to directly debit advisory fees from the Client's custodial account.
4. When possible, ClariVest seeks to obtain a completed "New Account Form" from new Clients with information helpful to ClariVest in completing the account opening process.
5. Refer to the ANTI-MONEY LAUNDERING section of this Manual for additional steps that may be taken in order to verify the identity of a person or entity seeking to establish an advisory account ("account owner"), and to prevent the potential for money laundering.
6. ClariVest shall obtain and document information for the purpose of determining investment suitability and investment objectives from each account owner.
7. ClariVest shall document any prohibitions or investment restrictions for new advisory accounts. If a trade restriction exists, it is coded in ClariVest's order management system. The actual trade restrictions are setup in the order management system and cannot be overridden except by the CCO or COO (except in emergency situations, where the Operations Manager may also have such authority).
8. ClariVest must be careful to document any prohibitions/restrictions on foreign investments for new advisory Clients. This may be particularly relevant in the case of institutional accounts, including pension and profit sharing plans that may be subject to ERISA.
9. In the event that the owner of a new account is referred to ClariVest by an outside solicitor, ClariVest will obtain the account owner's signed and dated acknowledgement of his or her receipt of the solicitor's separate written disclosure document and Part II of ClariVest's Form ADV.
10. ClariVest will ensure that the owner of a new advisory account has received Part 1A and Part 2A of Form ADV and ClariVest's Privacy Notice no later than when the person executes the advisory agreement. ClariVest will also provide its Form ADV Part 2A to each prospective investor, by including the Form ADV Part 2A as an appendix to each Investment Fund's offering documents. ClariVest will ensure that Part 2B is delivered for a supervised person no later than when that supervised person begins to provide advisory services to the client (when required by Rule 204-3).
11. ClariVest will communicate client information (percentage of advisory fee, name, account number, holdings, reports, etc.) to Mellon to input into its system.
12. ClariVest will develop a file for the Client that includes, among other things: the advisory agreement and correspondence.
13. ClariVest will note the state of residence of the new advisory account to determine any additional state notice filing requirements.
SUMMARY PROCEDURES FOR CLOSING A TERMINATED CLIENT ACCOUNT
1. ClariVest may be informed of a client termination through a variety of sources, including: i) receiving a letter directly from the Client with termination instructions (particularly on any position liquidations); or ii) verbal instructions from the Client. If the Client communicates this information verbally to ClariVest, ClariVest will confirm this information in writing, either through receipt of written notice from the Client or by providing the Client with written confirmation. The last day of advisory service for billing purposes shall be agreed upon between ClariVest and the Client.
2. The Investment Team shall be informed of the termination, all active management of the account shall cease as of the effective date of termination in accordance with Client's request. In some cases, the account owner may instruct ClariVest to liquidate certain positions in the account prior to closing. ClariVest will complete the trades to the best of its ability, taking into account the effects on the price at which the securities will be liquidated.
3. If a Client terminates in the middle of a billing cycle, a pro rata fee shall be calculated for the relevant period based upon the termination date.
o If the terminating client pays fees in advance, any difference between the pro rata fee and the fee paid by the terminating client is promptly returned to the client.
o If the terminating client pays fees in arrears, the pro rata fee is promptly billed to the terminating client.
4. Documentation showing the specific manner in which the pro rata fee was calculated, how the amount due from/payable to was identified, and a copy of the check/wire instructions is maintained in the Client file (or electronically on ClariVest's systems).
5. All information relating to the management of a terminated account must be maintained in accordance with the Advisers Act (I.E., five years from the end of the fiscal year in which the account is terminated) and ClariVest's Privacy policy and procedures.
6. ClariVest will cooperate with any account transfer instructions received from the account owner of the terminated account, and act to complete an account transfer efficiently and expeditiously.
RESPONSIBILITY
Several individuals will be responsible for various aspects of opening and closing a Client account; however, the Operations Manager will oversee the entire process.
Implementation Date: December 2012
ISSUE
From time to time, and despite its greatest efforts, ClariVest may receive complaints from Clients regarding services or related matters. ClariVest needs to respond to Client complaints and correct or improve its business dealings in an effort to prevent future complaints.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with handling Client complaints. This analysis includes risks such as:
o Client complaints not being handled in a timely manner or are ignored.
o The resolution of Client complaints not adequately documented.
o Employees being allowed to handle Client complaints without supervision.
ClariVest has established the following guidelines to handle Client complaints.
POLICY
ClariVest shall investigate all Client complaints and respond to all Client complaints in a timely manner.
PROCEDURES
1. ClariVest shall maintain all written complaints in the designated Client Complaint Log included as Attachment A.
2. Any statement by a Client alleging any specific failure on the part of ClariVest to perform its obligations to that Client constitutes a complaint. A Client complaint must be initiated by the Client and must involve a grievance expressed by the Client. It may be difficult to judge whether or not a communication from a client constitutes a "complaint". A mere statement of dissatisfaction from a Client about an investment or about investment performance in most cases does not constitute a complaint. All questions regarding whether a complaint has been made should be brought to the attention of the CCO.
3. The Complaint Log shall include the written complaint submitted by the advisory Client and all correspondence to and from the Client in response to the complaint.
4. Special procedures must be followed anytime a complaint is received from a Client, whether it is received orally or in writing. These procedures are outlined below:
o Immediately notify the CCO, who at his/her discretion may notify outside counsel;
o If the complaint was delivered orally, write a short memorandum describing the complaint based on facts obtained from knowledgeable employees;
o Respond to a written complaint in writing with the Client and/or the Client's counsel;
o Make every effort to address the complaint. Any offers of settlement or actual settlements must be made only with the knowledge, participation, and written approval of the CCO; and
o Create a written record of the complaint, including all correspondence and memoranda and file this record in the complaint file.
5. The Oral Complaint Memorandum included as Attachment B for all oral complaints shall include the date the complaint was received, the Client's name, a description of the complaint, individuals identified in the complaint, how ClariVest intends on resolving the complaint and any additional remarks. Any written response to the oral complaint shall be maintained in the Complaint Log.
RESPONSIBILITY
The CCO shall be responsible for overseeing the resolution of all issues derived from client complaints.
ATTACHMENT A
CLIENT COMPLAINT LOG
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POTENTIAL ENTITIES CONTACTED CLARIVEST'S COURSE OF ACTION
$ EXPOSURE BY CLIENT (IF KNOWN) FOR FOLLOW-UP/RESOLUTION
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ATTACHMENT B
ORAL COMPLAINT MEMORANDUM
To: Chief Compliance Officer
From: Employee
Date: Date
Re: Oral Receipt of Client Complaint
In accordance with ClariVest Adviser's Client Complaint Policy, I am reporting my oral receipt of a client complaint.
1. CLIENT MAKING COMPLAINT
2. DATE THE COMPLAINT WAS RECEIVED
3. DESCRIPTION AND NATURE OF COMPLAINT
4. CLARIVEST EMPLOYEES NOTED BY CLIENT THAT WERE INVOLVED IN THE COMPLAINT
5. ACTION THAT I TOOK UPON RECEIPT OF THE COMPLAINT
Employee: _______________________________________________ (Print Name)
Signature: ______________________________________________
Date: ___________________________________________________
ISSUE
Rule 206(4)-1(a) under the Advisers Act governs investment adviser advertising. The rule forbids an advertisement that:
o Refers to any testimonial of any kind concerning ClariVest or any advice, analysis, report or other service rendered by ClariVest (refer to the discussion of testimonials below);
o Refers to past specific recommendations of ClariVest that were or would have been profitable to any person (refer to the discussion of past specific recommendations below);
o Represents that any graph, chart, formula or other device offered by ClariVest can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them;
o Contains any statement to the effect that any report, analysis, or other service will be furnished free or without charge, unless the report, analysis or other service actually is or will be furnished entirely free and without any condition or obligation; and
o Contains any untrue statement of a material fact, or which is otherwise false or misleading.
Additionally, the SEC has issued no-action relief to investment advisers regarding their use of advertisements. ClariVest intends to follow the requirements and guidelines outlined in these no-action letters, when applicable.
The term "Advertisement" includes any written correspondence or communication addressed to more than one person, or any notice or other announcement in any publication or broadcast by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with the marketing of its advisory products/services/Mutual Funds. This analysis includes risks such as:
o Advertisements failing to comply with Rule 206(4)-1(a) under the Advisers Act. Specifically, they include testimonials, past specific recommendations, or any untrue statement of a material fact.
o Employees are not fully aware of what constitutes an "Advertisement."
o Marketing materials containing performance numbers are not presented fairly and do not comply with the relevant SEC no-action letters.
o Marketing materials containing false claims of Global Investment Performance Standards (GIPS) compliance.
o Hypothetical and/or back-tested performance data not containing the required disclosures.
o Advertisements using performance data for which the required back-up is not available.
o Marketing pieces including the names of Clients without the prior written consent of the Client.
o Marketing materials containing superlative statements.
o Marketing and advertising pieces not being approved by the CCO.
o Marketing pieces not being maintained subsequent to use.
o Employees not pre-clearing prior to conducting a formal speaking engagement.
o Marketing materials used to solicit Investors in an Investment Fund do not comply with requirements to rely on the "private offering" exemption from the registration requirements of the federal securities laws.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy to market its advisory services.
POLICY
All marketing materials produced by ClariVest shall be reviewed for conformity to applicable rules and regulations promulgated under state and federal securities laws. The rules, interpretations, and no-action positions governing marketing materials and communications are complex and are not covered in their entirety by this marketing policy. ClariVest has established this policy to help promote compliance with applicable rules and regulations.
ClariVest is prohibited from publishing, circulating, or distributing any advertisement that contains any untrue statement of a material fact or that is otherwise false or misleading. Marketing materials that are deceptive and misleading in their overall effect (although it could be argued that no single statement of a material fact is incorrect) are nevertheless prohibited. In considering whether marketing materials are misleading, the following factors should be considered:
o The presence or absence of any explanations and disclosures necessary to make the materials not misleading;
o The general economic or financial conditions affecting any assumptions in the materials;
o Any representations of future gains, income or expenses;
o Any portrayals of past performance that imply that past results may be repeated in the future, or that can not be justified under the circumstances;
o Any discussion of benefits of the investment without giving equal prominence to the risks or limitations associated therewith; and
o Any exaggerated or unsubstantiated claims.
Other factors that should be considered include the overall context in which the advertisement is made; the audience to which the advertisement is directed; the overall clarity of the advertisement; and the use of footnotes in the advertisement.
Any material that is solely for distribution internally to ClariVest and its affiliates should contain the legend "Internal Use Only" and may not be provided to persons who are not Employees or third party service providers of ClariVest.
ClariVest's investment strategy and decision making processes are described in its Form ADV Part 2A and offering circulars for the Investment Funds. Any other description of ClariVest's investment strategy or decision-making process or of the construction or characteristics of the portfolios of Client accounts or Investment Funds, including any descriptions in marketing brochures or presentations, must be consistent with the descriptions included in the Form ADV Part 2A and offering circulars.
Marketing material used to solicit Investors in an Investment Fund are subject to the restrictions on advertising described below. Even marketing material that refers generically to "funds" or "hedge funds" may be considered an advertisement for an Investment Fund that must comply with these requirements. Any marketing material that is to be delivered to potential separate account Clients and not to potential Investors in an Investment Fund should discuss the applicable investment strategy employed by ClariVest and exclude any reference to any Investment Fund or to "funds" or "hedge funds" generally.
PERFORMANCE ADVERTISING
The Advisers Act does not specifically address performance advertising. In a no-action letter to ALLIED INVESTMENTS CO. (pub. avail. May 24, 1979), the SEC permitted, but did not require, advisers to disclose performance as long as it was presented fairly.
Over the years, the SEC has issued no-action relief to investment advisers seeking to market their performance information in advertisements. Performance no-action letters that may be applicable to ClariVest, when developing its advertising materials, are briefly outlined below (this list in not meant to be inclusive of all relevant no-action letters):
o CLOVER CAPITAL MANAGEMENT (pub. avail. October 28, 1986) discusses disclosure and the use of model and actual performance results. Although dated, this SEC no-action letter continues to be the primary standard regarding adviser advertising and provides the most relevant and detailed guidance.
o INVESTMENT COMPANY INSTITUTE (#1) (pub. avail. July 24, 1987) permits an adviser to present performance figures on a "gross of fees" basis without reflecting custodian fees paid to a bank or other organization for safekeeping client assets.
o INVESTMENT COMPANY INSTITUTE (#2) (September 23, 1988) permits the use of "gross" performance on certain one-on-one presentations provided certain disclosures are made (see "One-on-One" Presentations section below).
o J.P. MORGAN INVESTMENT MANAGEMENT, INC. (pub. avail. May 7, 1996) permits an adviser to present performance that reflects the deduction of the highest advisory fee charged to any account employing that strategy during the performance period.
o ASSOCIATION FOR INVESTMENT MANAGEMENT AND RESEARCH (pub. avail. December 18, 1996) permits an adviser to present performance that is calculated on a gross-of-fees basis provided that it is presented with performance that is calculated on a net-of-fees basis.
ClariVest intends to follow the criteria outlined in the above no-action letters, where applicable, when it includes performance information in its marketing materials.
GLOBAL INVESTMENT PERFORMANCE STANDARDS
Please see ClariVest's separate GIPS(R) Policies and Procedures document.
In order to ensure compliance with these Policies and Procedures, ClariVest obtains verification quarterly from an independent third party. In addition to this verification, all marketing materials claiming GIPS(R) compliance are reviewed for GIPS(R) compliance by the CCO.
CURRENT PERFORMANCE DATA REQUIREMENT
All performance information included in any advertising material must be as current as practicable. For purposes of this Policy, the term "current" shall mean, at a minimum, quarterly. Thus, for example, ClariVest shall be prohibited from distributing an advertisement with performance data that does not include results for the most recent calendar quarter.
NO HYPOTHETICAL/BACKTESTED PERFORMANCE
No hypothetical/backtested performance information may be used unless specific procedures are followed and disclosures exist. The CCO must be consulted prior to any planned use of hypothetical/backtested performance results.
PAST PERFORMANCE INFORMATION (CLOVER CAPITAL MANAGEMENT)
For Model/Simulated or Actual results, the presentation of performance in marketing material is prohibited if the marketing piece:
o Fails to disclose the effect of material market or economic conditions on the results portrayed (e.g., an advertisement stating that the accounts of the adviser's Clients appreciated 25% in value without disclosing that the market generally appreciated 40% during the same period);
o Includes model/simulated or actual results that do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid. With certain exceptions as it relates to advertisements provided on a one-on-one basis, all performance must be presented net of fees, or both net and gross of fees with equal prominence;
o Fails to disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;
o Suggests or makes claims about the potential for profit without also disclosing the possibility of loss;
o Compares model/simulated or actual results to an index without disclosing all material facts relevant to the comparison (e.g. an advertisement that compares model results to an index without disclosing that the volatility of the index is materially different from that of the model portfolio); and
o Fails to disclose any material conditions, objectives, or investment strategies used to obtain the results portrayed (e.g., the model portfolio contains equity stocks that are managed with a view towards capital appreciation).
MODEL/SIMULATED RESULTS
o Fails to disclose prominently the limitations inherent in model/simulated results, particularly the fact that such results do not represent actual trading and that they may not reflect the impact that material economic and market factors might have had on the adviser's decision-making if the adviser were actually managing Clients' money;
o Fails to disclose, if applicable, that the conditions, objectives, or investment strategies of the model/simulated portfolio changed materially during the time period portrayed in the advertisement and, if so, the effect of any such change on the results portrayed;
o Fails to disclose, if applicable, that any of the securities contained in, or the investment strategies followed with respect to, the model/simulated portfolio do not relate, or only partially relate, to the type of advisory services currently offered by the adviser (e.g., the model includes some types of securities that the adviser no longer recommends for its Clients); and
o Fails to disclose, if applicable, that the adviser's Clients had investment results materially different from the results portrayed in the model/simulation.
ACTUAL RESULTS ONLY
o Fails to disclose prominently, if applicable, that the results portrayed relate only to a select group of the adviser's Clients, the basis on which the selection was made, and the effect of this practice on the results portrayed, if material.
ONE-ON-ONE PRESENTATIONS (INVESTMENT COMPANY INSTITUTE)
Advertisements using GROSS performance numbers may be used in one-on-one presentations of a private nature if accompanied by written disclosure of:
o The fact that the performance figures do not reflect the deduction of investment advisory fees;
o The fact that the Client's return will be reduced by the advisory fees and any other expenses it may incur in the management of its investment advisory account;
o The fact that the investment advisory fees are described in Part II of the adviser's Form ADV; and
o A representative example showing the effect an advisory fee, compounded over a period of years, could have on the total value of a client's portfolio.
ClariVest intends to include the disclosures described above if it utilizes only gross performance numbers in one-on-one presentation materials. In addition, ClariVest will include all of the other disclosures noted in the Clover no-action letter as discussed in the preceding section.
BACK-UP OF PERFORMANCE REQUIRED
Past performance reporting not only must be accurate, it also must be substantiated. ClariVest will only use prior ClariVest performance for which the back-up is available and maintained. With respect to performance generated at another firm, ClariVest will only use performance numbers which were publicly
disclosed by such prior firm and which were accumulated contemporaneously with the management of the account by the relevant Portfolio Manager (and in accordance with the requirements described below).
USE OF PERFORMANCE RETURNS GENERATED WHILE AT ANOTHER FIRM
ClariVest may use the performance returns generated by an Employee while he/she managed assets at another firm under limited circumstances. Specifically, in order to use such returns in its advertisements, ClariVest will make certain that:
o no other person played a significant role in generating the performance;
o the accounts currently managed by the Employee are similar to the accounts managed at the prior firm;
o the performance of the predecessor firm's accounts that were not transferred to ClariVest did not differ materially from the performance of the transferred accounts;
o ClariVest maintains the backup necessary to demonstrate the calculation of the performance results achieved by the Employee while at his/her prior firm, or relies on disclosures made by the prior firm regarding such performance results based on data accumulated contemporaneously with the management of the account (SALOMON BROTHERS, pub. avail. July 23, 1999); and
o the marketing materials include all relevant disclosures, including that the performance results were from accounts managed at another entity.
PAST SPECIFIC RECOMMENDATIONS
As noted above, ClariVest is prohibited from including past specific recommendations in advertisements that refer directly or indirectly to past specific recommendations made by ClariVest that were or would have been profitable to any person unless generally the advertisement sets out a list of all recommendations (with specific information included) made by the adviser within at least the prior one-year period.
However, the SEC staff has clarified its position on this issue through the following no-action letters:
o INVESTMENT COUNSEL ASSOCIATION OF AMERICA, INC. ("ICAA", pub. avail. March 1, 2004) permits an adviser to furnish specific information about its past specific recommendations to consultants provided the information was requested from the adviser on an unsolicited basis. The adviser may furnish the same information to existing Clients provided that the Clients have recently held the securities in their portfolios and the purpose of the communication was not to offer advisory services. When providing past specific recommendations to consultants/Clients as set forth above, the adviser must do so in a balanced non-misleading way.
o FRANKLIN MANAGEMENT, INC. (pub. avail. December 10, 1998) permits advisers to include a partial list of its securities recommendations in advertisements provided that the list is selected based on objective, non-performance based criteria (such as a top-ten holding list); the same selection criteria is used each time an advertised list is used; the list will not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, of any of the specific securities; and, the adviser maintains, and makes available to the Commission staff for inspection, records that evidence the complete list of all recommendations made by the adviser.
o THE TCW GROUP, INC. (pub. avail. November 7, 2008) permits an advisor to include a partial list of its securities recommendations in advertisements subject to certain requirements, including that the presentation of information and number of holdings will be consistent from time period to time period; the advertisement will show no fewer than ten holdings, including an equal number of
positive and negative holdings; advertisement will disclose how to obtain the method of calculation and a list showing every holding's contribution to performance during the time period; and the advisor maintains certain records. For the full requirements, refer to the no-action letter itself.
TESTIMONIALS
As noted above, ClariVest is prohibited from using testimonials, which are generally understood to include any statement by a former or present advisory client that endorses ClariVest or refers to the Client's favorable investment experience with the Company. The SEC believes that testimonials may create a deceptive or mistaken inference that the reader of the testimonial may mistakenly believe that he/she is likely to experience the same favorable results as those of the person providing the testimonial.(4)
CLIENT LISTS
In its most recent no-action letter dealing with this issue to CAMBIAR INVESTORS, INC. ("Cambiar", pub. avail. August 28, 1997) the SEC indicated that advisers may distribute a partial list of Clients to prospective clients and consultants, provided that the list is not presented in a false or misleading manner and the advertisement containing the list includes no untrue statement of material fact and is not otherwise false or misleading.
In addition to the position set forth in Cambiar, the conditions of the ICAA letter described above also apply to ClariVest's furnishing of a testimonial to a client, prospective client or consultant in response to an unsolicited request.
SUPERLATIVE STATEMENTS
ClariVest may not include superlative words or statements in its marketing materials (such as "superior", "top-notch", etc.) that may cause an investor to believe that he/she could not obtain comparable advisory services elsewhere. In addition, ClariVest's marketing materials must not contain exaggerated or unsubstantiated claims, and shall adopt a balanced approach to marketing its advisory services.
USE OF "RIA" OR "INVESTMENT COUNSEL"
ClariVest may not in any way, represent or imply that it has been sponsored, recommended or approved, or that its abilities or qualifications have in any respect been passed upon by the SEC, or any regulatory authority/organization. In addition, ClariVest forbids the use of "RIA" or "Investment Counsel" on business cards or marketing materials describing Employees' qualifications.
RESPONDING TO QUESTIONNAIRES, SURVEYS, AND OTHER COMMUNICATIONS
Questionnaires, surveys, and other communications furnished to third parties that publish reports about advisers are considered advertisements by the SEC. ClariVest is responsible for coordinating and responding to all RFPs and questionnaires received from third parties. Prior to dissemination, the CCO will review the RFP or questionnaire for accuracy.
ClariVest will maintain a copy of any written communication provided to such third parties and should a third party publish inaccurate information regarding ClariVest, the CCO will contact the publisher to inform them of the error.
ClariVest also updates online databases with information regarding the Firm and its products. As such information is updated, the updated information will be printed out (if possible) for review by the CCO. The CCO will review such updated information for accuracy.
PROCEDURES
1. All marketing materials utilized by ClariVest's offices and third-party service providers must be submitted to the CCO for approval prior to dissemination.
2. All marketing materials must be forwarded to the CCO. Final approval will be in writing (preferably email), and sent to the individual seeking approval for the use of the marketing material. Marketing materials that do not change from month to month, other than performance figures, shall not be required to be reviewed on an ongoing basis after the initial required review.
3. ClariVest will retain copies of the approvals received from the CCO.
4. ClariVest will retain copies of all marketing pieces utilized by individuals marketing ClariVest's services.
5. The CCO will review print-outs of information updated to online databases for accuracy. ClariVest will retain copies of such print-outs to document the CCO's review and approval.
6. Any proposed presentation to, or interview with, the media by an Employee must be approved in advance by the CCO or the CEO. (See Media Communications Policy and Procedures)
7. Proposed articles authored by ClariVest Employees in magazines and other publications must be approved in advance by the CCO. (See Use of Press Releases and Media Reports Policy and Procedures)
8. In the event that ClariVest becomes aware of an article, story, etc. written by a third-party that contains erroneous information about ClariVest, the CCO shall notify the third-party in writing of the error and maintain documentation of the written notification. Neither ClariVest nor any individual or entity acting on its behalf shall reprint and distribute the erroneous information as part of ClariVest's marketing efforts.
9. An Employee who proposes to participate in a seminar or a speak in front of a group regarding ClariVest's services must pre-clear such activity with the CCO or the CEO (Refer to Attachment A). Any written materials, slides, and other presentation materials to be supplied at the seminar or speech must be pre-approved by the CCO or the CEO.
PROCEDURES TO MAINTAIN PERFORMANCE COMPOSITES
ClariVest constructs performance composites and markets the returns of such composites in various marketing materials. ClariVest adheres to the following procedures to ensure that it is properly constructing and maintaining performance composites:
1. The maintenance of ClariVest's performance composites is based on account inclusion/exclusion parameters that are periodically reviewed to ensure that the criteria accurately represent the performance returns of ClariVest's Clients.
2. ClariVest's operations team is responsible for updating performance composite returns on a monthly basis subject to oversight from CCO. The process can be summarized by the following:
- Terminated accounts are removed from performance composites as of the end of the last full month before termination or loss of investment discretion.
- New accounts enter the appropriate performance composite as of the first day of the full month that ClariVest has investment discretion (unless the account is the first in the composite, in which case it will be added to the composite as of the first day of management that ClariVest has investment discretion).
- COO shall provide guidance in determining the appropriate performance composite for each new account.
3. ClariVest strives to calculate its performance free from material errors. In the event that an Employee discovers or is informed of a performance calculation error, the Employee must promptly notify the CCO. The CCO will promptly determine whether the error could be deemed to be material. If deemed material, the CCO will coordinate prompt and appropriate action, which may include disseminating correct performance to all individuals/entities that received the incorrect performance returns.
BOOKS AND RECORDS
In its books and records, ClariVest will maintain copies of all marketing materials. These materials may include (this list is not intended to be exhaustive):
o Brochures
o Newsletters
o Web Site
o Article Reprints
o Press Related Marketing Materials
o Marketing Letters to Current or Prospective Clients
o Responses to RFPs
o Quarterly and Annual Data Provided to Consultants
o Consultant Questionnaires
o Presentations developed for Seminars or Client meetings
o Transcripts of Newspaper Interviews
o Transcripts or Tapes of Television Appearances
o E-mails
EXEMPTION FROM FEDERAL SECURITIES REGISTRATION.
1. GENERAL. The Investment Funds offer and sell limited partner interests and shares, respectively (collectively herein called "Interests"), in the U.S. In doing so, the Investment Funds rely on the so-called "private offering" exemption from the registration requirements of the federal securities
laws. This exemption is described in part in Securities Act section 4(2) and in Rule 506 of Regulation D under the Securities Act. Securities Act section 4(2) provides that the registration provisions of Securities Act section 5 do not apply to transactions by an issuer, such as an Investment Fund, not involving any public offering. To clarify when a transaction does not involve a public offering, the SEC adopted Regulation D. Rule 506 of Regulation D allows an issuer, such as an Investment Fund, to offer and sell Interests to an unlimited number of "accredited investors." The various categories of accredited investors are described in the offering questionnaires used by the Investment Funds, under the heading "Accredited Investor." Because Regulation D imposes additional restrictions on sales to persons that are not accredited investors, Interests may not be sold to non-accredited investors without the approval of the CCO.
The representations in the Investment Funds' subscription agreements and the information requested in the Investment Funds' offering questionnaires are designed to provide documentary evidence of the qualifications of offerees who invest in the Investment Funds for purposes of compliance with section 4(2), Regulation D and Rule 205-3 under the Advisers Act (which is discussed in Part IX.F below). When subscribers to the U.S. Investment Funds return these documents, the CCO examines them carefully to ascertain that each subscriber meets all of the net worth and sophistication requirements of section 4(2) and Regulation D and the net worth or minimum investment requirements of Rule 205-3, if applicable. The Firm generally will not accept the subscription of any subscriber who does not meet all of these requirements.
Subscription documents for the non-U.S. Investment Funds are reviewed by such Investment Funds' offshore administrator for compliance with the foregoing requirements.
2. NO GENERAL SOLICITATION. No form of general solicitation or advertising may be used in offering or selling Interests. This prohibition precludes any mass mailing, any advertisement, article or notice published in any magazine, newspaper or newsletter, and any seminar or meeting where the attendees have been invited by any mass mailing, general solicitation or advertising. No Employee should mention or refer to any Investment Fund in any public medium, including any newspaper, on radio or television, on any website, or otherwise.
Only authorized personnel of ClariVest or its affiliates may offer Interests to potential Investors, send offering circulars for U.S. Investment Funds to potential Investors or provide contact information regarding a potential Investor to the administrator of a non-U.S. Investment Fund. Only the administrator of a non-U.S. Investment Fund is authorized to provide such Investment Fund's private offering memorandum to potential Investors in connection with the offering of securities (ClariVest may provide a copy of an Investment Fund's private offering memorandum to an existing Investor in that Investment Fund in response to that Investor's request for purposes of due diligence and not in connection with the offering of securities). Offers may be made only to persons with whom ClariVest, its affiliates or an Employee has a prior relationship or to whom ClariVest has received a private introduction.
3. GUIDELINES FOR OFFERING INTERESTS. The following guidelines must be followed when making an offer of Interests in a U.S. Investment Fund:
a. ClariVest or its affiliates may only offer to sell such Interests by delivering a copy of the Investment Fund's offering circular to prospective Investors. The Firm should write on the cover page of the offering circular the number of each offering circular and the name of the prospective Investor to whom such offering circular is being delivered. ClariVest should record this information in a log ClariVest maintains for this purpose.
b. Before ClariVest mentions or sends any material related to the Investment Fund, including the offering circular, to any potential Investor, ClariVest must reasonably believe that the Investment Fund would be a suitable investment for the potential Investor and ClariVest must comply with the state securities laws where the potential Investor resides. Only after ClariVest reasonably believes that the investment is suitable and the potential Investor or his or her personal representative is sophisticated in financial and business matters may ClariVest make such an offer and provide the offering circular. ClariVest must maintain written records of all information obtained regarding the suitability of each prospective offeree.
4. HEDGE FUND WEBSITES AND OTHER DATABASES. A number of commercial websites and other databases seek information regarding private investment funds for distribution through a website, newsletter or other database. Submitting information regarding an Investment Fund to such persons raises a number of issues regarding the prohibition on general solicitation discussed above. Therefore, no Employee should give any information to any such website operator or database provider without the CCO's prior approval. The CCO reviews ClariVest's agreement with the website operator or database provider to determine if it sufficiently requires the website operator or database provider to comply with procedures that reduce such risks.
STATE SECURITIES LAWS APPLICABLE TO THE OFFERING ("BLUE SKY LAWS").
The offer and sale of Interests in the U.S. also must comply with the securities laws of each state where an Investor or offeree resides or is domiciled. Such laws typically require filings to be made to rely on the "private offering" exemptions. Some state laws (such as New York law) require that filings be made or other actions be taken before offers may be made.
The CCO should be advised as soon as possible of the state of residence or domicile of each prospective offeree, the amount that such offeree may invest, whether such offeree is an individual, corporation, trust, limited liability company or partnership, the nature of the prospective offeree's business and the accreditation status of the offeree. The CCO may contact ClariVest's counsel to review applicable state laws and provide advice concerning the requirements for compliance.
RESPONSIBILITY
The CCO will generally be responsible for reviewing the marketing process, and the CEO will oversee Marketing to ensure that only approved materials are distributed to prospective clients.
ATTACHMENT A
APPROVAL TO CONDUCT FORMAL SPEAKING ENGAGEMENTS
Pursuant to ClariVest's Advertising and Marketing policy and procedures as set forth in its Code of Conduct and Regulatory Compliance Manual, the undersigned seeks to obtain approval to participate in a speaking engagement.
Date of speaking engagement: ______________________________________________ Location of speaking engagement: ______________________________________________ Sponsor of event: ______________________________________________ |
Topic discussed by ClariVest employee(s) at speaking engagement:
Please indicate the supplemental materials (i.e. PowerPoint presentation, handouts, etc.) that you plan to utilize at the speaking engagement:
Date on which the supplemental materials were approved for use:
Are any costs associated with the undersigned's attendance at speaking engagement (other than a meal or incidentals) paid by an entity other than ClariVest? If so, please list the costs:
List the individual(s) requesting the speaking engagement:
_____ Approved_____ Not Approved Person Approving ____________
Reasons Supporting Decision to Approve/Not Approve: ____________________________
ISSUE
From time to time, Employees may have the opportunity to communicate with the media regarding ClariVest and its business and services. All communications by investment advisers are subject to the anti-fraud provisions of the Advisers Act. Specifically, section 206(1) and (2) of the Advisers Act states that, "It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly:
(1) to employ any device, scheme, or artifice to defraud any client or prospective client; and
(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client."
Thus, investment advisers have an obligation to ensure that all of their communications with Clients, prospective clients and others are truthful, accurate, balanced and not misleading.
An area where investment advisers must exercise specific caution is in their communication with the media. Personnel of investment advisers are often called on to be interviewed by members of the press, either with respect to activities of the investment adviser or to provide commentary on the securities markets.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with communicating with the media. This analysis includes risks such as:
o Statements to the media being inaccurate or misleading.
o Employees inadvertently communicating Non-Public, confidential information to the media.
o Transcripts and/or video or audio tapes (if produced) of interviews not being maintained.
o Interviews with the media not being pre-cleared by the CCO or CEO.
o Statements to the media including past specific recommendations or testimonials.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy to communicate with the media.
POLICY
ClariVest, as a matter of policy, requires its Employees to adhere to the following policies when communicating with the media:
BE ACCURATE
o Do not make untrue statements or leave out a significant fact.
o In any presentation, interview, etc. where you are expressing your opinion, state that fact. Your opinion may not reflect the views of ClariVest as a whole.
o Do not make statements that are defamatory or libelous.
DO NOT MAKE PROJECTIONS
o Do not make statements that imply performance is guaranteed.
o Do not make promises of specific results, or exaggerated or unwarranted claims. Projections or forecasts should only refer to general market trends. You should not make projections about performance. This would not preclude statements about how market trends will generally affect performance of ClariVest Clients.
DO NOT PROVIDE MATERIAL, NON-PUBLIC OR SIMILAR INFORMATION
o Do not disclose Material Information about an issuer that is not publicly available, Non-Public Personal Information about a firm Client, or confidential information about ClariVest or its activities.
Any questions with respect to these policies and procedures should be directed to the CCO.
PROCEDURES
1. All Employees who receive a request for an interview from members of the press must obtain the pre-approval of the CCO or CEO.
2. When being interviewed, the Employee must adhere to the following standards (in addition to those outlined in the POLICY section above):
o Do not, directly or indirectly, make false or misleading statements;
o Communications must exhibit truthfulness and good taste. Any flamboyant, misleading, exaggerated, or inflammatory, inappropriate or unduly controversial material is forbidden;
o Statements containing promises of specific results, exaggerated or unwarranted claims, or opinions or forecasts for which no reasonable basis exists are forbidden;
o Discussions of potential returns of any investment must be balanced with discussions of the risks and drawbacks of that investment, including the possibility of loss of principal, whenever applicable;
o Comparisons must clearly indicate the purpose of the comparison, and they must provide a fair and balanced presentation, including any material differences;
o False or misleading statements to induce the purchase or sale of securities are prohibited;
o Do not make unrealistic claims for performance, service, quality or "value-added" service;
o Do not reference past specific recommendations or testimonials from current or former clients;
o Never use superlatives (including, but not limited to, such words as best, worst, most, least, highest, lowest, always, never, etc.); and
o Always bear in mind the level of financial sophistication of the ultimate recipient of the communication.
4. In addition, and with respect to any issuer specifically mentioned during the interview, the Employee must disclose to the interviewer, during or upon completion of the interview, the following:
o If ClariVest, its affiliates or the Employee has a financial interest in the securities of the issuer, and if so, the nature of the financial interest (including, without limitation, whether it consists of any option, right, warrant, future, long or short position);
o If, as of the end of the month immediately preceding the date of
the interview (or the end of the second most recent month if the
interview date is less than 10 calendar days after the end of the
most recent month), ClariVest or its affiliates or the Employee
beneficially own 1% or more of any class of common equity
securities of the issuer. (Computation of beneficial ownership of
securities must be based upon the same standards used to com-
pute ownership for purposes of the reporting requirements under
Section 13(d) of the Securities Exchange Act of 1934);
o Any other actual, material conflict of interest of ClariVest or its affiliates or the Employee with respect to the issuer, which the Employee knows or has reason to know at the time of the interview;
o If one exists for the issuer, the Employee must disclose the valuation methods used to determine a price target. Price targets must have a reasonable basis and must be accompanied by a disclosure concerning the risks that may impede achievement of the price target;
o If an Employee or a member of any Employees' household serves as an officer, director or advisory board member of the issuer; and
o If known to the Employee at the time of the interview, whether the issuer, or an affiliate of the issuer, is a Client of ClariVest or its affiliates.
5. Taking cost into consideration, the Employee should request that the interviewer arrange for a copy of any media dissemination to be provided to ClariVest. This includes printed materials, transcripts, and/or video tape of television broadcasts.
6. The CCO will review all documentation of the media dissemination of the interview. Violations of these policies and procedures appearing in the documentation will be noted. If such violations appear to have been caused by statements of the Employee being interviewed, the CCO will conduct an investigation. If necessary, appropriate disciplinary action will be taken by the CCO.
RESPONSIBILITY
Any questions regarding the compliance with this policy should be directed to the CCO.
ISSUE
Rule 206(4)-1(b) under the Advisers Act defines "advertisement" for purposes of the rule as including:
[A]NY NOTICE, CIRCULAR, LETTER OR OTHER WRITTEN COMMUNICATION ADDRESSED TO
MORE THAN ONE PERSON, OR ANY NOTICE OR OTHER ANNOUNCEMENT IN ANY PUBLICATION OR BY RADIO OR TELEVISION, WHICH OFFERS (1) ANY ANALYSIS, REPORT, OR PUBLICATION CONCERNING SECURITIES, OR (2) ANY GRAPH, CHART, FORMULA OR OTHER DEVICE TO BE USED IN MAKING ANY DETERMINATION AS TO WHEN TO BUY OR SELL ANY SECURITY, OR WHICH US SECURITY TO BUY OR SELL, OR (3) ANY OTHER INVESTMENT ADVISORY SERVICE WITH REGARD TO SECURITIES.
For purposes of this policy, press releases authored by ClariVest are deemed advertisements at the time that they are transmitted to the media. Media reports, and specifically article reprints, are deemed advertisements only when they are distributed by ClariVest.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with utilizing press releases and article reprints. This analysis includes risks such as:
o Statements included in press releases or article reprints being inaccurate or misleading.
o Press releases or article reprints include information violating Rule 206(4)-1 or that contradict SEC positions.
o Copies of press releases or article reprints not being appropriately maintained.
o Press releases and article reprints not being approved by the CCO prior to distribution.
o Articles published by third-parties containing false and misleading information about ClariVest.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy when utilizing press releases or article reprints.
POLICY
ClariVest is prohibited from publishing, circulating, or distributing any advertisement that contains any untrue statement of a material fact or that is otherwise false or misleading. Marketing materials that are deceptive and misleading in their overall effect when it could be argued that no single statement of a material fact is incorrect are also prohibited. In considering whether marketing materials are misleading, the following factors should be considered:
o The presence or absence of any explanations and disclosures necessary to make the materials not misleading;
o The general economic or financial conditions affecting any assumptions in the materials;
o Any representations of future gains, income or expenses;
o Any portrayals of past performance that imply that past results may be repeated in the future, or that can not be justified under the circumstances;
o Any discussion of benefits of the investment without giving equal prominence to the risks or limitations associated therewith; and
o Any exaggerated or unsubstantiated claims.
Other factors that should be considered include the overall context in which the advertisement is made; the audience to which the advertisement is directed; the overall clarity of the advertisement; and the use of footnotes in the advertisement.
PRESS RELEASES
For purposes of these policies and procedures, a "press release" is defined as a public-relations statement about ClariVest prepared and issued by ClariVest with the goal that portions of the statement will be reprinted by bona-fide media outlets. Because press releases are generated by ClariVest, the advertising rules under the Advisers Act are fully applicable.
ARTICLE REPRINTS
An "article reprint" is defined as any story or discussion about ClariVest or its affiliates that appears in a bona fide media source that is subsequently copied and distributed by ClariVest. For such a media outlet to be deemed bona-fide, the publisher of the article to be reprinted may not be an affiliate of ClariVest. ClariVest always must receive permission from publishers of the original article to reprint or change it. Because article reprints are distributed by ClariVest, the advertising rules under the Advisers Act are generally applicable.
Noteworthy, however, is the no action relief granted to KURTZ CAPITAL MANAGEMENT (pub. avail. January 18, 1988) ("Kurtz"). In Kurtz, the SEC staff took the position that bona-fide unbiased third-party reports generally are not covered by Rule 206(4)-1(a)(1), which prohibits the use of testimonials by an investment adviser. Similarly, the staff took the position that the subsequent distribution of a bona-fide news article written by an unbiased third-party is not subject to the requirements of Rule 206(4)-1(a)(2) when past specific recommendations happen to be referred to within the article. Use of reprints, however, remains subject to Rule 206(4)-1(a)(5), which makes it a violation for an investment adviser to publish an advertisement that contains any untrue statement of a material fact or is otherwise false or misleading.
PROCEDURES
PRESS RELEASES
1. All press releases must be approved by the CCO prior to distribution.
2. In addition to full compliance with the rules under the Advisers Act with respect to advertising, special care must be taken if the press release contains historical performance of ClariVest. In such cases, performance must be shown either net of all fees and expenses of ClariVest, or alternatively, gross and net performance may be shown with equal prominence. Relevant disclosure, as described primarily in the no-action letter to Clover (as discussed in the Marketing Policy), should be included.
3. ClariVest, and specifically the Employee who authored the press release, will make reasonable efforts to obtain copies of all newspaper articles, etc. created by bona-fide media outlets as a result of the ClariVest press releases. Copies will be maintained in ClariVest's permanent file for five years from the end of the fiscal year in which the press release was issued.
4. The CCO will review all copies of articles created as a result of the ClariVest press releases.
ARTICLE REPRINTS
1. All article reprints must be approved by the CCO prior to distribution.
2. Before ClariVest may distribute an article reprint, it must determine if the information in the reprint is accurate at the time of distribution. If necessary, disclosure must be added to the reprint that clarifies or amends the misleading language of the original article.
3. Excerpts of articles may be distributed, provided that the excerpted language is not misleading when removed from the context of the entire article. If necessary, disclosure must be added to the excerpt that clarifies or amends the misleading language.
4. The original date of the article must appear on the article reprint.
5. Care must be used when distributing article reprints containing ClariVest performance results, as it is highly unlikely that the performance results contained in the article would remain accurate at the time of distribution. Thus, all article reprints must include disclosure updating the perfor- mance identified in the article reprint to the most recent calendar quarter end. Relevant disclosure, as described primarily in Clover, should be included.
In addition, if performance results or an investment strategy appearing in an article reprint are not currently applicable to ClariVest, disclosure to that effect must be included in with the article reprint. For example, if an article reprint discusses performance achieved using IPO shares that are no longer available, the article reprint must contain disclosure that a percentage of the returns shown was attributable to ClariVest's investments in IPOs and that because IPO shares are not available in the quantities previously available, it is questionable whether ClariVest could continue to achieve substantially similar performance as it had previously achieved.
6. Article reprints referencing a mutual fund advised by ClariVest will be approved before their use by the fund's distributor. Guidelines for use and approval of these article reprints may be found in the distributor's policies and procedures.
7. Copies of all article reprints (or excerpts of article reprints), with the disclosures that were distributed with the article reprints, will be maintained in ClariVest's permanent file for five years from the end of the fiscal year in which the press release was issued. A copy of the original article will be maintained along with each article reprint.
RESPONSIBILITY
Any questions regarding the compliance with this policy should be directed to the CCO.
ISSUE
Rule 206(4)-3 under the Advisers Act allows registered investment advisers to pay a cash fee to a solicitor (both internal and unaffiliated) for referring Clients only if pursuant to a written agreement.(5) The Rule requires, among other things, that the investment adviser make a bona fide effort to determine whether the solicitor has complied with the agreement, and have a reasonable basis for believing the solicitor has complied with the Rule.
Effective January 1, 2011, in California individuals who solicit or market to California public retirement systems such as CalPERS or CalSTRS must register as lobbyists and file disclosure reports, subject to certain exceptions. (AB 1743, Chapter 668, Stats. 2010).
Rule 206(4)-5 under the Advisers Act, when effective, prohibits registered investment advisers from providing or agreeing to provide, directly or indirectly, payment to any third party solicitor to solicit government clients for investment advisory services on its behalf, unless such person is a "regulated person" as defined in the rule.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with utilizing solicitors to refer business to ClariVest. This analysis includes risks such as:
o ClariVest paying a solicitor a cash fee, although ClariVest and the solicitor have not executed a written solicitation agreement.
o ClariVest making indirect payments to third parties for client referrals.
o The solicitor failing to provide Clients with the disclosure documents required by Rule 206(4)-3, the Solicitor's Rule.
o The solicitor being subject to disciplinary actions that prohibit it from engaging in solicitation activities.
o Solicitor documents not being adequately maintained.
o ClariVest failing to make a bona fide effort to confirm that the solicitor is complying with the terms of the solicitation agreement.
o ClariVest making payments, directly or indirectly, to a third party solicitor who is not a regulated person to solicit government clients for ClariVest after the effective date of Rule 206(4)-5.
ClariVest also considered the materials risks associated with employees being deemed "placement agents" (as described below) under California law, including employees acting as placement agents without being properly registered as lobbyists.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy to utilize solicitors and ClariVest's policy to register lobbyists.
SOLICITOR POLICY
The requirements for solicitors that are affiliated with ClariVest (i.e., officers, directors, employees) are less stringent than the requirements for unaffiliated solicitors. Below are details of the requirements for both internal and unaffiliated solicitors. ClariVest may only make a payment to a third party for a client referral if such person is a solicitor and the procedures below have been complied with.
SOLICITOR PROCEDURES - GENERAL
INTERNAL AND UNAFFILIATED SOLICITORS
Rule 206(4)-3 under the Advisers Act prohibits solicitation payments to any solicitor unless the following conditions are met:
1. The investment adviser (i.e. ClariVest) is registered under the Advisers Act;
2. The solicitor is not a person (A) subject to a Commission order
issued under section 203(f) of the Act, or (B) convicted within the
previous ten years of any felony or misdemeanor involving conduct
described in section 203(e)(2)(A)-(D) of the Act, or (C) who has been
found by the Commission to have engaged, or has been convicted of
engaging, in any of the conduct specified in paragraphs (1), (5) or
(6) of section 203(e) of the Act, or (D) is subject to an order,
judgment or decree described in section 203(e)(4) of the Advisers Act;
3. Such cash fee is paid pursuant to a written agreement to which the adviser is a party; and
4. The status of such solicitor as a partner, officer, director or employee of such investment adviser or other person, and any affiliation between the investment adviser and such other person, is disclosed to the client at the time of the solicitation or referral.
UNAFFILIATED SOLICITORS
Rule 206(4)-3(a)(2)(iii)(A) prohibits a registered investment adviser from paying fees to an unaffiliated solicitor(6) for client referrals unless the following requirements are met:
1. ClariVest will only pay a cash fee, directly or indirectly, to a solicitor pursuant to a written agreement. ClariVest is strictly prohibited from making any indirect payments to marketing intermediaries such as pension consultants for the referral of Clients to ClariVest.
2. The written agreement between ClariVest and the solicitor shall require the following conditions:
o Description of the solicitation activities to be engaged in by the solicitor on behalf of ClariVest and the compensation to be received;
o An undertaking by the solicitor to perform his or her duties under the agreement in a manner consistent with ClariVest's instructions and the provisions of the Advisers Act and the Rules thereunder;
o An undertaking that the solicitor is not a person subject to the disciplinary actions stated in Rule 206(4)-3(A)(1)(ii); and
o An undertaking by the solicitor to, at the time of any solicitation activities, provide the client with a current copy of ClariVest's Part 2a of Form ADV and a separate written disclosure document.
3. The unaffiliated solicitor's separate written disclosure document must be provided to the prospective client at the time of solicitation. The disclosure document must contain the following information:
o The name of the solicitor;
o The name of ClariVest;
o The nature of the relationship, including any affiliation, between the solicitor and ClariVest;
o The terms of such compensation arrangement, including a description of the compensation paid or to be paid to the solicitor;
o The amount, if any, the client will be charged in addition to the advisory fee; and
o The Client's signature, as an acknowledgment of receipt by the prospective clients.
The SEC staff has, by no-action letter, permitted investment advisers (in lieu of their solicitors) to deliver copies of the investment advisers' Form ADV and the solicitors' separate written disclosure statements to prospective clients and, in the case of mass mailings and advertisements, to make such deliveries only when such prospective clients express interest in the investment advisers' services (as opposed to at the time of solicitation). See, e.g., AMA Investment Advisers, Inc. (available October 28, 1993); Moneta Group Investment Advisors, Inc. (available October 12, 1993) (cash solicitation arrangement with professional associations and credit unions); E. F. Hutton & Company, Inc. (available September 27, 1987). The SEC has also permitted the investment advisers' Form ADV to be delivered within one business day of the referral when, in the interest of administrative efficiency copies of the Form ADVs were maintained at a central office (as opposed to a branch office). See Charles Schwab & Co., Inc. (available April 29, 1998). The SEC has said that the solicitor's separate written disclosure statements can be delivered (and the required signed and dated client acknowledgment of receipt obtained) electronically consistent with the guidelines presented in the SEC's May 1996 release on the use of electronic media. See Securities Act Release No. 7288 (May 9, 1996).
4. ClariVest must obtain a signed and dated acknowledgement from the Client that they received the solicitor's separate written disclosure document and ClariVest's Part 2A of Form ADV. ClariVest must receive the acknowledgment prior to, or at the time of, entering into the advisory agreement with the client. In order to ensure compliance with this procedure, ClariVest may require Clients to sign and date the solicitor's separate written disclosure document which will evidence the client's receipt of the solicitor's separate written disclosure document as well as Part II of ClariVest's Form ADV.
5. Any solicitor acting on behalf of ClariVest shall not be a person subject to the disciplinary actions stated in Rule 206(4)-3(A)(1)(ii) under the Advisers Act.
6. ClariVest shall maintain originals and/or copies of all solicitor documents in the respective Client files.
7. ClariVest shall require its unaffiliated solicitors to complete the Solicitors Verification Letter included as Attachment A on an annual basis.
SOLICITOR PROCEDURES - GOVERNMENT ENTITIES
In addition to complying with the Solicitor Procedures outlined above, after the effective date of Rule 206(4)-5, ClariVest will be subject to special procedures relating to the solicitation of government clients. ClariVest will comply with the following procedures after Rule 206(4)-5's provisions regarding third-party solicitation become effective.
Rule 206(4)-5 makes it unlawful for ClariVest or its covered associates to pay, directly or indirectly, any person who is not a regulated person to solicit government clients for investment advisory services on ClariVest's behalf. Before making any payment, direct or indirect, for solicitation activities related to a government client, ClariVest will confirm with the third party solicitor that such entity is a regulated person as defined by Rule 206(4)-5. ClariVest will also ask the third party solicitor to confirm annually in the Solicitors Verification Letter included as Attachment A that, if they receive payment for soliciting government clients on ClariVest's behalf, they are a regulated person under Rule 206(4)-5, and that they are in compliance with any pay to play rules imposed on them in connection therewith.
SOLICITOR RESPONSIBILITY
The CEO will oversee ClariVest's solicitation arrangements, including the establishment of new relationships. The CEO shall determine the eligibility of the solicitors, and he will ensure that each solicitor complies with the terms of the written agreement with ClariVest. The CCO will ensure that all of the appropriate solicitation documentation exists to ensure compliance with the cash solicitation rule.
LOBBYIST POLICY
California law prohibits a person from acting as a placement agent in connection with any potential system investment made by a California public pension or retirement systems unless that person is registered as a lobbyist.
"Placement agent" means any person hired, engaged, or retained by, or serving for the benefit of or on behalf of, an external manager, or on behalf of another placement agent, who acts or has acted for compensation as a finder, solicitor, marketer, consultant, broker, or other intermediary in connection with the offer or sale of the securities, assets, or services of an external manager to a board or an investment vehicle, either directly or indirectly. However, the definition of placement agent excludes an individual who is an employee, officer, director, equityholder, partner, member, or trustee of an external manager and who spends one-third or more of his or her time, during a calendar year, managing the securities or assets owned, controlled, invested, or held by the external manager.(7)
With respect to state-level plans only, employees are also exempt (the "Entity Exemption") from registration as a lobbyist so long as ClariVest is:
1) Registered with the SEC as an "investment adviser" or "broker-dealer" or if exempt from SEC registration, with an appropriate state securities regulator; and
2) Was selected through competitive bidding and is providing services pursuant to a contract executed as a result of that competitive bidding procedures; and
3) Has agreed to a "fiduciary standard of care" as defined by the standards of conduct applicable to the retirement board of a public pension or retirement system when managing a portfolio of the pension or retirement system's assets.
The law also requires a person acting as a placement agent in connection with a local public retirement system to file any applicable reports with a local government agency that requires lobbyists to register and file reports and to comply with any applicable requirements imposed by a local government agency. It is important to note that the Entity Exemption from registration set forth above only applies to state plans (such as CALSTRS and CALPERS), and does not apply to local public retirement systems.
Finally, a placement agent selling or attempting to sell securities, assets, or services of an "external manager" to a California public pension fund cannot be compensated under a "contingency" arrangement.
LOBBYIST PROCEDURES
To ensure that ClariVest employees are exempt from registration as a lobbyist with respect to state-level plans, ClariVest will ensure that it complies with the requirements of the Entity Exemption set forth above.
With respect to local plans, certain ClariVest personnel will be exempt from registration because they spend more than one-third of their time managing the securities invested by ClariVest. For personnel that do not spend more than one-third of their time managing securities for ClariVest, such employees will not have contact with a local plan until the CCO has an opportunity to determine if such contact would result in the employee being required to register as a lobbyist.
Finally, ClariVest will not compensate any placement agent under a contingency arrangement with respect to any California public pension fund business.
LOBBYIST RESPONSIBILITY
The CCO will ensure that ClariVest complies with the Entity Exemption set forth above. ClariVest employees are required to notify the CCO before they have any contact with a local plan, and the CCO will work with the employee to determine if such contact would result in registration as a lobbyist. The CFO will ensure that ClariVest does not compensate any placement agent under a contingency arrangement.
ATTACHMENT A
SOLICITORS VERIFICATION LETTER
[DATE]
NAME OF SOLICITOR ("Solicitor")
ADDRESS
CITY, STATE ZIP
Dear <Solicitor>:
In accordance with our obligation to comply with the provisions of Rule 206(4)-3 under the Investment Advisers Act of 1940 ("Advisers Act"), more commonly referred to as the "cash solicitation rule," ClariVest Asset Management LLC ("ClariVest") must ensure that its unaffiliated solicitors provide the requisite disclosure documents to prospective clients of ClariVest. Specifically, subparagraph (a)(2)(iii)(C) of the rule requires an adviser to make a bona fide effort to ascertain whether the solicitor has complied with the written agreement that governs the arrangement and have a reasonable basis for believing that the solicitor has so complied.
Since ClariVest and Solicitor have executed an agreement to compensate Solicitor for the referral of advisory Clients to ClariVest, ClariVest respectfully requests confirmation from Solicitor that it has provided and continues to provide all prospective clients of ClariVest, AT THE TIME OF ANY SOLICITATION ACTIVITIES: 1) a current copy of Part II of ClariVest's Form ADV, and 2) the separate written disclosure document required by subparagraph (b) under Rule 206(4)-3. By signing below, you acknowledge and certify that, to the best of your knowledge, you have complied with the disclosure requirements noted above.
Additionally, by signing below, Solicitor certifies that it continues to comply with the following representations which were made in the original solicitation agreement with ClariVest:
1. Solicitor is not a person, as defined by Section 202(a)(16) of the
Advisers Act, (a) subject to a Commission order issued under Section
203(f) of the Advisers Act, or (b) convicted within the previous ten
years of any felony or misdemeanor involving conduct described in
Section 203(e)(2)(A)-(D) of the Advisers Act, or (c) who has been
found by the Commission to have engaged, or has been convicted of
engaging, in any of the conduct specified in paragraphs (1), (5) or
(6) of Section 203(e) of the Advisers Act, or (d) who is subject to an
order, judgment or decree described in Section 203(e)(4) of the
Advisers Act (collectively referred to as "Rule 206(4)-3 Disqualifying
Orders");
2. If Solicitor has been sanctioned by the Commission and is subject to a one or more Rule 206(4)-3 Disqualifying Orders, ClariVest may still be permitted to compensate Solicitor in compliance with Rule 206(4)-3. In the Division of Investment Management's no-action letter to DOUGHERTY & COMPANY LLC (March 21, 2003), the staff indicated that an adviser may pay a solicitor cash solicitation fees when the Commission has sanctioned the solicitor but has not barred or suspended the solicitor from acting in any capacity under the Federal Securities Laws. Thus, in order to comply with the provisions outlined in DOUGHERTY, by signing below, Solicitor acknowledges and confirms that if he is subject to a Rule 206(4)-3 Disqualifying Order, to the best of his/her knowledge: (1) the cash solicitation arrangement continues to be conducted in compliance with the terms of Rule 206(4)-3 except for ClariVest's payment of cash solicitation fees to Solicitor who is subject to a Rule 206(4)-3 Disqualifying Order; (2) no Rule 206(4)-3 Disqualifying Order bars or suspends Solicitor from acting in any capacity under the Federal Securities Laws; (3)
Solicitor has complied with the terms of each Rule 206(4)-3 Disqualifying Order, including, but not limited to, the payment of disgorgement, pre-judgment interest, civil or administrative penalties and fines; and (4) for a period of ten years following the date of each Rule 206(4)-3 Disqualifying Order, Solicitor shall disclose the order to each person whom Solicitor solicits in the separate written disclosure document required to be delivered to such person under Rule 206(4)- 3(a)(2)(iii)(A) or, if Solicitor is a person specified in Rule 206(4)-3(a)(2)(i) or (ii), Solicitor shall disclose the order to each person whom Solicitor solicits by providing the person at the time of the solicitation with a separate written disclosure document that discusses the terms of the order;
3. Solicitor has obtained any SEC and/or state registrations that may be appropriate or required in connection with the solicitation services provided under the solicitation agreement with ClariVest or has been advised by counsel that it is exempt or excluded from registration;
4. Solicitor does not provide investment advisory services on behalf of ClariVest in any manner to solicited Clients;
5. With respect to any prospective or solicited client that is a retirement plan subject to ERISA or a tax qualified retirement plan or IRA under the Internal Revenue Code, Solicitor, and any of its of- ficers, directors, Employees, agents or affiliates, are not a fiduciary, trustee or administrator for any such plan; and
6. With respect to any prospective or solicited client that is a state, municipality, or other political entity, agency or subdivision, Solicitor, and any of its officers, directors, Employees, agents or affiliates, are not associated in any way with such entity or have been elected official, Employee or person providing professional services to such entity within the last two years.
7. From and after the effective date of Rule 206(4)-5's provisions regarding third party solicitation, if Solicitor receives or intends to receive payment, directly or indirectly, for soliciting government clients on ClariVest's behalf, Solicitor represents and warrants that it is a regulated person under Rule 206(4)-5. Solicitor further represents and warrants that it is in compliance with any pay to play regulations or other rules imposed on it in connection therewith (including any regulations of registered municipal advisors by the SEC or MSRB).
Please complete the enclosed acknowledgement and return it to the above noted address at your earliest convenience. If you have any questions with respect to this request, please call me at 858-480-2422. Thank you for your attention to this matter.
Regards,
Stacey Nutt, CEO
ClariVest Asset Management LLC
ACKNOWLEDGED AND CERTIFIED BY:
By:___________________________________ (Print Name)
Signature:____________________________
Date: ________________________________
ISSUE
Rule 204-2 under the Advisers Act requires investment advisers to maintain certain books and records.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with its maintenance of an effective books and recordkeeping system. This analysis includes risks such as:
o ClariVest's system of maintaining books and records being outdated, insufficient, and not compliant with Rule 204-2(a) under the Advisers Act.
o Employees not being sufficiently knowledgeable about the books and records rule and what documents must be maintained.
o Electronically stored documents not being reasonably safeguarded from loss, alteration, or destruction.
o Improper alteration/destruction of hard copy documents.
ClariVest has established the following policy and procedures to help monitor and ensure ClariVest properly maintains and safeguards its books and records.
POLICY
All books and records required by Rule 204-2 will be maintained for a period of not less than five years from the end of the fiscal year during which the record was last altered (with limited exceptions as described in Attachment A), the first two years in ClariVest's office.(8)
Records pertaining to investment advisory services rendered to a registered investment company must be maintained for no less than six years.
PROCEDURES
MAINTENANCE OF REQUIRED RECORDS -- ClariVest will maintain the records required by Rule 204-2 under the Advisers Act. These records include, but are not limited to the following: financial statements, bank statements, bills and invoices, contracts, partnership or limited liability company agreements for Investment Funds, agreements with Investors in each Investment Fund (such as Subscription Agreements
and Offering Questionnaires) and written communications with Clients (including offering materials for Investment Funds and materials regarding the suitability of each prospective Investor). The records will be maintained by various individuals and maintained in ClariVest's office.
RECORD RETENTION POLICY - ClariVest will maintain its books and records in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the record was last altered, the first two years in ClariVest's office.
CORPORATE RECORDS - Limited liability company agreements, certificates of formation and amendments, etc. of ClariVest and of any predecessor shall be maintained in the principal office of ClariVest and preserved until at least three years after termination of the enterprise.
MAINTAINING RECORDS ELECTRONICALLY -- ClariVest may elect to maintain and preserve certain books and records electronically, on a computer storage medium under the conditions set forth below. ClariVest will:
1. Arrange and index the records in a way that permits easy location, access, and retrieval of any particular record;
2. Provide promptly any of the following that the SEC (by its examiners or other representatives) may request:
o A legible, true, and complete copy of the record in the medium and format in which it is stored;
o A legible, true, and complete printout of the record; and
o Means to access, view, and print the records.
3. Separately store, for the time required for preservation of the original record, a duplicate copy of the record on any medium allowed by this section.
REPRODUCTION OF NON-ELECTRONIC RECORDS TO ELECTRONIC STORAGE MEDIUM -- ClariVest utilizes Adobe Acrobat and a scanner to convert certain hard copy documents into electronic documents for the purposes of storing the documents in electronic medium. The use of the technology provides ClariVest with reasonable assurance that any reproduction of a non-electronic original record on electronic storage media will be complete, true, and legible when retrieved. This also safeguards against alteration or destruction of hard copy documents.
ClariVest shall maintain certain books and records electronically and in accordance with the Advisers Act.
DESTRUCTION POLICY
The CCO has sole authority to authorize the destruction of any book or record after it has been maintained and preserved for the requisite time period. All destruction of records stored in onsite or offsite records facilities will be approved by the CCO after the record has been retained for all applicable retention periods and verification is received that there are no legal impediments on destruction.
If ClariVest or any of its Employees are under any type of regulatory or legal investigation or proceeding, or know that one is pending, all documents related to the matters under investigation or involved in the proceeding must be preserved in a manner specified by counsel. The CCO is responsible for notifying Employees of any such investigation or proceeding (the level of detail to be determined by applicable law and related circumstances) and the parameters to be followed regarding the maintenance and destruction of related documents.
Should ClariVest determine to destroy any documents, ClariVest will:
1. Ensure that documents containing Non-Public Information are burned, pulverized, or shredded so the information cannot be read or reconstructed;
2. Ensure the destruction or erasure of electronic media containing Non-Public Information so the information cannot be read or reconstructed; and
3. Ensure that "disposal companies" engaged by ClariVest to dispose of Non-Public Information are performing their duties in accordance with this policy. ClariVest may perform this diligence by:
o reviewing an independent audit of the disposal company's operations and/or its compliance with the disposal rule;
o obtaining information about the disposal company from several references or other reliable sources;
o requiring that the disposal company be certified by a recognized trade association or similar third party; and/or
o taking other appropriate measures to determine the competency and integrity of the disposal company.
RESPONSIBILITY
The CCO is responsible for overseeing and implementing this policy in consultation with the CEO. All Employees must be familiar with the record-keeping requirements required by the federal securities laws, and most importantly, the Advisers Act. Such familiarity will ensure the effectiveness of ClariVest's books and record-keeping system. All questions regarding an Employee's responsibility under this policy should be directed to the CCO.
ISSUE
ClariVest has adopted this Electronic Communications Policy and Procedures (the "EPolicy") to comply with federal and state securities laws, including Rule 204-2 under the Advisers Act. The EPolicy was designed to ensure that ClariVest implements reasonable procedures to monitor Employees' use of the Internet and electronic communications including, without limitation, e-mail.
All software, files, e-mail messages, and voice mail messages on ClariVest's computers, network, and communications systems are the property of ClariVest. These resources are made available by ClariVest to facilitate your ability to do your job efficiently and productively. Employees are to use computers, software, phone systems and Internet access for the benefit of ClariVest and its Clients. In addition, all ClariVest related software, files, e-mail messages on personal computers, PDAs and similar sources must be maintained in accordance with the Advisers Act and this EPolicy. For example, all e-mail correspondence to and from Clients must be maintained in accordance with the Advisers Act and this EPolicy.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with Employees' use of electronic means for communicating internally and with outside parties. This analysis includes risks such as:
o Employees' use of email and the Internet not being properly monitored for inappropriate use.
o Email communication with Clients not being maintained, as required by the books and records rule.
o ClariVest's computer systems being exposed to infiltration by computer viruses due to increased use of email and the Internet.
o Employees not being aware that their use of the Internet, email, and instant messaging is subject to the same standards as all other forms of communications and is not private.
o Employees using public email services from their work computer for business purposes without retaining or archiving such records for purposes of the record retention requirements under the Advisers Act.
o Instant messages not being captured and maintained.
o Regulatory documents being delivered electronically without the client's informed consent to receive such documents electronically.
o Employees who are dual employees not understanding the rules regarding the use of their various business e-mail addresses.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy to govern the manner in which Employees may communicate via electronic means.
POLICY
This EPolicy applies to all electronic communications, including e-mail. Employees are reminded that ClariVest requires Employees to act with integrity, competence, dignity, and in an ethical manner when dealing with the public, Clients, prospects, their employer, and their fellow Employees. An Employee's use of ClariVest's e-mail, computer, Internet and PDA is held to the same standard as all other business communications, including compliance with our anti-discrimination and anti-harassment policies. ClariVest expects its Employees to use good judgment in their use of these systems.
As noted above, electronic communications systems, particularly the Internet and internal and external e-mail, are resources of growing importance for both regulators and our Clients. Given the vast accessibility of these technologies, it is quite easy to overlook the significant risks associated with their use. Thus, all Employees must take great care in using the Internet and in communicating with business associates just as one would when using print or any other media. The Internet is a public forum as opposed to a private or secure network. One should always assume that nothing written in an e-mail communication is private.
E-Mail has become a fundamental means for Employees to communicate with Clients, service providers, and others. Among the many purposes that it serves, e-mail is utilized to streamline and document a number of an Employee's daily functions and tasks. Thus, it has, or will, become an integral part of the daily communication ritual of most, if not all, Employees.
PROCEDURES
A. CORRESPONDENCE. Any written electronic communications sent by an Employee to Clients, customers, service providers, another Employee, or any other party, relating to ClariVest's business, including e-mail and fax, should be treated in the same manner and with the same care as letters or other official communications on ClariVest's letterhead. In addition, such communications may be subject to the recordkeeping requirements under the Advisers Act, which generally mandates that such documentation be maintained by an adviser for a period of five years from the end of the fiscal year in which the communication was created -- the first two years in the office of the adviser. Investor or client complaints that are received by an Employee via e-mail must immediately be forwarded to the CCO. ClariVest shall maintain a copy of all hard copy written communications mailed or sent via fax.
B. ELECTRONIC MAIL. Employees must take great care in preparing and sending both internal and external e-mails. Certain e-mails that are sent to more than one person (including Clients, prospective clients, etc.) may be considered by the SEC to be advertisements that are subject to the marketing and advertising rules under the Advisers Act. Thus, the same care should be taken in creating an e-mail as that which is taken when creating a new marketing or promotional piece.
In order to comply with the requirement that all Employee e-mails be maintained in accordance with the recordkeeping rules under the Advisers Act, ClariVest has engaged an independent service provider to archive and retain all of the e-mails that are sent and received by all Employees.
ClariVest shall ensure that its e-mails are maintained in accordance with the recordkeeping requirements under the Advisers Act, and is aware of the fact that such e-mails may be subject to inspection by the SEC or other regulatory authorities, including any third parties that ClariVest may contract to monitor Employees' e-mail.
All ClariVest business should be conducted by Employees through ClariVest's e-mail system. All Eagle business should be conducted by dual employees through Eagle's e-mail system. Eagle is responsible for capturing, maintaining and reviewing any emails sent through Eagle's e-mail system. ClariVest does not have supervisory responsibility for Employees when they are acting as dual employees for Eagle.
Employees are prohibited from using public e-mail services from their ClariVest computer (desktop or laptop) for business use. Employees are permitted to make reasonable personal use of their ClariVest e-mail account to send or receive personal e-mails. However, such use should not interfere with ClariVest's business activities or involve a meaningful amount of Employee's time or ClariVest's resources. As always, all e-mail, whether business or personal, must be appropriate in both tone and content. Employees acknowledge that ClariVest and its authorized agents have the right to access and obtain all e-mails, including personal e-mails that Employees send or receive through ClariVest computers. Employees acknowledge that all of their e-mails may be subject to, at any time and without notice to Employee, monitoring and review by ClariVest and/or its authorized agents as permitted or required by law. Employees expressly consent to such monitoring and review by ClariVest and/or its authorized agents of all e-mails.
C. PDAS. Employees utilizing PDAs (Blackberry, etc.) for business use are required to password protect their PDAs. Any employee found without a password on their PDA will no longer be permitted to use a PDA for work purposes. Employees utilizing PDAs (Blackberry, etc.) for business use are prohibited from sending messages directly to the PIN number(s) of other PDA users. Conversely, Employees are prohibited from furnishing PIN number(s) to other PDA users with the expectation of receiving messages for business use that are sent directly to the Employee's PIN number. When sending/receiving messages in the manner described above, the messages do not get copied to ClariVest's email server, and thus certain messages may not be maintained in accordance with ClariVest's EPolicy.
D. PRIVILEGED EMAILS. When corresponding via e-mail with its legal counsel, ClariVest will consider that such e-mails may be subject to SEC review. As such, ClariVest will consider the maintenance of a "Vaughn index" to log e-mails in which it will seek the attorney-client(9) privilege. E-mails in which ClariVest seeks to exert the attorney-client privilege should be marked by including the phrase, "Privileged and Confidential" in the subject line of the e-mail. Notwithstanding the foregoing, legal privilege is not applicable on a wholesale basis or simply because the Company wants it to be. Including the words "Privileged and Confidential" does not automatically confer privileged status, nor does the lack of such language mean that the e-mail is not privileged. Recent legal decisions have tended to confine the ambit of privilege considerably more narrowly than was previously generally understood.
E. INSTANT MESSAGING AND CHAT ROOMS. Instant messaging is an increasingly popular form of electronic communication that allows one user to communicate with another one in real time. A "chat room" differs from instant messaging as several users have the ability to communicate with one another in real time.
Employees are prohibited from using an instant message platform that has not been approved in writing by ClariVest. In addition, Employees are strictly prohibited from utilizing instant messaging for business purposes without the written consent of ClariVest.
It is difficult and burdensome for ClariVest to monitor and supervise its Employees' chat room communications. In addition, it is typically cost prohibitive for an adviser to develop or acquire the sophisticated systems that are required to capture, archive, and retrieve chat room communications. Accordingly, ClariVest prohibits the use of chat rooms by its Employees at work for business use.
F. PROHIBITED COMMUNICATIONS. ClariVest prohibits Employees from using ClariVest's electronic facilities to do any of the following:
o Download or transmit unlawful or inappropriate images or materials;
o Transmit externally any documents marked "For Internal Distribution Only" or forward any e-mail automatically to an outside e-mail account;
o "Hack" or attempt to gain unauthorized access to computers or databases, tamper or interfere with electronic security mechanisms, misrepresent a user's identity (e.g. , spoofing) or disseminate intentionally any viruses or other destructive programs;
o Transmit chain letters, unapproved mass solicitations or any other form of unsolicited e-mail/SPAM for non-ClariVest approved purposes;
o Establish a personal business or use ClariVest facilities for personal profit; or
o Download, install or execute software, including patches and upgrades, without prior approval of the Chief Technology Officer.
G. ELECTRONIC DELIVERY OF REGULATORY DOCUMENTS. The expansion of the Internet and electronic communications now allows advisers to deliver investment adviser regulatory documents electronically. The delivery of such communications, including, among other things, an adviser's Form ADV and privacy policy, must be made in accordance with the three elements of Notice, Access, and Evidence of Delivery as discussed more fully below.
NOTICE - Information provided electronically (i.e., on ClariVest's website or in an e-mail sent by an Employee to a Client) provides notice to ClariVest's Client that they have received something important.
ACCESS - Those who are provided with electronic documents should have access comparable to that of a paper document. The use of a particular medium (i.e., Internet website or e-mail) should not be so burdensome that intended recipients cannot effectively access the information provided. Persons to whom information is sent electronically must have an opportunity to retain the information through the selected medium (i.e., recipient should be able to either download or print information delivered electronically such that they can maintain a permanent record).
EVIDENCE OF DELIVERY - When providing documents electronically, one must have reasonable assurance that such documents have been actually delivered. In order to evidence satisfaction of delivery obligations advisers may: 1) obtain the Client's informed consent, 2) obtain evidence the Client has actually received the document (i.e., return receipt), or 3) disseminating information via fax.
H. SECURITY. The Internet is not a secure environment. Files and e-mail can be intercepted and read by technically savvy Internet users, including ClariVest's competitors. All Employees should attempt to limit the amount of confidential, classified, or proprietary information that is transmitted electronically to only that which is absolutely necessary and required to conduct one's job.
I. REPORTING PROBLEMS. If sensitive ClariVest information is lost, disclosed to unauthorized parties or suspected of being lost or disclosed, Employees shall immediately notify the CCO. In addition, the CCO should be notified if any unauthorized use of ClariVest's information systems has taken place, or is suspected of taking place. Similarly, when passwords or other system access control mechanisms are lost, stolen, or disclosed, or suspected of being lost, stolen, or disclosed, the CCO should be notified immediately. All unusual system behavior, such as missing files, frequent systems crashes, misrouted messages and the like should be reported immediately to ClariVest's Chief Technology Officer as one of these issues may indicate a computer virus infection or similar security problem.
J. MONITORING AND SURVEILLANCE PROGRAM. In order to ensure compliance with this EPolicy, ClariVest reserves the right, subject to applicable law, to monitor (which includes, without limitation, the right to access, disclose, record or review) for any purpose, all communications delivered via ClariVest's electronic communications resources and all communications, information or materials created or stored on ClariVest's network computer systems or on an Employee's personal computer. Thus, Employees should be mindful that their e-mails may be reviewed by ClariVest or its authorized agents on a random basis or based upon certain key-word searches. ClariVest has retained the services of a third-party archiving system (the Global Relay system) to document the review of Employee e-mails, Instant Messages and Bloomberg messages by the Chief Compliance Officer. At any time, ClariVest may require an Employee to provide ClariVest with any of their electronic access codes or passwords.
ClariVest may monitor the electronic communications of Employees for any purposes, including without limitation: regulatory requirements, investigating possible Employee theft or espionage, monitoring work flow, retrieving missing business data in an Employee's absence, reviewing and evaluating Employee performance, ensuring that ClariVest's systems are used for legitimate purposes and not for the transmittal of discriminatory or offensive messages, finding illegal software installed on an Employee's computer, ensuring that Employees are either not using ClariVest's equipment and resources for personal purposes, or complying with any state, federal or international laws or legal process, including without limitation, responding to subpoenas, court orders for surveillance or similar requests.
EMPLOYEE CONSENT AND NON-COMPLIANCE WITH THE EPOLICY
Your consent and compliance with this EPolicy is a term and condition of your employment. Failure to abide by this EPolicy or to consent to any interception, monitoring, copying, reviewing or downloading of any communications or files is grounds for discipline, up to and including suspension or dismissal, at the discretion of management. In any situation where you are unsure about the application of this EPolicy, please discuss the situation confidentially with the CCO.
CONFIDENTIALITY
All reports and any other information filed with ClariVest pursuant to this EPolicy shall be treated as confidential, except that the same may be disclosed to ClariVest's management, any regulatory or self-regulatory authority or agency upon its request, or as required by law or court or administrative order.
RESPONSIBILITY
The CCO and designees are responsible for overseeing and implementing this policy.
ISSUE
The SEC has indicated that among the specific obligations that flow from an adviser's fiduciary duty is the requirement to seek to obtain the best price and execution of client securities transactions where the adviser is in a position to direct brokerage transactions (See In the Matter of Kidder Peabody & Co., Advisers Act Release No. 232 (pub. avail. October 16, 1968) and In the Matter of Delaware Management Company, Inc., Exchange Act Release No. 8128 (pub. avail. July 19, 1967)). This policy discusses ClariVest's philosophy relating to trading securities.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered the material risks associated with its trading processes. This analysis includes risks such as:
o Client trades not being placed in such a way as to ensure that ClariVest is seeking to obtain best execution on the transactions.
o The allocation of investment opportunities among Client accounts is not being done in a fair manner.
o Clients participating in a bunched order, when appropriate, do not receive average price.
o Allocation of bunched trades are not done prior to close of business on trade date.
o Allocations of trades are consistently done after, rather than prior to, execution.
o ClariVest participates in IPOs or secondary offerings in violation of client guidelines or restrictions, especially those of Investment Companies related to affiliated underwriters.
o ClariVest conducts trading that violates Federal Securities Laws.
o Order tickets do not contain all required information, as set forth in Rule 204-2(a)(3).
o Trade breaks are not identified and corrected in a timely manner.
o ClariVest does not periodically and systematically evaluate the quality and cost of services provided by broker-dealers .
o ClariVest fails to disclose all material conflicts of interest relating to its brokerage arrangements.
o ClariVest does not seek to negotiate favorable trading arrangements.
o ClariVest lacks written policies and procedures governing the use of soft dollars.
o ClariVest uses soft dollars in a manner that is inconsistent with disclosures to Clients.
o ClariVest uses services outside of the Section 28(e) safe harbor.
o ClariVest cannot document a good faith allocation in connection with products or services that are partially paid for using soft dollars, if applicable.
o ClariVest fails to conduct appropriate due diligence of broker-dealers added to the approved broker-dealer list, or fails to conduct appropriate on-going diligence.
o ClariVest trades with too few broker-dealers such that future execution is put at risk if there are personnel or other management changes at such broker-dealers.
ClariVest has established the following guidelines to effectuate and monitor ClariVest's policy to govern the manner in which trades will be placed in Client accounts.
POLICY
ClariVest's principal objective in selecting broker-dealers and entering Client trades is to seek to obtain best execution for Clients' transactions. As such, ClariVest will follow procedures to ensure that it is seeking to receive the best execution available on Client trades as there may be conflicts of interests that on occasion arise in the trading function.
ClariVest's allocation procedures seek to allocate investment opportunities among Clients in the fairest possible way taking into account Clients' best interests. ClariVest will follow procedures to ensure that allocations do not involve a practice of favoring or discriminating against any Client or group of Clients.
ClariVest recognizes that the analysis of execution quality involves a number of factors, both qualitative and quantitative. To consider all of these factors, ClariVest will follow a process in an attempt to ensure that its Portfolio Managers are seeking to obtain the most favorable execution under the prevailing circumstances when placing Client orders.
When necessary, ClariVest shall address potential conflicts of interests in its trading practices by disclosure to Clients in its Form ADV or other appropriate medium.
Only the Portfolio Managers (including Assistant Portfolio Managers), or other Employees of ClariVest with prior approval from a Portfolio Manager, are authorized to place trade orders on behalf of Clients. In the event that the lead Portfolio Manager is unreachable, back-up Portfolio Manager(s) are authorized to trade Client positions.
TRADING PROCEDURES - ALLOCATION OF BROKERAGE
1. The communication of the detailed trades to executing broker-dealers is through the Charles River Investment Management system.
2. Portfolio Managers are empowered with the discretion to decide upon the appropriate means of executing each specific trade, and may utilize any number of trading venues to execute transactions with a broker-dealer from the approved broker-dealer list. In selecting broker-dealers to execute client portfolio securities transactions, Portfolio Managers consider the full range and quality of the services offered by the broker-dealer to seek the most favorable transactions costs under the circumstances. These factors may include execution capability, the commission rate
charged, the broker-dealer's financial responsibility, and their
responsiveness to ClariVest, among other things. Other possibly
relevant factors may include, but are not limited to, the following:
the size and type of the securities transaction; the speed and
certainty of trade executions, including willingness to commit
capital; the nature and characteristics of the markets for the
security to be purchased or sold, including the degree of
specialization of the broker-dealer in such markets or securities; the
availability of liquidity in the security, including the liquidity and
depth afforded by a market center or market-maker; the reliability of
a market center or broker-dealer; responsiveness to traders, including
the trader's assessment of whether and how closely the broker-dealer
likely will follow the trader's instructions to the broker-dealer; the
degree of anonymity that a particular broker-dealer or market can
provide; the potential for avoiding or lessening market impact; the
execution services rendered on a continuing basis; and the execution
efficiency, settlement capability, and financial condition of the
firm. Based on the factors considered, ClariVest may choose to execute
an order using electronic communications networks (ECNs), including
algorithmic trading, crossing networks, direct market access and
program trading, or by actively working an order. The negotiated
commissions paid to broker-dealers may not represent the lowest
obtainable commission rates. However, as described below under "Best
Execution", ClariVest has policies and procedures in place (including
scoring broker-dealers on qualitative and quantitative metrics,
ranking of broker-dealers based on those scores, etc.) to help ensure
that (1) ClariVest is seeking the most favorable transaction costs
under the circumstances and (2) ClariVest has made a good faith
determination that the commissions paid are reasonable in relation to
the value of the services provided by broker-dealers.
3. Portfolio Managers seek to allocate trades across a variety of broker-dealers to mitigate the potential negative consequences to ClariVest's ability to obtain best execution where there are personnel or other management changes at ClariVest's broker-dealers.
4. ClariVest maintains an approved broker-dealer list. Before a broker-dealer is added to the approved list, ClariVest engages in legal, operational and financial reviews of the brokerage relationship. The CCO is involved in reviewing the legal documentation required by the broker-dealer to establish the relationship. The Operations Manager works with the broker-dealer's operational team to ensure that the broker-dealer is connected through the FIX network and trades are communicated accurately. The Chief Financial Officer reviews the broker-dealer's financial statements (if available) to ensure that the broker-dealer meets its net capital requirements. The addition of new broker-dealers to the approved list will be presented at the quarterly Best Execution Committee as necessary. Given that ClariVest trades publicly traded equities DvP with broker-dealers, we believe this is an appropriate level of broker-dealer due diligence.
5. On an annual basis, the Operations Manager will oversee the preparation of a diligence report containing each broker-dealer's net capital requirement and ratio (current and previous 3 years). The Operations Manager, COO and CCO will then review this information for any issues, including a trend analysis. An overview of the information will be discussed as part of the Best Execution Committee meeting, as necessary.
6. Trades are communicated with executing broker-dealers through the Charles River Investment Management System, via the FIX network, or via broker-neutral execution management systems such as "Newport". Additionally, Portfolio Managers may elect to execute transactions through an electronic communications network.
7. ClariVest does not consider client referrals from broker-dealers in determining the manner in which it will allocate its brokerage.
TRADING PROCEDURES -- ORDER AGGREGATION
1. The individual managing the trade will allocate the securities across the accounts, considering account size, diversification, cash availability, and other factors, including, where appropriate, the value of having a round lot in the portfolio.
2. Orders for the same security entered on behalf of more than one Client will generally be aggregated (i.e., blocked or bunched) subject to the aggregation being in the best interests of all participating Clients. Subsequent orders for the same security entered during the same trading day may be aggregated with any previously unfilled orders; filled orders shall be allocated separately from subsequent orders. One exception is that subsequent orders may be aggregated with filled orders if the decision to trade the security was made in close proximity. For example, it may be optimal to get a broker-dealer working on a security for the known approved quantities while approval is being obtained for other accounts. All Clients participating in each aggregated order shall receive the average price and subject to minimum ticket charges, pay a pro-rata portion of commissions. The CCO and/or COO review daily reports of any aggregated orders which are allocated a price other than the average price, and will retain documentation of the justification for any such allocation.
3. Orders for the same security may be traded at the same time with different broker-dealers (and possibly obtain different execution) if the security is being traded differently. For example, an order may be part of a basket of trades for a given client(s). In such an instance, the decision of how to trade the security is a function of how trading is unfolding for other securities in the same basket or program and it may be suboptimal to split off the trade. If the aggregate amounts of the security in question are such that the two orders represent a high amount of average daily volume when combined, then usually the orders will be combined to form a single order. The idea is to avoid having two competing orders that may cause "trading against ourselves".
4. When a trade is to be executed for an individual account and the trade is not in the best interests of other accounts, then the trade will only be performed for that account. This is true even if the Portfolio Managers believe that a larger size block trade would lead to best overall price for the security being transacted.
5. Instances in which Client orders will not be aggregated include, but are not limited to, the following:
o Portfolio Managers determining that the aggregation is not appropriate because of market conditions;
o Portfolio Managers must effect the transactions at different prices, making aggregation unfeasible;
o The order instructions are different between Portfolio Managers (e.g., limit orders vs. non-limit orders, passive "dark pool" trading vs. active trading instructions); and
o The order is in a different mandate or strategy and is for a de minimis amount, in which case the de minimis amount may get executed separately from another order currently being traded.
6. The Chief Compliance Officer typically reviews two trading reports on a daily basis to confirm (a) that all accounts in a single aggregated trade received the same average price, and (b) that trades are aggregated when appropriate. The CCO documents this review through (1) printouts of such trading reports when issues were present and (2) a log of the days on which there were no issues.
TRADING PROCEDURES -- ALLOCATION OF TRADES
1. Prior to execution, ClariVest shall formulate allocations except in cases when the Portfolio Managers unexpectedly learn about investment opportunities and completing such written allocations proves unreasonable. If the entire order is filled, Clients shall receive their portion of the allocation specified on the initial allocation.
2. All allocations shall be made prior to the close of business on trade date.
3. In the event that an error is made in an allocation, the allocation shall be corrected in the Charles River system which creates an audit trail.
4. In the event an order is "partially filled", the allocation shall be made in the best interests of all the Clients in the order, taking into account all relevant factors, including, but not limited to, the size of each Client's allocation, odd lots, price movement effects on cash requirements, Clients' liquidity needs and previous allocations. Normally, ClariVest seeks to ensure that accounts will get a pro-rata allocation based on the initial allocation.
5. When ClariVest transacts in IPOs or secondary public offerings for advisory accounts, ClariVest takes into account cash availability and need, eligibility, suitability, investment objectives and guidelines and other factors deemed appropriate in making investment allocation decisions. The Portfolio Managers are required to obtain pre-approval from the CCO before participating in an IPO or secondary public offering on behalf of client accounts. The CCO will review the proposed transaction to ensure that it complies with client investment guidelines and restrictions, especially Investment Company restrictions.
6. When the market price of a security moves substantially, the allocation of an order shall be made on a pro-rata basis in the same proportion as the original aggregated order. Whenever reasonable business judgment is used and a non-pro rata allocation is made, the reasons for the non-pro rata allocation shall be reported to the CCO. Whenever a pro-rata allocation may not be reasonable (such as Clients receiving odd lots or de minimis amounts) the individual placing the order may reallocate the order on a modified random basis without reporting the reallocation to the CCO.
7. In the event that an unexpected investment opportunity makes completing a written allocation impractical, the written allocations shall be completed after execution of the trade. The size of the order shall be based on a rough estimate of what Portfolio Managers expect to be appropriate for the Clients. Every effort will then be made to allocate the securities as soon as possible. Written allocations shall be completed no later than the close of business on the trade date.
8. The Chief Compliance Officer typically reviews a trading report on a
daily basis to confirm that accounts receive their pro-rata allocation
based on the initial allocation. The CCO documents this review through
(1) printouts of such trading report when issues were present and (2)
a log of the days on which there were no issues.
TRADING PROCEDURES - CROSS TRADES
ClariVest does not utilize cross transactions when managing Client accounts. All trades are placed in the open market.
SECURITY SHORT SALES
Rule 105 of Regulation M prohibits covering short sales with stock that is purchased in a follow-on public offering ("offering stock"). The prohibition covers any short sales that are made from five days before the pricing of the offering stock until the time of pricing. Rule 105 was implemented to prohibit short sellers from artificially depressing the offering price of offering stock and from engaging in transactions in which they do not assume any real market risk.
Rule 105 prohibits the following:
1. Covering a short position that is taken within five days of the pricing of an offering stock with such offering stock;
2. Covering the short position with the offering stock at a later date by instructing the prime broker to collapse a "box" in which any part of the short position is taken within five days of pricing and any part of the long position is acquired in the follow-on offering; and
3. Subsequently covering the short position with the offering stock by "crossing" an order to sell the offering stock with an order to cover the short position through the same broker-dealer.
Rule 105 does not prohibit creating a box with a short position that is created within five days of pricing and a long position that is acquired in the offering. However, the position must be unwound in the open market and market risk must be taken when the position is unwound.
With respect to short sales:
1. ClariVest may execute a short position in Client accounts within five days of the pricing of the offering stock. However, in order to avoid the appearance of interfering with the pricing of the offering stock, ClariVest may not take a short position within two hours of market close on the day that the offering stock is priced.
2. All instructions to collapse a box must be pre-approved by the CCO to ensure that such instruction does not violate Rule 105.
3. ClariVest requires that the order to unwind one side of a box (E.G., the order to sell the long position or the order to cover the short position) must be completely worked before the order to unwind the other side of the box can be placed. This ensures that true market risk is taken and that ClariVest is not on both sides of the trade.
4. ClariVest cannot partake in any type of "sham transaction" that is designed to evade the requirements of Rule 105. Examples of sham transactions include: 1. effecting short sales during the pre-pricing restricted period and covering the shorts using offering securities obtained through an arrangement with a third party who acquires the securities in the primary offering; and 2. effecting pre-pricing short sales during the Rule 105 restricted period, receiving offering shares, selling the offering shares into the open market, and then contemporaneously or nearly contemporaneously purchasing an equivalent number of the same class of shares as the offering shares to cover the short sales.
MISCELLANEOUS TRADE RESTRICTION ISSUES
ClariVest is aware that certain federal and state laws may limit its ability to acquire controlling interests in companies in highly regulated industries. Generally speaking, ClariVest is limited to investing in no more than five (5) percent of the following issuers' outstanding voting securities:
o Public utility companies or public utility holding companies:
o Bank holding companies;
o Owners of broadcast licenses, airlines, railroads, water carriers and trucking concerns;
o Casinos and gaming businesses;
o Insurance companies; and
o Public service companies (such as those providing gas, electric or telephone services).
ClariVest's CCO has imposed a rule through the Charles River Investment Management System compliance engine that prohibits the group of ClariVest's accounts from investing in more than five (5) percent of any issuer.
MANIPULATIVE TRADING PRACTICES
Section 9(a)(2) of the 34 Act makes it unlawful for any person, acting alone or with others, to effect a series of transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of the security, for the purpose of inducing the purchase or sale of such security by others. Rule 10b-5 under the 34 Act has been interpreted to proscribe the same type of trading practices in OTC securities.
These prohibitions against manipulative trading practices mean that no Employee
may engage in trading or apparent trading activity in a security for the
purpose of: (a) inducing the purchase or sale of such security by others; or
(b) causing the price of a security to move up or down, and then taking
advantage of such price movement by buying or selling the security at the
"artificial" price.
Price changes resulting from supply and demand are not prohibited. Therefore, buy or sell programs may cause security prices to rise or fall without violating securities laws. Section 9(a)(2) prohibits activity that has the purpose of affecting the price of a security artificially through trading or apparent trading, not otherwise lawful activity that has the incidental result of changing the supply or demand or the intrinsic value of a security.
ORDER DOCUMENTATION PROCEDURES
A. Order Memoranda
Portfolio Managers must transmit orders by placing them through the Charles River Investment Management System, via the FIX network, or via broker-neutral execution management systems such as "Newport", unless otherwise approved by the CCO or COO. Order tickets created and maintained in CRD contain the following information (See Rule 204-2(a)(3) under the Advisers Act):
o the terms and conditions of the order, instruction, modification, or cancellation;
o the person connected with the adviser who recommended the transaction to the Client;
o the person connected with the adviser who placed the order;
o the Client account for which the transaction was entered;
o the date for which the transaction was entered;
o the bank, broker or dealer by or through whom the transaction was executed; and
o how the trade is to be allocated among Clients.
Orders entered by ClariVest's Portfolio Managers are typically done so pursuant to ClariVest's exercise of discretionary power, so the order memoranda do not include a specific statement to that effect. However, when ClariVest enters trades for a non-discretionary account, a phrase such as "non-discretionary" is added to the account name to identify the account as non-discretionary on the order tickets.
All order tickets must be stored, either in hard copy or electronic form, in accordance with the record-keeping requirements of the Advisers Act. ClariVest currently utilizes the functionality of Charles River Investment Management System to ensure that all "order histories" contain the information above. If ClariVest allows a trade to be placed outside the Charles River system, it will be placed directly with the broker-dealer via email or phone and documentation will be prepared that will have all of the information required by Rule 204-2(a)(3).
B. Allocation Statements
ClariVest shall maintain copies of order histories (in hard copy or electronic form) that reflect order allocations, which are created by the Portfolio Managers in the CRD system.
C. Trade Confirmations
In certain cases broker-dealers are required to disclose specified information in writing to customers at or before completion of a transaction in a security, including listed and OTC options. ClariVest will strive to ensure that each domestic transaction entered into on behalf of an advisory Client is confirmed in writing between ClariVest (or its designee) and the executing broker-dealer by means of a trade confirmation or through other electronic means which include all details of the trade. These confirmations or other electronic communications include, among other things: (a) the security, price, quantity, trade date and settlement date, commission, tax or other settlement charges; and (b) specify whether the Client account "bought" or "sold".
With respect to international transactions, trade details are confirmed between ClariVest (or its designee), the Client's custodian/sub-custodian and/or the executed broker-dealer (as appropriate).
TRADING PROCEDURES -- BACK OFFICE
1. Once a trade has been executed it is confirmed in Charles River and added to our inventory.
2. Portfolios are distributed daily to ensure that the portfolio is up to date and correct.
3. At the end of the day, trades are communicated to Mellon, and Mellon confirms with the broker-dealer as appropriate for symbol/security identifier, quantity, price and commissions on our behalf.
4. Any deviation ("breaks") from trade to settlement information are identified in exception reports. Any "breaks" must be corrected as soon as practicable. The trade breaks must be corrected and posted back into the system with the proper amounts and quantities. Operations personnel review trading information for missing trades and test for reasonableness and complete the trade file.
5. As an additional control measure, we compare Mellon and CRD holdings to test the integrity of the numbers to identify potential trade errors.
6. The Portfolio Management Team periodically completes a top-level review of current inventory and trading activity and is the ultimate decision-maker with respect to trade issues.
RECONCILIATION PROCEDURES
Mellon reconciles Client accounts with Client custodians on a monthly basis. When the Client's custodian has SWIFT communication capabilities, cash and securities are electronically reconciled on a daily basis.
SOFT DOLLAR COMMITMENTS/ARRANGEMENTS
ClariVest will not enter into any formal "soft dollar commitments/arrangements", written or verbal, explicit or implied, with any broker-dealers . A soft dollar commitment/arrangement is viewed by ClariVest as a commitment, understanding or agreement to pay increased commissions, or direct trades to a broker-dealer, in exchange for the receipt of research. ClariVest may, however, effect transactions for clients with broker-dealers who provide ClariVest with research or brokerage products and services, providing lawful and appropriate assistance to the Firm in the performance of its investment decision-making responsibilities. Research and brokerage products and services received from broker-dealers are supplemental to ClariVest's own research efforts. ClariVest does not separately compensate broker-dealers with soft dollars for such products and services. As noted above, Portfolio Managers consider the full range and quality of a broker-dealer's services when placing brokerage to ensure that transactions are the most favorable under the circumstances. As discussed below under "Best Execution Committee", ClariVest has a process in place to ensure that we are seeking to obtain best execution for our clients.
Additionally, except as set forth in the gifts and entertainment policy, ClariVest will not accept from a broker-dealer at no cost (or reduced cost) any item which would be ineligible under Section 28(e) ("Non-28(e) Items"), unless such item is paid for out of pocket (known as "hard dollars"). As described below, ClariVest maintains a process to ensure that all items received from a broker-dealer that are not paid for with hard dollars are Section 28(e) eligible. With respect to items paid for with hard dollars, the CCO in cooperation with the Best Execution Committee will seek to ensure that hard dollars paid are not reduced or otherwise affected by the trading relationship with such broker-dealer, and will maintain documentation of this assessment, which may include minutes of meetings reflecting oversight, confirmation from the broker-dealer or a comparison of similar services offered by others.
SECTION 28(E) ELIGIBILITY REVIEW
The CCO, with input from the other members of the Best Execution Committee,
maintains a Soft Dollar Review matrix listing broker-dealers through which
ClariVest trades (the "Matrix"). The Matrix summarizes the research and
brokerage services received from each broker-dealer and reflects ClariVest's
assessments as to whether (1) the research or brokerage is Section 28(e)
eligible, (2) the research or brokerage actually provides lawful assistance in
investment decision-making, and (3) ClariVest has made a good faith
determination that the amount of commissions paid is reasonable in relation to
the value of the services provided. Research and brokerage products and services
will be broken into four general categories (1) generic research (i.e.,
non-ClariVest specific research produced by broker-dealers) regarding
securities, issuers, industries, economic factors and trends, portfolio strategy
or the performance of accounts, (2) brokerage services, (3) ClariVest sourced
requests for research and (4) any other item not covered in 1 through 3. The CCO
will review and approve (or reject) the receipt of any item in categories (3) or
(4) above in order to confirm Section 28(e) eligibility. On an ongoing basis,
the CCO will update the Soft Dollar Review matrix to reflect any changes needed
after the discussions held as part of the Best Execution Committee meetings.
If ClariVest will obtain products or services that are not used exclusively in ClariVest's investment decision-making process ("mixed-use items"), prior to receiving any such mixed-use item the CCO will work with the appropriate members of the portfolio management team to document ClariVest's reasonable allocation of the mixed use item, and will pay hard dollars for the Non-28(e) Items.
CERTIFICATIONS
In order to ensure compliance with these policies, each Portfolio Manager and Investment Analyst will attest quarterly that (1) he/she has not entered into any written or verbal, explicit or implied, arrangement with any broker-dealer to pay increased commissions, or direct trades, to a broker-dealer in exchange for the receipt of research and (2) he/she is not receiving any research or brokerage product or service from any broker-dealer that has not been approved by the CCO (where approval is required) as set forth above.
Additionally, the Best Execution Committee will review the receipt of these goods and services as described below under "Best Execution Committee."
DISCLOSURE
ClariVest will disclose its soft dollar policies and procedures in Part 2 of Form ADV.
BEST EXECUTION
As an investment adviser, ClariVest has a fiduciary relationship to its Clients. One of the specific duties that flows from this relationship is a duty to seek the best price and execution of client securities transactions when the adviser is in a position to direct brokerage transactions.(10) While not defined by statute or regulation, "best execution" generally means the execution of Client trades at a cost that is the most favorable under the circumstances. The determining factor is whether a transaction represents the best overall execution for the Client and not whether the lowest possible commission cost is obtained. As described above, ClariVest considers the full range and quality of the broker-dealer's service in selecting broker-dealers to meet best execution obligations, and may not pay the lowest commission rate available.
It is ClariVest's policy to always seek best execution for Client securities transactions. ClariVest maintains a process for ensuring that (1) it is seeking to execute client transactions under the most favorable terms given the circumstances and (2) ClariVest has made a good faith determination that the commissions paid are reasonable in relation to the value of the services provided. ClariVest shall evaluate its efforts to seek to obtain best execution on Client trades through:
o initial review of individual broker-dealers;
o contemporaneous reviews of trading by ClariVest's Portfolio Managers; and
o quarterly Best Execution Committee meetings. The Best Execution Committee meetings shall include the Chief Investments Officer, CCO and representatives from the Portfolio Management and Operations teams.
These policies and procedures, along with those set forth above under "Soft Dollar Arrangements/Commitments," generally will be tested on an annual basis by a third party (for example, as part of a mock SEC audit).
CONTEMPORANEOUS REVIEWS
The Portfolio Managers review trades completed by ClariVest for purposes of ensuring best execution is being sought considering all factors affecting the trade. Unexpected deviations in price, commission rate, market impact, execution speed, or other aspects of execution quality will be discussed at the Best Execution Committee meetings.
BEST EXECUTION COMMITTEE
In order to assist the firm in seeking best execution, the Best Execution Committee has completed a rating scheme for each broker-dealer that evaluates qualitative and quantitative factors, including (1) commission costs, (2) availability of liquidity in certain asset classes, (3) the degree of specialization of the broker-dealer in certain markets or securities; (4) operational skill (such as the execution efficiency, settlement capability, and financial condition of the firm), (5) responsiveness to traders, including the trader's assessment of whether and how closely the broker-dealer likely will follow the trader's instructions, (6) short term performance (7) long term performance, and (8) availability and quality of electronic communications networks (ECNs), including algorithmic trading, crossing networks, direct market access and program trading, for traders who prefer those methods. Based on these ratings, broker-dealers have been broken down into tiers (the "Execution Tiers"), provided that a broker-dealer's Execution Tier may be revised based on a qualitative overlay. Annually, the Best Execution Committee will review this assessment and update it as necessary (in addition to performing quarterly reviews as set forth in Attachment A).
In order to ensure compliance with the policy regarding Soft Dollar Arrangements/Commitments as set forth above, the Portfolio Managers and Analysts have ranked the broker-dealers into tiers based on the research received from them (the "Research Tiers") considering research provided and quality of the investment ideas. Annually, the Best Execution Committee will review this assessment and update it as necessary (in addition to performing quarterly reviews as set forth in Attachment A).
These Execution Tiers and Research Tiers will be used to assist the Best Execution Committee's analysis of ClariVest's brokerage practices for possible anomalies, potential conflicts or trends.
Quarterly, the Best Execution Committee will review trading and shall follow the guidance provided in Attachment A as an agenda to its meetings. A Portfolio Manager or the CCO will prepare minutes from the Best Execution Committee meeting to document the firm's review and assessment.
BROKERAGE ALLOCATION REPORT FOR REGISTERED INVESTMENT COMPANIES
Rule 31a-1(b)(9) under the IC Act requires that each fund maintain a record for each FISCAL QUARTER, which shall be completed within 10 days after the end of such quarter, showing specifically the basis or bases upon which the allocation of orders for the purchase and sale of portfolio securities to named broker-dealers or dealers and the division of brokerage commissions or other compensation on such orders among named persons were made during such quarter. The record shall indicate the consideration given to:
(i) sales of shares of the investment company by brokers or dealers,
(ii) the supplying of services or benefits by brokers or dealers to the investment company, its investment adviser or principal underwriter, or any persons affiliated therewith, and
(iii) any other considerations other than the technical qualifications of the brokers and dealers as such.
The record is also required to show the nature of the services or benefits made available, and describe in detail the application of any general or specific formula or other determinant used in arriving at such allocation of purchase and sale orders and such division of brokerage commissions or other compensation.
The record shall also include the identities of the persons responsible for the determination of such allocation and the division of brokerage commissions or other compensation, such as to the fund's portfolio manager and/or traders.
Upon request, ClariVest will produce and forward a brokerage allocation report to the Board of Trustees or other representatives of any fund which is a Client.
REPORTING TO THE BOARD OF TRUSTEES/DIRECTORS OF A U.S. REGISTERED INVESTMENT COMPANY
Investment company trustees have a responsibility, under both Section 15(c) and
Section 36 of the IC Act, to request and review information regarding brokerage
allocation practices. Accordingly, upon request ClariVest will provide any
Client that is a U.S. registered investment company with the following
information to assist the Board in evaluating the impact of brokerage
allocation practices on the U.S. registered investment company:
o portfolio turnover rates;
o a list of broker-dealers used and total commission dollars paid to each broker-dealer;
o aggregate average commission per share and average commission rate per share by broker-dealer; and
o written attestation from ClariVest that all trades of a U.S. registered investment company received best execution and that soft dollar arrangements or commitments were not used.
ClariVest will also provide any other information that may be reasonably requested by the Board of Trustees in connection with its brokerage allocation practices.
U.S. REGISTERED INVESTMENT COMPANY TRADING ISSUES
When sub-advising a U.S. registered investment company, ClariVest will be mindful of certain regulations pertaining to executing transactions on behalf of the investment company. Below is a summary of each relevant regulation of the IC Act:
1. SECTION 17(a)(7) prohibits a registered investment company from buying securities from, or selling securities to, an affiliate of the registered investment company, or an affiliate of an affiliate, absent compliance with Rule 17a-7. Rule 17a-7 governs purchase and sale transactions between a registered investment company and any persons who may be deemed to be affiliated with the registered investment company including another registered investment company or other accounts managed by the adviser of the registered investment company. ClariVest will abide by the registered investment company's 17a-7 policy and procedures.
2. SECTION 17(E) AND RULE 17e-1 govern the payment of brokerage commissions to affiliated persons of a registered investment company. Together, these provisions require that the brokerage commission or other fee paid by a registered investment company to an affiliated broker-dealer be reasonable and fair compared to the commission or other fee that other broker-dealers would charge in comparable transactions involving similar securities purchased at the same time. ClariVest will abide by the registered investment company's 17e-1 policy and procedures.
3. SECTION 10(f) prohibits a registered investment company from acquiring a security during a public offering (either a primary or a secondary offering) if an affiliate of the registered investment company is a member of the underwriting syndicate. RULE 10f-3 provides an exemption from this prohibition and establishes the conditions under which a registered investment company may purchase securities from an underwriting syndicate in which a broker-dealer affiliated with an investment adviser or sub-adviser of the registered investment company, or any affiliate thereof, participates as a manager or co-manager of the underwriting or as a member of the underwriting syndicate (i.e., principal underwriter). ClariVest will abide by the registered investment company's 10f policy and procedures.
4. SECTION 12(d)(3) prohibits a registered investment company from purchasing or otherwise acquiring any security issued by, or other interest in, broker-dealers , underwriters, and investment advisers. The SEC interprets this section broadly to prohibit the acquisition of interests in these entities either directly or indirectly through ownership of controlled or affiliated companies. RULE 12d3-1 provides an exemption from Section 12(d)(3) provided certain conditions are satisfied. ClariVest will abide by the registered investment company's 12d3 policy and procedures.
5. SECTION 12(d)(1)(A) prohibits a registered investment company (and companies or funds it controls) from:
o Acquiring more than three percent of another registered investment company's voting securities;
o Investing more than five percent of its total assets in any one acquired registered investment company; or
o Investing more than ten percent of its total assets in all acquired registered investment companies.
Section 12(d)(1)(B) prohibits a registered open-end investment company from selling securities to any fund (including unregistered funds) if, after the sale, the acquiring fund would:
o Together with companies and funds it controls, own more than three percent of the acquired fund's voting securities; or
o Together with other funds (and companies they control) own more than ten percent of the acquired fund's voting securities.
ClariVest will abide by the registered investment company's 12(d)(1) policy and procedures.
RESPONSIBILITY
The Portfolio Managers, Operations Team and CCO are responsible for administering the foregoing policies and procedures, as set forth above.
Attachment A
Best Execution Committee Agenda
The Best Execution Committee shall meet quarterly to review trading, including transaction costs, flows to broker-dealers, and conflicts of interest, and may consider the items outlined below, as applicable:
1. Analyze transaction cost reports to evaluate how well broker-dealers are trading for us, and to be aware of overall firm level execution costs.
2. Discuss any trade errors by broker-dealers.
3. Review average commission rates paid to broker-dealers and note any outliers and reasons for being "outside the norm".
4. Discuss any new broker-dealers added to the approved broker-dealer list.
5. Discuss any significant developments requiring interim changes to be made to the ratings/Execution Tiers assigned to broker-dealers. This will include adding in ranks/tiers for new broker-dealers as appropriate.
6. Discuss any significant developments requiring interim changes to be made to the Research Tiers. This will include adding in tiers for new broker-dealers as appropriate.
7. Review the Execution Tiers, Research Tiers and order flow to determine if there any anomalies requiring additional follow up.
8. Review the reasonableness of the Soft Dollar Review matrix, relative to the benefits associated with the products and services obtained.
9. Discuss any mixed use items to confirm the reasonableness of the allocation for the Non-28(e) Items.
10. Discuss any reportable gifts received from broker-dealers (or any known exceptions to gift policies) and assess potential conflicts of interest in connection with the broker-dealer selection process.
11. Discuss any services that ClariVest pays hard dollars for and any potential affects the receipt of such services may have had on the broker-dealer selection process.
12. Discuss any other conflicts of interest and effects on ClariVest's selection of broker-dealers.
13. Based on a consideration of all of the foregoing factors, discuss whether the commissions paid to broker-dealers are reasonable in light of the services received.
14. Based on a consideration of all of the foregoing factors, discuss whether costs paid appear to be the most favorable under the circumstances, or if any broker-dealers should be removed from the approved broker-dealer list due to failure to provide best execution.
15. Additional items may be discussed, as necessary.
The CCO will maintain copies of the materials used by the Best Execution Committee to form the basis of its conclusions.
ISSUE
The Advisers Act does not specifically address trade error corrections, and the SEC staff has provided only limited guidance regarding correction of trade errors.
1. In a letter to Charles Lerner (pub. avail. October 25, 1988), the SEC staff stated that an investment adviser:
o Should bear any loss associated with correcting a trade error in a client account; and
o Should not consider a broker-dealer's error correction functions as providing "lawful and appropriate assistance" to the investment manager in the carrying out of his/her responsibilities to advised accounts. Nor can an "error correction" trade be considered "incidental" to the initial trade for the client; it is an entirely separate transaction effected to correct the manager's error, not to benefit the advised account. Thus, error correction functions would not constitute research or brokerage services for purposes of Section 28(e).
The SEC stated in the Lerner Letter, the absorption of trade error losses by a broker-dealer relieves the adviser of the responsibility and cost of the error it would otherwise have to bear. The Department of Labor has taken the position that the receipt by an investment manager of such consideration from a party (i.e., the broker) dealing with an Employee benefit plan client is a violation of Section 406(b)(3) of ERISA.(11) Under the Advisers Act (which covers relationships with all Clients), the receipt by the adviser of a benefit not protected by Section 28(e) could be deemed a violation of the antifraud provisions of Section 206, as well as the adviser's fiduciary duty.
2. In Advisers Act Release No. 1318 (pub. avail. June 30, 1992), the SEC stated that the investment adviser willfully aided and abetted the violation of Section 206(1) and (2) of the Advisers Act by using one client's account to correct an error made in another client's account.
3. In Adviser Act Release No. 2374 (pub. avail. April 6, 2005), the SEC alleged that traders at an investment adviser sold the same position twice, creating an inadvertent short position. According to the SEC, rather than have the investment adviser absorb the loss created by the error, the CEO and Chairman of the Board improperly took steps that led to the allocation of the loss to several client hedge fund accounts. Specifically, the SEC alleged that the CEO instructed personnel to prepare backdated trade tickets for the erroneous trade to give the impression that the Portfolio Managers had instructed the trading desk to sell the stock short.
The firm allegedly did not have any error correction procedures. The SEC's complaint did not indicate whether the hedge funds' offering documents disclosed whether or not the funds would indemnify the investment adviser for trading errors. The SEC went on to state that by making its clients pay for its trade error, the adviser willfully violated Sections 206(1) and 206(2) of the Advisers Act.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered numerous risks associated with committing trade errors in Client accounts. This analysis includes risks such as:
o Trade errors not being identified and corrected in a timely manner.
o Trade errors not being reported to management, including the CCO.
o Management not carefully reviewing each error to determine if procedures may be implemented to prevent future similar errors.
o Clients bearing the loss of trade errors.
o The number of trade errors being excessive.
o Documentation of trade errors and their resolution not being adequately maintained.
ClariVest has established the following guidelines to effectuate and monitor trade errors.
POLICY
It is the policy of ClariVest that the utmost care be taken in making and
implementing investment decisions of behalf of Client accounts. To the extent
that any errors occur, they are to be (a) corrected as soon as practicable and
in such a manner that the Client incurs no loss, (b) reported to the CCO, and
(c) scrutinized carefully with a view toward implementing procedures to prevent
or reduce future errors, if necessary.
Errors may occur either in the (a) investment decision-making process (e.g., a decision may be to purchase a security or an amount of a security that is inconsistent with a Client's investment restrictions) or (b) trading process (e.g., a buy order may be executed as a sell, or vice versa, or a security other than that which the Portfolio Manager ordered may be purchased or sold). For purposes of this policy, errors in both investment decision-making and trading are referred to as trade errors. A list of common trade errors is included in Attachment A.
Because ClariVest manages accounts on a primarily discretionary basis, most trade errors will be caused by ClariVest or an executing broker-dealer. As mentioned above, in all cases of trade errors, it is ClariVest's policy that a Client account be "made whole." Thus, trades are adjusted as needed in order to put the Client in such a position as if the error had never occurred. Unrelated trade errors generally will not be netted, although this will be evaluated on a case by case basis in conjunction with the affected client.
Trade errors must be corrected at no cost to the Client. Moreover, ClariVest will not use "soft dollars" to correct trade errors. ClariVest also will not use future brokerage to compensate a broker-dealer either directly or indirectly for absorbing the cost of correcting an error in an earlier transaction.
ClariVest attempts to minimize trade errors by promptly reconciling confirmations with order tickets and intended orders, and by reviewing past trade errors to understand the internal control breakdown that caused the errors.
TRADE ERROR PROCEDURES
1. IDENTIFICATION OF TRADE ERROR
a) Portfolio Managers and the Operations Manager will review each transaction to detect possible trade errors. Upon detection of a possible error, the Portfolio Manager/Operation Manager will research the error, cause and the party(ies) responsible for the error and immediately notify the CCO and/or CEO.
b) Trade errors must be corrected as soon after discovery as reasonably practical, consistent with the orderly disposition (and/or acquisition, as applicable) of the securities in question. If it is determined that more than two days are needed to correct an error, the approval of the CCO to delay resolution of the error must be obtained.
2. CORRECTING A TRADE ERROR
a) A trade error in one Client's account may be corrected through a reallocation of securities to various other accounts participating in the transaction prior to settlement, or alternatively, may be corrected by other transfer involving a post-settlement adjustment involving a purchase or sale between the account in which the error occurred and another Client(s) account(s). Such reallocation or other transfer must represent a legitimate investment decision on behalf of each account involved, and then is permissible only if the reallocation or other transfer is done without loss to the transferee account.(12) Final allocations must be documented to ensure that the allocations represent legitimate investment decisions for each of the accounts involved. In the case of registered investment companies, a reallocation may be effected to correct an error only if it would not change any net asset value of the fund calculated between the commission of the error and the reallocation. Regulatory restrictions may limit post-settlement adjustments through purchases and sales among certain types of accounts. In no event may such a post-settlement adjustment involve any account subject to ERISA
b) In the case of a trade error caused by ClariVest that is discovered prior to the close of trading on the day after the trade date but prior to settlement, the Portfolio Manager/trader may seek cancellation of the trade by the broker-dealer if it is documented (e.g., by a printout from a trade screen or such other evidence as the CCO may require) that the price at which the trade was originally placed is not outside the spread quoted for the security at the time of cancellation. In the case of registered investment companies, trade cancellations may be effected to correct an error only if it would not change any net asset value of the fund calculated between the commission of the error and the cancellation. Any such error shall be reported as a trade error notwithstanding cancellation of the trade.
c) ClariVest will maintain all documentation to form an "audit trail" of a trading error to substantiate the course of action and kept in a trading error file. Such documentation may include account statements, trade confirmations, internal memoranda and reimbursement checks.
d) ClariVest's Portfolio Manager/Operations Manager must complete the Trade Error Reporting and Resolution Form in Attachment C. Errors requiring payment by ClariVest of $2,000 or less require review by the CCO; while errors requiring payment by ClariVest in excess of $2,000 require review by the CEO or COO.
3) In the event that the trade error results in a gain to the client account, the client account will be permitted to retain the gain. However, if the client refuses to accept the gain (if, for example, the trade error was a violation of a social restriction and the client refuses the gain), then any amounts sent to ClariVest will be donated to the American Red Cross or another appropriate charitable organization.
3. PAYMENT FOR TRADE ERROR
a) Broker-dealers may not be permitted to assume responsibility for trade error losses caused by ClariVest, but they may be permitted to assume responsibility for trade error losses caused by them. Nor may there be any reciprocal arrangements with respect to the trade in question or any other trade to encourage the broker-dealer to assume responsibility for such losses.
b) If ClariVest is wholly at fault, the broker-dealer may retain any profit when the trade is reversed. If the trade is at a loss, ClariVest will reimburse the broker-dealer for that loss, and ClariVest will book the charges against its own operating expenses. The Portfolio Manager/Operation Manager should immediately cover the trades that caused the error and confirm the covering of the trades that day with the broker-dealer.
c) In the case of a dispute between ClariVest and the broker-dealer in which the Operations Manager/Portfolio Manager believes in good faith that he or she was not responsible for the error and which can be adequately documented to demonstrate that a dispute in fact exists, ClariVest may consent in the broker-dealer's assuming responsibility for part or all of the error. Any disputed error that is resolved in this manner shall be documented.
d) In the event that ClariVest elects to reimburse a Client for a trade which the Client believes is an error (despite the fact that ClariVest is disputing whether the trade was an error and whether ClariVest is financially responsible for the trade), prior to disbursing funds ClariVest shall obtain the Client's written approval to resolve the trade in the proposed manner. A sample approval letter which may be used is included as Attachment B.
4. BROKER-DEALERS' TREATMENT OF TRADE ERRORS
Notwithstanding this Trading Error policy, the broker-dealers/custodians through which ClariVest places Client trades maintain certain policies with respect to trade errors committed by investment advisers through which they do business. Accordingly, the policies may affect the corrective action taken by ClariVest for trade/investment errors. However, as noted above, in no case will ClariVest's advisory Clients pay for trade errors and in no case will ClariVest allocate brokerage based on a broker-dealer's previous absorption of losses on trade errors.
TRADE BREAK PROCEDURES
The majority of instances in which ClariVest will correct/amend certain trades result from reconciliation errors between ClariVest's broker-dealers and custodians. ClariVest monitors such "trade breaks" in the manner discussed below:
1. Daily trades are sent to Mellon to update its books and records, and reconcile any trade breaks.
2. Trade break reports are sent daily to ClariVest. A "null" report is sent if there are no trade issues.
3. ClariVest's operations team reviews all trade breaks.
4. After review, ClariVest's operations team contacts Mellon to provide guidance as to how to remedy the trade breaks. Mellon will then contact the executing broker-dealer(s) and, if necessary, will recommend ClariVest contact the executing broker-dealer.
5. If a trade break continues unresolved for several days, ClariVest operations will contact the executing broker-dealer in order to resolve.
6. Any trade breaks that are a result of incorrect information provided by ClariVest to Mellon must be corrected in writing.
RESPONSIBILITY
The CCO will review error trades when they occur in conjunction with the Portfolio Manager that directed and placed the trade.
The Operations Manager is responsible for discovering an unsettled trade during preparation of the daily or monthly reconciliations, and the back-office will notify the Client's custodian to assist in completing the settlement. Problems involving trade fails are brought to the attention of the Portfolio Manager responsible for the trade by the Operations Manager, if necessary, to resolve fails.
ATTACHMENT A
POSSIBLE TRADE ERRORS
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TYPES OF ERRORS TO WHICH ERROR EXAMPLE
CORRECTION PROCEDURES APPLY
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Purchase/sale of securities not legally Buy foreign securities for a municipal account statutorily
authorized for an account barred from owning such securities
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Purchase/sale of securities not authorized by Buy start-up, private placement securities for an account
the account's investment objectives whose investment objectives preclude such investments
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Purchase/sale of securities not authorized by Buy tobacco company securities when management
the management contract contract precludes such purchases
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Purchase/sale of wrong or unintended number Buy 2,000 shares when intended to buy 20,000 shares
of securities
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Purchase/sale of wrong or unintended Buy Transcontinental Realty Investors, Inc., whose stock
securities symbol was TCI, while intending to buy Tele-
Communications, Inc., whose stock symbol was TCOMA
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Purchase/sale of securities for wrong or Buy shares for account X when the plan had been to buy the
unintended account same shares for account Y
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Allocation of wrong or unintended number of Buy 20,000 shares and allocate 5,000 to each of five
securities accounts
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Allocation of securities to wrong or Buy 20,000 shares and allocate 5,000 to X account, which
unintended account has insufficient funds to cover the purchase
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Failure to purchase/sell securities as intended Hold, rather than sell, securities in a Client account
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Failure to follow specific Client directives to Client directs that a particular investment be liquidated on
purchase/sell/hold/wait to purchase securities Dec. 31, but adviser fails to execute this liquidation until
January 3
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ATTACHMENT B
TRADE ERROR RELEASE FORM
Date
VIA CERTIFIED MAIL
Client Name
Address 1
Address 2
City, State Zip Code
Dear client:
In response to the Security trade in your account taking place on Date, we will
pay you the sum of $X,XXX. Payment of the foregoing sum does not constitute an
admission or acknowledgment of any wrongdoing. Enclosed herewith, please find a
release form. Please execute the release, have it notarized and return it to
us. Upon receipt of the release, we will forward a check to you. As set forth
in the release, it will not be effective until you have received our check. If
you have any questions regarding this matter, please feel free to contact me at
(858) 480-2440.
Sincerely,
Tiffany Ayres
Chief Compliance Officer
ClariVest Asset Management LLC
TO ALL TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT
___________________ as RELEASOR in consideration of the sum of $___________ to be received from ClariVest Asset Management LLC ("RELEASEE") hereby releases and discharges the RELEASEE, RELEASEE'S directors, officers, Employees, successors and assigns from all actions, causes of citation, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever, in law, admiralty or equity, against such parties which, the RELEASOR, RELEASOR'S heirs, executors, administrators, successors and assigns ever had, have or hereafter can, shall or may, have for, upon or by reason of any matter, cause or thing whatsoever relating to the trade error described in the letter from RELEASEE dated as of [ ________ ]
Whenever the text hereof requires, the use of singular number shall include the appropriate plural number as the text of the within instrument may require.
This RELEASE may not be changed orally.
This RELEASE shall only be effective upon receipt of a check by RELEASOR from RELEASEE in the amount of $___________.
IN WITNESS WHEREOF, the RELEASOR has hereunto set RELEASOR'S hand and seal on this ____ day of ________ in the year 20XX.
In presence of
State of:
County of:
On this _____ day of __________, in the year 20XX, before me personally appeared _________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the within instrument.
Notary Public
ATTACHMENT C
TRADE ERROR REPORTING AND RESOLUTION FORM
CLIENT(S) INVOLVED:
CLIENT CUSTODIAN ACCOUNT NUMBER
TRANSACTION DATE:
SECURITIES INVOLVED:
CLARIVEST PERSONNEL INVOLVED:
TOTAL AMOUNT OF GAIN/LOSS: $
REIMBURSED BY CLARIVEST: $
REIMBURSED BY OTHERS: $
MANAGEMENT ACKNOWLEDGEMENT:_________________________________________________
BACKUP DOCUMENTATION MAINTAINED:______________________________________________
DATE:_____________________________
ISSUE
ClariVest investment personnel are responsible for evaluating securities for investment, reviewing Clients' portfolios for which they are primary or back-up managers, making security selection decisions and ensuring that transactions are properly executed. The intent of this policy is to ensure that all portfolios are reviewed and being managed according to Clients' investment objectives and pursuant to ClariVest's stated investment strategies and styles.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered numerous risks associated with the management of Client accounts. This analysis includes risks such as:
o Client portfolios being managed in ways that deviate from Client mandates, potentially exposing Client assets to a higher risk of loss.
o ClariVest conducts trading that violates its clients' investment limitations and/or restrictions.
o Portfolio Managers making higher risk investments in an attempt to make up earlier losses incurred in managing Clients' accounts.
o The CCO not being knowledgeable about the management of Client accounts.
o Portfolio management staff failing to maintain documentation to substantiate their investment recommendations.
o ClariVest failing to review risks on multiple levels (portfolio and firm-wide) to understand the level of risk exposure presented by its Clients' portfolios.
o ClariVest not maintaining adequate documentation to substantiate its Clients' investment objectives and restrictions, both initially and on an ongoing basis.
o Performance-based fees are charged to non-qualified clients.
o ClariVest fails to ensure that corporate actions with respect to securities in Clients' portfolios are identified and recorded timely and accurately.
ClariVest has established the following guidelines to effectuate and monitor the investment activities in client accounts.
POLICY
The portfolio management function is a dynamic activity which considers objective and subjective factors in making investment decisions. Securities holdings and trades are reviewed on a daily basis by ClariVest's Portfolio Managers.
PROCEDURES
1. Investment personnel will monitor economic and financial news and events on a daily basis to determine the effect on securities held in Client portfolios.
2. With the assistance of the investment personnel, the Portfolio Managers compile a "universe" of companies that meet ClariVest's criteria for investment for specific investment strategies. ClariVest expects that the majority of its Client accounts following a specific strategy or benchmark will include securities from its respective universe.
3. ClariVest utilizes Charles River Development's compliance engine, which is fully integrated with our Charles River trading system. The CCO enters client guidelines/restrictions into the Charles River
compliance engine (when possible). The COO will periodically review a selection of the client account guidelines in the compliance engine to ensure that all guidelines/restrictions are appropriately addressed. The compliance engine performs both pre and post-trade compliance checks. The Charles River system requires that all trades must pass the pre-trade compliance check before such trades can be executed. If a trade triggers a violation of a client guideline in the compliance engine, only the CCO or COO can override the violation to permit the trade to go through (or, in situations where neither the CCO nor COO is able to override the violation, the Operations Manager may be granted temporary authority to conduct such overrides). In addition, ClariVest typically runs daily portfolio compliance checks to track the effects of market movements on a portfolio's compliance with client guidelines.
4. ClariVest utilizes third party as well as proprietary research to analyze and assess companies comprising its universe of potential investments. To the extent practical and possible ClariVest will maintain all research used in this process.
5. ClariVest's investment personnel hold both formal and informal meetings to discuss investment ideas, economic developments, current events, investment strategies, issues related to portfolio holdings, etc. In addition, ClariVest's personnel have developed software to assist the firm in developing optimal portfolio allocations.
6. The financial and allocation models are maintained by the Portfolio Management staff.
7. ClariVest's models seek to monitor exposures on multiple levels and the application of ClariVest's investment strategy generally results in allocations based on objective criteria suggested by the model and subjective input from the Portfolio Manager in charge of the account. ClariVest's Portfolio Managers review the managed accounts' exposure levels and other criteria on a daily basis to ensure that it is operating within allowable risk parameters.
8. ClariVest does not borrow or use leverage in its long only strategies. ClariVest may borrow and use leverage (in the form of short sales) in its long-short products, including its Market Neutral product. ClariVest reserves the right to launch future strategies that use hedging techniques including the use of debt, short sales, options swaps and other derivative transactions.
9. Each advisory Client is assigned one Portfolio Manager who is primarily responsible for the management of the account and maintenance of the relationship, and one or more backup Portfolio Manager that would perform the same functions in the absence of, or as assistance to, the primary Portfolio Manager.
10. Investment personnel and the CCO regularly review ClariVest's portfolios, specifically looking for irregularities and for unusual patterns. Performance attribution analyses will be conducted to ensure that all accounts with similar investment objectives are performing within a reasonable band of returns. Any issues will be resolved by the investment personnel with the oversight of the responsible Portfolio Manager. The CCO's compliance review in CRD includes reviewing accounts for violations resulting from market movements.
11. ClariVest, through Mellon, provides Clients with monthly appraisals that include cost basis, current market values and yields of each position.
12. ClariVest shall on an annual basis inquire into the investment objectives of Clients. Any changes will be noted in the Client's file and the appropriate adjustments will be made to the Client's investment policy. All changes to a Client's investment objective that are received via telephone by ClariVest from the Client must be confirmed as soon as practicable in writing to the Client.
13. (a) Subject to the exceptions set forth in (c) and (d) below, ClariVest has determined as a firm that the firm will not recommend that its Clients' portfolios hold the same security both long and short. In other words, if any Client portfolio holds a long position in a security, then no other Client portfolio can hold a short position in the same security, and vice versa. (b) As a general matter, the portfolio that is "trading into" the conflict will be prohibited from doing so, and the portfolio with the existing position will be permitted to retain the position. (c) In the event that a long only account is required to maintain an active position in a sector or industry (for example) within a certain variance from a benchmark's position in that sector or industry, an exception will be made to the policy set forth in (a) above where the long only account holds a security in order to remain in compliance with the stated variance but would otherwise sell that security. The portfolio manager will certify in writing that it is holding such security to remain in compliance with the stated variance and would otherwise sell such security. Upon receipt of such certification, the CCO will approve the concurrent long position and short position. (d) The firm can recommend that its clients hold an ETF or other similar security both long and short, so long as 1) the security is not held long and short within the same strategy, 2) the portfolio manager that is "trading into" the conflict obtains pre-approval from compliance, and 3) the security represents an index, industry, sector, or other segment of the market, rather than a single company. (d) ClariVest reserves the right to change this policy #13 at any time and from time to time, provided that ClariVest will provide written notice of such change to its Clients.
14. ClariVest may only charge "Incentive" or "Performance-based" advisory fees to a "qualified client" (i.e. a client that has either placed at least $1 million under ClariVest's management or a client whose net worth is at least $2 million).
15. During the account opening stage, the Operations team (typically the Operations Manager) provides the Client's custodian with the contact information for the person(s) at Mellon responsible for corporate actions, and the custodian is instructed to forward all corporate action notices to Mellon. Mellon is then notified by the custodians of any corporate actions (either voluntary or mandatory). Mellon then notifies ClariVest either as information-only or as a request for a decision where there is no standing instruction (ClariVest has a standing instruction with Mellon to take cash instead of dividend reinvestments where applicable). Mellon provides ClariVest with a deadline to respond, which is usually several days prior to the custodian's internal deadline to respond. Depending on the nature of the corporate action, the Operations team notifies the appropriate portfolio manager and asks for a decision. Mellon keeps a running tickler of all corporate actions that are pending, and notifies ClariVest where we have not responded by the deadline.
RESPONSIBILITY
ClariVest's Portfolio Managers are responsible for reviewing Client accounts subject to oversight from the CEO. Investment personnel are responsible for conducting periodic reviews of Client portfolios to detect trading irregularities and unusual positions. Investment personnel are responsible for running the required pre-trade compliance engine, and the CCO (or COO, in the CCO's absence) is responsible for running daily portfolio compliance to track the effect of market movements on compliance with client guidelines. Finally, investment personnel are expected to stay apprised of events that may have an effect on Clients' portfolios.
ISSUE
This document outlines certain aspects of the immediate and long-term contingency planning and recovery process of ClariVest. The purpose of this Contingency and Disaster Recovery Plan ("CDRP") is to provide specific guidelines ClariVest will follow in the event of a failure of any critical business capability.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered numerous risks associated with its inability to continue its operations in the event of an emergency. This analysis includes risks such as:
o ClariVest not having procedures to follow in the event of a major disaster or the failure of a critical business system.
o Employees not knowing what to do in the event of an emergency.
o Company and Client assets not being protected from loss or damage.
o ClariVest not having an alternative work site(s) in place, or the capability to run operations remotely.
ClariVest has established the following guidelines to effectuate and monitor its disaster recovery procedures.
GOALS AND OBJECTIVES
The goal of the CDRP is to provide uninterrupted service to our Clients or to minimize the downtime should a system or vendor failure occur. The CDRP has been developed to meet the following objectives:
o Provide for immediate, accurate and measured response to emergency situations;
o Minimize the impact upon the safety and well being of firm personnel;
o Protect against the loss or damage to organizational assets; and
o Provide our Clients with alternative site processing with a minimum of inconvenience.
Risk assessment, disaster prevention, and disaster avoidance are critical components of ClariVest's contingency planning process. The implementation of this CDRP should help to ensure all data processing systems, data communication facilities, information, data and business functions can be restored in a secure manner. Restoration must be accomplished in a time frame consistent with legal, regulatory and business requirements while maintaining information integrity.
A complete disaster recovery plan is separately maintained and documented, and a copy is available upon request.
ISSUE
Rule 206(4)-6 under the Advisers Act requires every investment adviser who exercises voting authority with respect to Client securities to adopt and implement written policies and procedures, reasonably designed to ensure that the adviser votes proxies in the best interest of its Clients. The procedures must address material conflicts that may arise in connection with proxy voting. The Rule further requires the adviser to provide a concise summary of the adviser's proxy voting process and offer to provide copies of the complete proxy voting policy and procedures to Clients upon request. Lastly, the Rule requires that the adviser disclose to Clients how they may obtain information on how the adviser voted their proxies.
ClariVest votes proxies for its Clients unless requested otherwise, and therefore has adopted and implemented this Proxy Voting Policy and Procedures.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered numerous risks associated with its voting of client proxies. This analysis includes risks such as:
o ClariVest does not maintain a written proxy voting policy as required by Rule 206(4)-6.
o Proxies are not voted in Clients' best interests.
o Proxies are not identified and voted in a timely manner.
o Conflicts between ClariVest's interests and the Client are not identified; therefore, proxies are not voted appropriately.
o The third-party proxy voting service utilized by ClariVest is not independent.
o Proxy voting records and Client requests to review proxy votes are not maintained.
ClariVest has established the following guidelines to effectuate and monitor its proxy voting policy and procedures.
POLICY
It is the policy of ClariVest to vote proxies in the interest of maximizing value for ClariVest's Clients. Proxies are an asset of a Client, which should be treated by ClariVest with the same care, diligence, and loyalty as any asset belonging to a Client. To that end, ClariVest will vote in a way that it believes, consistent with its fiduciary duty, will cause the value of the issue to increase the most or decline the least. Consideration will be given to both the short and long term implications of the proposal to be voted on when considering the optimal vote.
Any general or specific proxy voting guidelines provided by an advisory Client or its designated agent in writing will supersede this policy. Clients may wish to have their proxies voted by an independent third party or other named fiduciary or agent, at the Client's cost.
The staff of the Securities and Exchange Commission has issued interpretive guidance on investment advisers that use the recommendations of independent third parties to vote Client proxies in its letter to Egan-Jones Proxy Services (pub. Avail. May 27, 2004). The interpretive letter addresses what is meant by "independent third party." The letter states that a third party generally would be independent of an investment adviser if that person is free from influence or any incentive to recommend that the proxies should be voted in anyone's interest other than the adviser's Clients. ClariVest has retained RiskMetrics Group ("RMG"), and generally follows their recommendation when voting proxies. ClariVest determined that it is appropriate to follow the voting recommendations of RMG because ClariVest believes that RMG (a) has the capacity and competency to adequately analyze proxy issues, and (b) can make such recommendations in an impartial manner and in the best interests of ClariVest's Clients.
The interpretive letter also discusses conflicts of interest that can arise from the proxy voting firm's relationships with issuers. When the proxy voting firm has a relationship with an issuer of voting securities (e.g., to provide advice on corporate governance issues), the adviser's proxy voting procedures should require a proxy voting firm to disclose to the adviser any relevant facts concerning the firm's relationship with the issuer, such as the amount of the compensation that the firm has received or will receive. That information will enable the investment adviser to determine whether the proxy voting firm can make voting recommendations in an impartial manner and in the best interests of the Clients, or whether the adviser needs to take other steps to vote the proxies.
PROCEDURES FOR IDENTIFICATION AND VOTING OF PROXIES
These proxy voting procedures are designed to enable ClariVest to resolve material conflicts of interests with Clients before voting their proxies.
1. ClariVest shall maintain a list of all Clients for which it votes proxies. The list will be maintained either in hard copy or electronically and updated by the Operations Manager who will obtain proxy voting information from Client agreements.
2. ClariVest shall work with the Client to ensure that RMG is the designated party to receive proxy voting materials from companies or intermediaries. To that end, new account forms (including a letter of authorization) of broker-dealers/custodians will state that RMG should receive this documentation.
3. ClariVest subscribes to the RMG proxy voting service. This browser-based proxy voting system automates the physical paper handling and detailed recordkeeping needs of ClariVest's proxy voting function. RMG also provides independent recommendations with respect to each proxy vote.
4. As a default, proxies are generally voted by RMG in accordance with RMG recommendations. However, ClariVest retains ultimate decision making authority with respect to the voting of Client proxies and reserves the right to override RMG recommendations.
5. For any Client who has provided specific voting instruction, the Operations Manager shall vote that Client's proxy in accordance with the Client's written instructions.
6. The Operations Manager will provide any proxy solicitation information and materials that he may receive to the appropriate personnel of RMG for their review and consideration.
7. As noted by the SEC in Release 2106, the fiduciary duty that ClariVest owes its Clients prohibits the adoption of a policy to enter default proxy votes in favor of management. Thus, ClariVest shall review all Client proxies in accordance with the general principles outlined above.
8. ClariVest's investment personnel shall be responsible for making voting decisions with respect to all Client proxies, where a proxy is not voted in accordance with RMG recommendations. Such decisions shall then be provided to the Operations Manager who will then ensure that such proxy votes are submitted in a timely manner.
9. The Operations Manager may delegate the actual voting of Client proxies to any of ClariVest's employees who are familiar with RMG's service.
10. ClariVest is not required to vote every Client proxy and refraining from voting should not necessarily be construed as a violation of ClariVest's fiduciary obligations. ClariVest shall at no time ignore or neglect its proxy voting responsibilities. However, there may be times when refraining from voting is in the Client's best interest, such as when an adviser's analysis of a particular Client proxy reveals that the cost of voting the proxy may exceed the expected benefit to the Client (i.e., casting a vote on a foreign security may require that the adviser engage a translator or travel to a foreign country to vote in person). Such position also complies with Interpretive Bulletin 94-2 of the DOL.
11. The Operations Manager shall be responsible for conducting the proxy voting cost-benefit analysis in those certain situations in which ClariVest believe it may be in its Clients' best interest for ClariVest not to vote a particular proxy. The Operations Manager shall maintain documentation of any cost-benefit analysis with respect to Client proxies that are not voted by ClariVest.
12. The Operations Manager will report any attempts by any of ClariVest personnel to influence the voting of Client proxies in a manner that is inconsistent with ClariVest's Policy. Such report shall be made to the CCO, or if the CCO is the person attempting to influence the voting, then to the CEO.
13. Proxies received after the termination date of a Client relationship will not be voted. Such proxies should be delivered to the last known address of the Client or to the intermediary who distributed the proxy with a written or oral statement indicating that the advisory relationship has been terminated and that future proxies for the named Client should not be delivered to ClariVest.
14. The Operations Manager, with the assistance of the CCO, will reasonably try to assess any material conflicts between ClariVest's interests and those of its Clients with respect to proxy voting (where a proxy is not voted in accordance with RMG recommendations) by considering the situations identified in the CONFLICTS OF INTEREST section of this document.
CONFLICTS OF INTEREST
1. GENERAL: As noted previously, ClariVest will vote its Clients' proxies in the best interest of its Clients and not its own. In voting Client proxies, ClariVest shall avoid material conflicts of interest between the interests of ClariVest on the one hand and the interests of its Clients on the other.
2. POTENTIAL MATERIAL CONFLICTS OF INTEREST: ClariVest is aware of the following potential material conflicts that could affect ClariVest's proxy voting process in the future. It should be noted that these potential conflicts have been listed for informational purposes only and do not include all of the potential conflicts of interest that an adviser might face in voting Client proxies. ClariVest acknowledges that the existence of a relationship of the types discussed below, even in the absence of any active efforts to solicit or influence ClariVest, with respect to a proxy vote related to such relationship is sufficient for a material conflict to exist.
o EXAMPLE CONFLICT: ClariVest retains an institutional Client, or is in the process of retaining an institutional Client that is affiliated with an issuer that is held in ClariVest's Client portfolios. For example, ClariVest may be retained to manage Company A's pension fund. Company A is a public company and ClariVest Client accounts hold shares of Company A. This type of relationship may influence ClariVest to vote with management on proxies to gain favor with management. Such favor may influence Company A's decision to continue its advisory relationship with ClariVest.
o EXAMPLE CONFLICT: ClariVest retains a Client, or is in the process of retaining a Client that is an officer or director of an issuer that is held in ClariVest's Client portfolios. The similar conflicts of interest exist in this relationship as discussed above.
o EXAMPLE CONFLICT: ClariVest's Employees maintain a personal and/or business relationship (not an advisory relationship) with issuers or individuals that serve as officers or directors of issuers. For example, the spouse of an Employee may be a high-level executive of an issuer that is held in ClariVest's Client portfolios. The spouse could attempt to influence ClariVest to vote in favor of management.
o EXAMPLE CONFLICT: ClariVest or an Employee(s) personally owns a significant number of an issuer's securities that are also held in ClariVest's Client portfolios. For any number of reasons, an Employee(s) may seek to vote proxies in a different direction for his/her personal holdings than would otherwise be warranted by the proxy voting policy. The Employee(s) could oppose voting the proxies according to the policy and successfully influence ClariVest to vote proxies in contradiction to the policy.
o CONFLICT: ClariVest or its affiliate has a financial interest in the outcome of a vote, such as when ClariVest receives distribution fees (i.e., Rule 12b-1 fees) from registered mutual funds that are maintained in Client accounts and the proxy relates to an increase in 12b-1 fees.
3. DETERMINING THE MATERIALITY OF CONFLICTS OF INTEREST: Determinations as to whether a conflict of interest is material will be made after internal discussion among the CCO, the Portfolio Manager(s) for the affected Clients and the Operations Manager. Among the factors to be considered in determining the materiality of a conflict include whether the relevant Client relationship accounts for a significant percentage of ClariVest's annual revenues, or the percentage of ClariVest's assets that is invested with a particular issuer. Materiality determinations are fact based, and will depend on the details of a particular situation. Whether a particular conflict of interest is deemed material will be based on the likelihood that the conflict might cause a proxy to be voted in a manner that was not in the best interests of ClariVest's Clients. All materiality deliberations will be memorialized in writing by the Operations Manager.
If the committee determines that the conflict in question is not material, ClariVest will vote the proxy in accordance with the policies stated herein. If a conflict is judged material, ClariVest will consider RMG's recommendation or, at its expense, engage the services of legal counsel who will provide an independent recommendation on the direction in which ClariVest should vote on the proposal. The proxy voting service's or consultant's determination will be binding on ClariVest.
PROCEDURES FOR CLARIVEST'S RECEIPT OF CLASS ACTIONS
ClariVest recognizes that as a fiduciary it has a duty to act with the highest obligation of good faith, loyalty, fair dealing and due care. When a recovery is achieved in a class action, clients who owned shares in the company subject to the action have the option to either: (1) opt out of the class action and pursue their own remedy; or (2) participate in the recovery achieved via the class action. Collecting the recovery involves the completion of a Proof of Claim form which is submitted to the Claims Administrator. After the Claims Administrator receives all Proof of Claims, it dispenses the money from the settlement fund to those persons and entities with valid claims.
Unless otherwise agreed with a Client, if "Class Action" documents are received by ClariVest for its Clients, ClariVest will gather the materials it has and forward to the Client, to enable the Client to file the "Class Action" at the Client's discretion. The decision of whether to participate in the recovery or opt-out may be a legal one that ClariVest may not be qualified to make for the Client. Therefore, unless otherwise agreed with a Client, ClariVest will not file "Class Actions" on behalf of a Client.
RECORDKEEPING
ClariVest will maintain the documentation described in the following section for a period of not less than five (5) years, the first two (2) years at its principal place of business. The Operations Manager will be responsible for the following procedures and for ensuring that the required documentation is retained.
CLIENT REQUEST TO REVIEW PROXY VOTES:
o Any request, whether written (including e-mail) or oral, received by any Employee of ClariVest, must be promptly reported to the CCO and/or Operations Manager. All written requests must be retained in the permanent file.
o The Operations Manager will record the identity of the Client, the date of the request, and the action taken as a result of the request, in a suitable place.
o Furnish the information requested, free of charge, to the Client within a reasonable time period (within 10 business days). Maintain a copy of the written record provided in response to Client's written (including e-mail) or oral request. Unless maintained electronically, a copy of the written response should be attached and maintained with the Client's written request, if applicable and maintained in the permanent file.
o Clients are permitted to request the proxy voting record for the 5 year period prior to their request.
PROXY STATEMENTS RECEIVED REGARDING CLIENT SECURITIES:
o Upon receipt of a proxy, copy or print a sample of the proxy statement or card and maintain the copy in a central file along with a sample of the proxy solicitation instructions.
NOTE: ClariVest is permitted to rely on proxy statements filed on the SEC's EDGAR system instead of keeping its own copies.
PROXY VOTING RECORDS:
o A record of how ClariVest voted client Proxies.
o Documents prepared or created by ClariVest that were material to making a decision on how to vote, or that memorialized the basis for the decision.
o Documentation or notes or any communications received from third parties, other industry analysts, third party service providers, company's management discussions, etc. that were material in the basis for the decision.
DISCLOSURE
ClariVest will ensure that Part 2A of Form ADV is updated as necessary to reflect: (i) all material changes to the Proxy Voting Policy and Procedures; and (ii) information about how Clients may obtain information on how ClariVest voted their securities.
PROXY SOLICITATION
As a matter of practice, it is ClariVest's policy to not reveal or disclose to any Client how ClariVest may have voted (or intends to vote) on a particular proxy until after such proxies have been counted at a shareholder's meeting. ClariVest will never disclose such information to unrelated third parties.
The CCO is to be promptly informed of the receipt of any solicitation from any person to vote proxies on behalf of Clients. At no time may any Employee accept any remuneration in the solicitation of proxies. The CCO shall handle all responses to such solicitations.
RESPONSIBILITY
The Operations Manager is responsible for supervising the proxy voting process and maintaining the records, in each case as described above.
ISSUE
Adviser hereby adopts the following anti-money laundering program (this "Program"). As used in this Program, the term "Client" refers to any entity or individual to whom Adviser renders investment advisory services.
POTENTIAL RISKS
o Managed accounts are owned and funded by prohibited persons or entities as identified by OFAC.
o Managed account's custodial and brokerage arrangements are in countries that are prohibited by OFAC country sanctions, or are located in countries that have none or limited AML requirements.
o Managed account's custodial relationship is with an entity that is considered a "shell bank" entity, or is considered to be a "correspondent account" with a foreign financial institution.
POLICY
Even though Adviser does not currently meet the definition of a "financial institution" under the Bank Secrecy Act who are required to comply with the provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "Patriot Act"), Adviser intends to comply with the spirit of certain US AML provisions, and has therefore adopted these policies and procedures to limit any inherent risks to the Adviser's operations and investors. In addition, as a matter of policy, the Adviser will not contractually assume responsibility for any AML or customer identification provisions on behalf of the Client's custodian (except with respect to Investment Funds).
Design of AML Compliance Program:
o A system of internal controls to ensure ongoing compliance with certain AML requirements for the firms operations.
o Testing of the AML compliance program.
o Designating an individual responsible for managing the AML Program.
o Training for appropriate personnel.
I. TYPES OF ACCOUNTS
A. SEPARATELY MANAGED ACCOUNTS
As a general practice, ClariVest does not open brokerage or custodial accounts on behalf of Clients. All prospective non-related accounts are required to have established a custodial or brokerage account prior to Adviser effecting transactions in such accounts.
Non-Natural Persons or Entities
ClariVest shall request that the Client certify to the provisions stated in Attachment A to this Policy either at the time of the contract or prior to effecting transactions in the account. The certification shall be maintained in the Client file.
B. INVESTMENT FUNDS
1. If the Firm or any of its affiliates acts as the general partner, managing member or in any other similar capacity with respect to a U.S. Investment Fund, the Firm may require that each such Investment Fund obtain appropriate representations and warranties from prospective and existing Investors and:
1. If the existing or prospective Investor is a natural person, the Firm may obtain either that Investor's notarized signature on his or her subscription agreement (this option is available only for prospective Investors) or a certified or notarized copy of that Investor's driver's license or passport, unless that Investor previously has provided such information to the Firm or the Firm previously has established a substantive relationship with that Investor;
2. If the existing or prospective Investor is an entity (unless shares of that entity are traded publicly in the U.S. on a national securities exchange), the Firm may obtain a certified copy of that entity's charter documents and certificates of good standing, unless the Firm previously has established a substantive relationship with that Investor; and
3. If the existing or prospective Investor is an investment entity, in addition to the documents required by the preceding item b, the Firm may obtain additional appropriate representations from that Investor, which representations should include, among other things, representations that the Investor (i) has an appropriate anti-money laundering program that complies with all applicable laws, rules and regulations and is designed to detect and report any activity that raises suspicion of money laundering activities, and (ii) has obtained appropriate background information regarding all of the officers, directors and beneficial owners of the investment entity.
2. If the Firm acts as the investment adviser or in any other similar capacity with respect to a non-U.S. Investment Fund, the Firm requires representations and warranties from the administrator of each such Investment Fund, that the administrator or other person who screens and accepts the subscriptions for that Investment Fund uses appropriate anti-money laundering procedures and compares the Investment Fund's Investor list with watch lists described above.
II. OFAC POLICY & PROCEDURES
(I) POLICY
A. OFAC LIST CHECK
Information obtained from each prospective Client, as required by this Program, shall be reviewed by the Chief Compliance Officer in order to verify that no such individual or entity is named on the OFAC List. If so, the Chief Compliance Officer will implement the procedures noted in Section III of this Program and procedures. See Attachment B for a list of Identification Information.
B. REFUSAL TO PROVIDE IDENTIFICATION INFORMATION
ClariVest shall not: (a) accept any payment from any Client or prospective Client or (b) enter into any agreement with any Client or prospective Client, who refuses to: (i) submit and verify all requested Identification Information; (ii) otherwise comply with any and all applicable AML regulatory requirements; or (iii) provide acknowledgements represented in Attachment A regarding OFAC and Prohibited Persons.
C. PROHIBITED INDIVIDUALS
ClariVest shall not: (a) accept any payment from any Client or prospective Client or (b) enter into any agreement with any Client or prospective Client who has been identified on the OFAC List or who has affirmed that they can not make the acknowledgements represented in Attachment A regarding OFAC and Prohibited Persons.
(II) PROCEDURES
A. OFAC LIST DATABASE CHECKS
(i) Initial Review
ClariVest's review of the Identification Information
of a Client or prospective Client shall include:
(a) an examination of all identification documents
provided by the Client or prospective Client; and (b)
a check against the OFAC List through the publicly
accessible database provided by the NASDR at
http://apps.nasd.com/Rules_&_Regulations/ofac/default.asp
(ii) False-Positives or Hits
The CCO shall be responsible to make a final determination of whether a person or entity identified on the OFAC List is a "false-positive" by obtaining further information. For instance, the CCO shall compare the complete entry on the OFAC list with the Identification Information obtained by Adviser. An entry in the OFAC List will often have, for example, a full name, address, nationality, passport, tax ID number, place of birth, date of birth, former names and aliases.
C. ON-GOING REVIEWS
o ClariVest's trading system shall include a pre-trade restrictions that prohibits the purchase of securities with issue countries that are restricted by OFAC or are traded on exchanges in countries that are restricted by OFAC.
o On a monthly basis, ClariVest shall compare its holdings and client lists against the OFAC list to review for any matches. The CCO shall be responsible to make a final determination of whether a person or entity identified on the OFAC List is a "false-positive" by obtaining further information, as described further above.
C. REPORTING OF SUSPICIOUS INDIVIDUALS OR ACTIVITIES
o Employees of ClariVest who identify any Client or prospective Client as: (i) named on the OFAC List; or (ii) being affiliated with any person, government, country or entity so named or appearing on the OFAC List, shall complete Attachment C and notify the CCO.
o Employees of ClariVest who identify any Client or prospective Client as engaged in "Red Flag" activities, or any other suspicious activity or pattern of activities such as those listed in Attachment D, shall notify the CCO.
o Any Client or prospective Client who refuses to: (i) submit and verify all requested Identification Information; or (ii) otherwise comply with any and all applicable regulatory requirements, shall be identified to the CCO.
The CCO shall make the determination, along with consultation with senior management or outside counsel, as to whether the Adviser shall voluntarily file a Suspicious Activity Report (Form SAR-SF) with FinCEN. A copy of the SAR-SF and filing instructions can be found at www.fincen.gov or at: http://www.fincen.gov/forms/fin101_sar-sf.pdf
III. ASSET FREEZES AND BLOCKING OF ACCOUNTS PROCEDURES
A. SUSPENSION OF WITHDRAWAL RIGHTS
ClariVest, by written notice to any Client shall, to the extent required by applicable law and within the power of ClariVest, suspend any withdrawal rights of such Client with respect to any interest if:
4. Such Client is identified as: (a) a person named in the OFAC List, or (b) is known by ClariVest to being affiliated with any person, government, country or entity under the OFAC List;
5. ClariVest is so ordered by a competent US court or regulatory authority; or
6. ClariVest's management reasonably deems it necessary to do so in order to comply with relevant AML legislation and regulations applicable to Adviser.
B. NOTIFICATION TO CLIENT
ClariVest may notify the Client that the Client's assets have been frozen or restricted. However, no written notice to the Client shall be made prior to such suspension if the US court or regulatory authority ordering such suspension specifies, in writing, that ClariVest may not inform the Client of the suspension of such withdrawal rights.
C. NOTIFICATION TO OFAC
In the event that the Chief Compliance Officer makes the determination that a match is a "positive hit", the Chief Compliance Officer shall implement the due-diligence steps noted by OFAC at http://www.treas.gov/offices/enforcement/ofac/faq/one_page.shtml
If the Chief Compliance Officer believes that it has a "positive hit" after completing the due-diligence steps, the Chief Compliance Officer shall contact the OFAC Hotline at 1-800-540-OFAC (6322) for further guidance.
IV. EMPLOYEE TRAINING
Employees who participate in the review and approval of Clients, the opening or closing of Client accounts and the reconciliation of Client custodial accounts shall participate in periodic training programs addressing ClariVest's AML policies, procedures, practices and controls.
V. TESTING OF THE PROGRAM
As part of ClariVest's annual policy and procedures review requirement of Rule 206(4)-7 under the Advisers Act, the CCO shall ensure that under such review or periodic testing that this Program is included to assure that this Program is functioning as designed.
A written report shall be required as part of the testing of this Program, which may incorporated as part of ClariVest's annual 206(4)-7 review. Any recommendations from the review should be promptly implemented or shall be submitted to the senior management of ClariVest for consideration.
VI. RECORDKEEPING & RETENTION
CLIENT FILES: ClariVest shall maintain records of all Identification Information submitted through the account opening stages and any other relevant information provided by any Client. Additionally, documents which evidence ClariVest's check against the OFAC SDN List during the account opening process shall be maintained in Client files. The retention requirement for these records is five years from the date the account is closed.
OTHER REPORTS/DOCUMENTS: ClariVest shall also maintain records of all reports and supporting documentation made by employees to the CCO under this Program, as well as all reports and supporting documentation and communications to regulatory authorities, including divisions of the Department of the Treasury (OFAC and FinCEN). These records shall be maintained for five years from the end of the last fiscal year in which the contact or submission of the report was made.
TRAINING: The CCO shall maintain a Training File that will evidence employee training as required by this Program. Documentation should substantiate a copy of the AML training presentation (seminar agenda or materials), and the employee(s) attendance and date of training. These records shall be maintained for five years from the end of the last fiscal year in which the training was conducted.
RESPONSIBILITY
The CCO may delegate to others certain aspects of the AML Compliance Program, but the CCO is responsible for ensuring that the appropriate documentation is obtained and reviewed, and that the OFAC database is searched to confirm that its Clients are not identified in the OFAC database.
ATTACHMENT A
MANAGED ACCOUNT AML CERTIFICATION
NAME OF ACCOUNT: ____________________________________________________
CUSTODIAN: __________________________________________________________
[ ] U.S. Branch [ ] U.S. Branch [ ] US with Foreign Branch
CUSTODIAN LOCATION:
[ ] US with Foreign Branch [ ] Non-US [ ] Non-US
DATE OF CONTRACT: ____________________________________________________
ANTI-MONEY LAUNDERING ACKNOWLEDGEMENT PROVISION:
By signing below, Client represents that the amounts contributed by it to the managed account(s), noted above, were not and are not directly or indirectly derived from activities that may contravene federal, state or international laws and regulations, including anti-money laundering laws and regulations. Federal regulations and Executive Orders administered by the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") prohibit, among other things, the engagement in transactions with, and the provision of services to, certain foreign countries, territories, entities and individuals.
Client hereby represents and warrants that, to the best of its knowledge, none
of: (i) the Client; (ii) any person controlling or controlled by the Client;
(iii) if the Client is a privately held entity, any person having a beneficial
interest in the Client; or (iv) any person for whom the Client is acting as
agent or nominee in connection with this investment is a country, territory,
individual or entity named on an OFAC list, nor is a person or entity
prohibited under the OFAC Programs or is a senior foreign political figure, any
immediate family member or close associate of a senior foreign political figure
as such terms are defined in the Bank Secrecy Act.
Client understands and agrees that, by law, Adviser may be obligated to "freeze" the Client's interests, either by prohibiting additional contributions and/or declining any withdrawal requests with respect to assets under management in compliance with governmental regulations, and the Adviser may also be required to report such action and to disclose the Client's identity to OFAC or other State or Federal agencies. Further, Client understands and agrees that the Adviser may not accept management of the account from the Client if Client cannot make ongoing representations set forth in this Agreement.
ATTACHMENT B
IDENTIFICATION INFORMATION OF CLIENTS
o Full name (i.e., no initial for a first name, full middle name, etc.)
o Full residence address, including apartment number, if applicable.
o Social security number (if applicable) and a photocopy of the investor's passport or driver's license (if applicable).
o In the case of a legal entity:
o Its W-9, taxpayer identification number (if applicable) or business name and purpose;
o The jurisdiction in which it was incorporated; and
o Copies of the entity's certificate of incorporation and any relevant organizational documents.
o Information regarding the legal capacity in which the Client is acting (i.e., on his/her or its own behalf; or on behalf of another person or legal entity).
o Information regarding the identity of any ultimate beneficial owners of the Client.
o For trusts, evidence of its due formation and existence and identity of its trustee(s). Information provided must be sufficient for ClariVest to understand the structure of the trust sufficiently to determine the source of the funds, persons who controls the trust, and persons who have the power to remove the trustee.
ATTACHMENT C
AML FORM FOR THE REPORTING OF SUSPICIOUS ACTIVITY
Name of Person Completing this Form:________________________________________
Date Form Completed:_____________________________________________________
I. Name of client:______________________________________________
II. Reason for Submission of Report (circle one or more and provide explanation; attach additional pages if necessary; and attach copies of such Identification Information as the investor may have provided, along with information regarding interests the investor may already hold.)
A. Refusal to provide Identification Information. Explanation:
B. Refusal to provide information regarding beneficial ownership.
Explanation:
C. Individual or entity is named on the OFAC SDN List, EO 13224 Annex, or is affiliated with an individual or entity so named.
Explanation:
D. Inconsistency in Identification Information. Explanation:
E. Other Explanation:
Date Received by CCO:____________________________________
Initials of CCO:___________________
ATTACHMENT D
EXAMPLES OF POTENTIAL MONEY LAUNDERING ACTIVITIES
o Unusually large transactions that have no apparent economic purpose;
o Multiple persons or accounts that share the same name, address, telephone number or other identification;
o Successive transactions by the same person(s) in a short period of time that are under the reporting threshold of $10,000 or below $3,000 if paid by money order or bank, traveler's or cashier's checks;
o Group or cluster transactions (i.e., a name, address, or other identification appears on different persons' identifying documents);
o Financial activity that does not seem to correlate with the stated investment strategy;
o Investor's use of more than one address (including suspected false addresses); or
o Investor's use of traveler's checks which are illegible, unverifiable, blank or suspiciously signed.
ISSUE
ClariVest has adopted the following Valuation & Pricing Policy and Procedures to govern the pricing (valuation) of securities held in ClariVest's Client portfolios or Investment Funds.
POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered numerous risks associated with its valuation of securities held in advisory Client accounts or Investment Funds. This analysis includes risks such as:
o Account performance and advisory fees are calculated erroneously due to inaccurate pricing of portfolio holdings.
o Fair valuation methodologies do not reasonably reflect the amount at which an asset could be sold in a current transaction.
o The Portfolio Manager has the ability to override prices at his or her discretion. Portfolio Managers may deliberately provide inaccurate prices to cover up unprofitable management decisions.
o The CCO is not notified of pricing overrides.
o ClariVest does not maintain written fair valuations procedures. Fair valuation procedures are not consistently applied.
o ClariVest does not periodically test or verify the prices obtained from an independent pricing service.
o Pricing errors are not corrected immediately and reviewed for materiality.
ClariVest has established the following guidelines to effectuate and monitor its securities valuation policy and procedures.
POLICY
If a pricing issue arises that is not covered by these procedures, ClariVest's trading group shall use its best efforts and all appropriate means to obtain all relevant information in order to determine a fair value. If it is deemed necessary or prudent, ClariVest may hire an independent third party to provide an appraisal of the security.
ClariVest should continuously assess the availability and reliability of market quotations, and should regularly test the accuracy of their fair value prices by comparing them with values that are available from other sources, including actual trade prices, as well as quotations from pricing services and dealers.
A determination that market quotations are no longer "readily available" would not preclude ClariVest from concluding that the most recent closing market prices represent fair value. The most recent closing market prices generally should be considered, along with other appropriate factors, when determining the fair value of securities for which current market quotations are not readily available.
METHODS OF VALUING INVESTMENTS
Securities held in ClariVest's Client portfolios and Investment Funds are reported at fair value. Fair value is the amount at which the investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Many financial instruments are publicly traded in active markets, and therefore end-of-day market quotations are readily available. Quoted market prices in active markets are the best evidence of the fair value of a financial instrument. If quoted market prices in active markets are not available, ClariVest will initiate fair valuation techniques to price the security. ClariVest follows the following procedures to value portfolio securities:
ClariVest generally utilizes Mellon to price portfolio holdings. In the event that Mellon is unable to price securities, ClariVest shall utilize fair valuation techniques discussed below.
MARKET-TRADED SECURITIES. Valuing securities listed and traded on one or more securities exchanges, or unlisted securities traded regularly in over-the-counter (OTC) markets (for example, U.S. Treasury bonds, notes and bills or stocks traded in the National Market System [NMS] of the NASDAQ Stock Market), ordinarily is not difficult, because quotations of completed transactions are published daily, or price quotations are readily obtainable from financial reporting services or individual broker-dealers. A security traded in an active market on the valuation date is valued at the last quoted sales price except in rare situations. A security listed on more than one national securities exchange should be valued at the last quoted sales price at the time of valuation on the exchange on which the security is principally traded; securities traded both on a national exchange and in the over-the-counter market should be valued based on the price in the market where the security is principally traded. If the security was not traded in the principal market on the valuation date, the security should be valued at the last quoted sales price on the next most active market, if management determines that price to be representative of fair value. If the price is determined not to be representative of fair value, fair value should be estimated.
FAIR VALUATION. Although ClariVest does not generally trade in securities that are exposed to valuation issues, situations could plausibly arise when quoted market prices are not readily available because market quotations and transactions are infrequent and the most recent quotations and transactions occurred substantially prior to the valuation date. The market for such a security may be "thin" (that is, there are few transactions or market-makers in the security, the spread between the bid and asked prices is large, and price quotations vary substantially either over time or among individual market-makers).
Furthermore, situations may also arise in an active market where market quotations are available but the validity of the quotation is questionable as to whether it represents fair value. Those situations are rare but may occur. In such cases, ClariVest must estimate the fair value of the security based on consistent application of the Pricing Policy.
When market quotations are either not readily available or not available (such as restricted securities), the security should be valued at fair value as estimated in good faith by ClariVest's senior management. The objective of the estimating procedures is to state the securities at the amount at which they could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The term current transaction means realization in an orderly disposition over a reasonable period. All relevant factors should be considered in selecting the method of estimating the fair value of each kind of security.
In determining the fair value assigned to a particular financial instrument, ClariVest should, to the extent necessary, take into consideration all indications of fair value that are available. The following is a list of some of the factors to be CONSIDERED:
o Financial standing of the issuer
o Business and financial plan of the issuer
o Cost at date of purchase
o Size of position held and the liquidity of the market
o Contractual restrictions on disposition
o Pending public offering with respect to the financial instrument
o Pending reorganization activity affecting the financial instrument (such as merger proposals, tender offers, debt restructurings, and conversions)
o Reported prices and the extent of public trading in similar financial instruments of the issuer or comparable companies
o Ability of the issuer to obtain needed financing
o Changes in the economic conditions affecting the issuero A recent purchase or sale of a security of the company
o Pricing by other dealers in similar securities
o Financial statements of investees
Valuation Hierarchy:
a. Investments MUST be valued using objective, observable, unadjusted quoted market prices for identical investments in active markets on the measurement date, if available. If not available, then investments SHOULD be valued using:
b. Objective, observable quoted market prices for similar investments in active markets. If not available or appropriate, then investments SHOULD be valued using;
c. Quoted prices for identical or similar investments in markets that are not active (markets in which there are few transactions for the investment, the prices are not current, or price quotations vary substantially over time and/or between market makers). If not available or appropriate, then investments SHOULD be valued based on;
d. Market-based inputs, other than quoted prices, that are observable for the investment. If not available or appropriate, then investments SHOULD be valued based on;
e. Subjective unobservable inputs for the investment where markets are not active at the measurement date. Unobservable inputs SHOULD only be used to measure FAIR VALUE to the extent that observable inputs and prices are not available or appropriate. Unobservable inputs reflect the FIRM'S own assumptions about the assumptions that market participants would use in pricing the investment and SHOULD be developed based on the best information available under the circumstances.
No single method exists for determining fair value in good faith because fair value depends on the facts and circumstances of each individual case. ClariVest should be satisfied, however, that the method used to estimate fair value is reasonable and appropriate and that the resulting valuation is fair. Methods commonly used in valuation of financial instruments include analogy to reliable quotations of similar financial instruments, pricing models, matrix pricing, or other formula-based pricing methods. These methodologies incorporate factors for which published market data may be available. For instance, the mathematical technique known as matrix pricing may be used to determine fair value based on market data available with respect to the issue and similar issues without exclusive reliance on issuer-specific quoted market prices.
An estimate of fair value different from market quotations should be infrequent, and continued use of the estimates should be assessed immediately upon the availability of subsequent market quotations. The rationale for the use of an estimate of fair value different from market quotations should be documented and should assist ClariVest in determining what valuation parameters are best suited to value the portfolio holdings.
REVIEW AND DOCUMENTATION
A. REVIEW OF PRICING EXCEPTION REPORTS
Pricing exception reports, if any, shall be forwarded to and reviewed by the CCO and/or COO for reasonableness. The Operations Manager shall maintain documentation for securities that have had prices overridden in lieu of the price provided by Mellon. Such documentation should contain the name of the security, CUSIP, name of any independent pricing source or broker-dealer utilized, ClariVest manual price, other documentation as necessary to support the use of such manual price, and an explanation as to why the price was determined not to be appropriate.
B. MAINTENANCE OF VALUATION RECORDS
ClariVest shall maintain any and all documentation necessary to support its
monthly and quarterly valuations of securities including, but not limited to:
written broker, dealer or market maker quotations, contemporaneous notes from
conversations with representatives from brokers, dealers or market makers
regarding the valuation of securities, or written documentation received from
independent third-party pricing services.
RESPONSIBILITY
Any questions or concerns regarding this Policy should be directed to the CCO.
BACKGROUND
Rule 206(4)-2 under the Advisers Act defines Custody as follows:
"Custody" means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. Custody includes:
1. Possession of client funds or securities, (but not of checks drawn by Clients and made payable to third parties,) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them (see procedures below);
2. Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and
3. Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.
Examples of practices or arrangements which may result in an adviser having Custody, as defined under the Rule, may include (but are not limited to):
- Bearer Form Securities - Omnibus Account
- Direct Debit Billing - Affiliated Entities
- Trustee or Executor - Receipt of Stock Certificates
- Adviser and GP to a Limited Partnership - Full Power of Attorney
- Receipt of Investment Checks - Account Signatory Power
Payable to the Adviser
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POTENTIAL RISKS
In developing these policies and procedures, ClariVest considered numerous risks associated with its maintaining custody (as defined above) of Client assets. This analysis includes risks such as:
o ClariVest inadvertently having custody of Client assets through certain practices, including: receipt of investor checks payable to the adviser, direct debit billing, signatory authority over Client's account, or serving as general partner to a limited partnership (or similar structure).
o ClariVest not having a reasonable basis to believe that the Client's qualified custodian sends (or provides access to) account statements at least quarterly (unless otherwise requested by the Client).
o Custodial arrangements not being adequate to protect Clients' assets from misappropriation.
o ClariVest charges "incentive" or "performance-based" advisory fees to a Client that is not a "qualified client" as defined below.
ClariVest has established the following guidelines to effectuate and monitor any of its practices that give it custody of client assets.
POLICY
ClariVest will not take or maintain physical custody of any Client assets, and will conduct all business operations in such a way that all Client cash and investments will be preserved in the safekeeping of qualified custodians INDEPENDENT from ClariVest. Clients' custodians will generally be banks, trust companies or broker-dealers unaffiliated with ClariVest.
ClariVest will not engage in activities such as direct debit billing or trustee relationships which may give ClariVest custody.
INADVERTENT RECEIPT OF SECURITIES AND INVESTMENT CHECKS
A. SECURITIES
Upon inadvertent receipt of securities the CCO is to be notified promptly and an entry made in a log maintained for that purpose. If the securities are delivered by the Client, in person, Employees may prepare a transmittal letter and accompany the Client to the custodian for the purpose of depositing the securities to the Client's account.
For securities received by mail the CCO is to be notified, a log entry made, and the securities returned to the Client by overnight mail. That mailing should include a transmittal letter and envelope addressed directly to the custodian. In no instance may ClariVest fail to return the securities to the Client within three (3) business days of ClariVest's receipt of the securities.
B. INVESTMENT CHECKS
Checks intended for a client account and made payable to ClariVest or affiliates may not be accepted. The CCO should be notified, the check logged, and returned by overnight mail to the Client/Sender along with instructions (and a pre-paid envelope) to make the replacement check payable to the Client's account at the custodian.
Notwithstanding the foregoing in Section A and B, as set forth in the SEC No-Action letter to Investment Advisers Association, publicly available since September 20, 2007, ClariVest may forward inadvertently received client assets to a qualified custodian within 5 business days of receipt, provided that the client assets were sent by a third party that is (1) a tax authority sending the client a tax refund; (2) a fund administrator distributing settlement proceeds in class action lawsuits or other legal actions; or (3) an issuer sending stock certificates or dividend checks related to a class action lawsuit involving bankruptcy or as a result of business reorganization.
SAFEGUARDING OF CLIENT ASSETS
ClariVest ensures the safekeeping of Client assets through the consistent application of its policies and procedures (including the fact that ClariVest will not have custody of Client assets), as well as the periodic reviews of Client portfolios, cash flows in Client accounts and standardized billing processes. In addition, imbedded into the asset safeguarding practices employed by ClariVest is the strength of fund disbursement procedures followed by the custodians selected by Clients through which ClariVest conducts business. Taken together, the safeguards substantially reduce the chance of the misappropriation of Client assets by ClariVest personnel.
The operations group reviews daily transaction reports generated by the Mellon reporting system for significant cash flows. Any unusual cash flows that occur are reviewed with the entity that custodies the Client's assets and, if necessary, with the Client. This monitoring assists ClariVest in detecting the potential misappropriation of client assets and ensuring the existence of cash when trading securities in a client's account.
In order to ensure that qualified custodians are sending (or providing access to) account statements to ClariVest Clients at least quarterly (unless otherwise requested by the Client), the Operations Manager will annually email all custodians and ask them to confirm by email that they are sending (or providing access to) account statements at least quarterly (unless otherwise requested by the Client). If any custodian refuses to provide such confirmation, the Operations Manager will inform the Chief Compliance Officer. The Operations Manager and the Chief Compliance Officer will determine the best resolution, which may include contacting the applicable Client(s) directly.
ADVISORY FEE BILLING PROCESSES
ClariVest utilizes the following procedures when collecting advisory fees from advisory Client accounts:
1. ClariVest assesses advisory fees to Clients in arrears and in accordance with the negotiated billing terms as specified in the investment management agreement.
2. The Portfolio accounting system market value will be used as the basis on which accounts will be assessed the contracted advisory fee, unless otherwise specified in the investment management agreement.
3. Unless otherwise specified in the investment management agreement, Mellon calculates the dollar amount of the advisory fee billing and generates the advisory fee invoice to be sent to Clients. The CFO then reviews and approves the advisory fee invoices prepared by Mellon prior to being sent to the client.
4. ClariVest mails approved fee invoices directly to clients for payment.
5. Subadvised portfolios may calculate their own advisory fee and submit the calculation to ClariVest for approval.
INVESTMENT FUNDS
Each U.S. Investment Fund is audited annually by a PCAOB Accountant. ClariVest must deliver to each Investor in a U.S. Investment Fund a copy of the annual audited financial statements no later than 120 days after the end of the audit period (typically December 31).
RESPONSIBILITY
The operations personnel are responsible for reporting to the CCO in the event that ClariVest inadvertently receives securities or funds of its Clients. The CCO is responsible for ensuring that those funds are returned to the Client in accordance with the provisions hereof.
POTENTIAL RISKS
POLICIES AND PROCEDURES
INVESTMENT COMPANY ACT
FUND EXCLUSIONS FROM IC ACT
Investment companies are required to register with the SEC under the IC Act. The Investment Funds, however, are excluded from the definition of an investment company under the IC Act. Therefore, they are not required to so register.
The ClariVest Emerging Markets Equity Fund, L.P. relies on ICA section 3(c)(7) for an exclusion from the definition of an investment company because it sells Interests only to qualified purchasers and is not making or proposing to make a public offering of its securities. The definition of qualified purchaser is complex. An Employee should consult with the CCO to determine whether an investor is a qualified purchaser.
An Employee is not a qualified purchaser unless he or she meets the required financial test or is a "knowledgeable employee" as defined under the ICA "Knowledgeable employee" includes only executive officers and certain (but not necessarily all) investment personnel of the Firm. The CCO should consult with outside legal counsel before an Employee is permitted to invest in an Investment Fund that relies on ICA section 3(c)(7).
MUTUAL FUNDS
If an investment company registered under the ICA acquires or holds five percent or more of the outstanding Interests of an Investment Fund, the Investment Fund may be deemed to be a "portfolio affiliate" of that investment company. Therefore, no mutual fund may purchase Interests without the approval of the CCO.
Generally, no Investment Fund may purchase more than 3% of any registered investment company (including any ETF), although there may be exceptions for the purchase of registered money market funds.
TAX CONSIDERATIONS FOR FOREIGN LIMITED PARTNERS OF THE U.S.-BASED FUNDS.
Investors who are neither citizens nor residents of the U.S. and non-U.S. entities that are generally exempt from U. S. taxation and do not file U.S. tax returns ("Foreign Investors") may suffer adverse tax consequences by investing in a U.S. Investment Fund. In addition, the Investment Fund may be required to withhold taxes each year on a Foreign Investor's allocable share of the Investment Fund's income. Any prospective Foreign Investor is advised in the Investment Fund's offering circular to consult its own tax advisers before investing in the Investment Fund, and the CCO will consult with ClariVest's accountants before admitting any Foreign Investor.
INVESTMENT FUND "PLAN ASSET" ISSUES
The investment by ERISA Plan investors in an Investment Fund can result in the underlying assets of the Investment Fund, in addition to the interests held by such investors, being treated as their "plan assets," unless an exemption applies. The consequences of such an occurrence are described in the offering circulars of the Investment Funds under the heading ERISA and Other Plan Considerations.
An exemption from the treatment of fund assets as "plan assets" is available if "benefit plan investors," in the aggregate, own less than 25% of the value of each class of interests in an Investment Fund (excluding interests held by ClariVest or its affiliates, other than through their employee benefit plan). Therefore, unless and until the CCO decides otherwise, subscriptions from any "benefit plan investor" should not be accepted if doing so would cause an Investment Fund to reach or exceed the 25% threshold.
For purposes of the ERISA Plan asset regulations, a "benefit plan investor" is a U.S. private sector employee benefit plan (including an "owner-only" plan), an IRA and, in general, any entity (such as a fund of funds) that itself is not a plan or IRA but which holds "plan assets" because "benefit plan investors" own 25% or more of any class of its equity interests. In a master-feeder structure, however, if benefit plan investors own at least 25% of a class of equity interests of a dedicated feeder fund, the feeder fund is not treated in its entirety as a "benefit plan investor"; instead, only the portion of the feeder fund that is owned by "benefit plan investors" is counted towards the master fund's 25% threshold. Determining whether a master fund is a "plan assets" fund is complex, and ClariVest should consult outside counsel and coordinate carefully with the administrator.
The offering questionnaires for the Investment Funds contain questions that are designed to elicit the information necessary to determine if an investor would be considered a " benefit plan investor." The CCO is responsible for monitoring the applicable percentages. For U.S. Investment Funds, the CCO reviews the current calculation periodically. For non-U.S. Investment Funds, the administrator is responsible for maintaining information from which the current calculation can be determined and must provide that information to the CCO on request.
FINRA NEW ISSUE RULES
1. RULE 5130. Rule 5130 of the Financial Industry Regulatory Authority ("FINRA"), generally restricts FINRA members and their associated persons from, among other things, selling new equity issues to any FINRA member or to any associated person of a FINRA member, to any portfolio manager or to certain other restricted persons (collectively, "Restricted Persons"). Rule 5130, however, allows an account beneficially owned by both Restricted Persons and unrestricted persons to allocate up to ten percent of new issue profits to Restricted Persons (including the Firm).
2. RULE 5131. FINRA Rule 5131 generally prohibits FINRA members and their associated persons from, among other things, selling new equity issues to any account in which executive officers or directors of a particular public or large private company have an aggregate beneficial interest in excess of 25%, if such company has an investment banking relationship with the FINRA member or the FINRA member expects, to establish such a relationship.
3. COMPLIANCE FOR INVESTMENT FUNDS. A U.S. Investment Fund is structured to comply with Rule 5130 and Rule 5131 (together the "New Issue Rules") by providing in the partnership agreement that the profits and losses from new issues may be specially allocated by ClariVest in compliance with the New Issue Rules. A non-U.S. Investment Fund is structured to comply with Rule 5130 by providing two classes of shares. Class B Shares participate in New Issue profits and losses only to the extent that the Investment Fund's directors deem consistent with the Rule 5130 or appropriate for administrative ease in implementing the New Issue Rule. If the Directors so decide, the Investment Fund may not allocate New Issue profits and losses to the Class B Shares. In addition, if an Investor (or group of Investors) in non-U.S. Investment Fund is restricted by Rule 5131, the Directors may need to create a new class of shares for those Investors so that they do not receive any new issue profits and losses.
4. ANNUAL CLIENT AND INVESTOR CONFIRMATIONS. Typically, a brokerage firm from which an Investment Fund purchases new issues requests a representation from the Investment Fund regarding compliance with the New Issue Rules. The CCO should be contacted to provide that representation or review any brokerage firm forms regarding the New Issue Rules. Because the Investment Fund will need to make this representation to these brokerage firms annually, it will need to confirm the non-restricted status of its investors annually. The CCO is responsible for sending (or coordinating with an Investment Fund's administrator for the delivery of) such confirmation at least annually to each Investor.
CLARIVEST ASSET MANAGEMENT LLC
CODE OF CONDUCT AND REGULATORY COMPLIANCE MANUAL ACKNOWLEDGEMENT FORM
I have read and understand the following policies and procedures contained in the Code of Conduct and Regulatory Compliance Manual, recognize that they apply to me and agree to comply in all respects with the procedures described therein for the duration of my employment with ClariVest. All questions that I may have had regarding the contents of the Manual or my responsibilities as outlined in the Manual were addressed by the Chief Compliance Officer.
o Code of Conduct
o Maintenance of Code of Conduct and Regulatory Compliance Manual
o Code of Ethics (including any amendments thereto)
o Client Privacy
o Maintenance and Dissemination of Disclosure Documents and Filings
o Duty to Supervise
o Review of Third-Party Service Providers
o Account Opening and Closing Procedures
o Client Complaints
o Advertising and Marketing
o Media Communications
o Press Releases and Article Reprints
o Solicitors
o Maintenance of Books and Records
o Electronic Communications
o Trading
o Investing/Trading Errors
o Portfolio Management and Reviews
o Contingency and Disaster Recovery Plan
o Proxy Voting
o Anti-Money Laundering
o Security Valuation Policy
o Custody and Billing
o Other Compliance Matters
Employee___________________________________________________ (PRINT NAME)
Signature___________________________________________________
Date__________________________
CLARIVEST ASSET MANAGEMENT LLC
CODE OF ETHICS AND REGULATORY COMPLIANCE MANUAL CERTIFICATION
By responding to the following questionnaire, you are making an attestation that your responses are, to the best of your knowledge, accurate and truthful. The answers that you provide in response to the following questions will be forwarded to the CCO for any necessary follow-up and review.
1. I, or a member of my immediate family living in my household, serve as an officer or director of the following entities (please include public and provide entities, both for profit, and not-for-profit entities) or official in the following government:
_____ Not Applicable (I do not serve as an officer or director of any entity or official in any government)
Entity/Government Role/Title ----------------- ---------- _________________________________ _____________________________________ _________________________________ _____________________________________ |
2. The following individuals are my family members that work at broker-dealers and/or companies in which ClariVest conducts or seeks to conduct business:
_____ Not Applicable (I am not aware of any family members that work at broker-dealers and/or companies in which ClariVest conducts or seeks to conduct business)
Broker-Dealer/Company Family Member Role ____________________________ _______________________ __________________ ____________________________ _______________________ __________________ |
3. I have reported all of my Securities Accounts and Reportable Securities over the past 12 months in accordance with ClariVest's Personal Security Trading Policy.
_____ True _____ False
Explain:
4. I have reported all instances in which I may have come into possession of material Non-Public Information over the past 12 months.
_____ True _____ False
Explain:
5. I reported all gifts that I have received and given in accordance with ClariVest's Gift Policy over the past 12 months.
_____ True _____ False
Explain:
6. I have properly used ClariVest's name, properly used ClariVest's property and have used reasonable judgment when incurring travel expenses against ClariVest over the past 12 months.
_____ True _____ False
Explain:
7. I have not received any unreported personal gain or profit in connection with my position at ClariVest over the past 12 months.
_____ True _____ False
Explain:
8. I have not disbursed/disclosed private client information to individuals outside of ClariVest other than permitted by law and/or for specified purposes noted in ClariVest's Privacy Policy over the past 12 months.
_____ True _____ False
Explain:
9. I am not aware of any breaches to the Privacy Policy over the past 12 months.
_____ True _____ False
Explain:
10. I have reported all conflicts of interest in the proxy voting process (examples of which are contained in the proxy voting policies and procedures) that have come to my attention over the past 12 months.
_____ True _____ False
Explain:
11. As a supervisor, I have reported all material employee matters (i.e. misconduct, allegations, etc.) that have come to my attention over the past 12 months to Senior Management.
_____ Not Applicable (I do not maintain supervisory responsibilities
over other Employees)
_____ True _____ False
Explain:
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12. I have not, to the best of my knowledge, distributed any unapproved marketing materials over the past 12 months.
_____ True _____ False
Explain:
13. I have not entered into any marketing arrangements with outside individuals over the past 12 months that have not been reported to Senior Management.
_____ True _____ False
Explain:
14. I have, to the best of my knowledge, maintained books and records in accordance with ClariVest's books and recordkeeping policy, including records related to proxy voting, security valuation, trade errors, accounting, etc.
_____ True _____ False
Explain:
15. I have utilized my ClariVest email account in accordance with ClariVest's Electronic Communications Policy.
_____ True _____ False
Explain:
16. I am not aware of any fraudulent activity that has been committed against ClariVest Clients over the past 12 months.
_____ True _____ False
Explain:
17. I have not been subject to disciplinary action over the past 12 months that warrants disclosure on either Parts 1A or II of Adviser's Form ADV. (Note: If you have a question about what type of disciplinary action would warrant disclosure, please discuss with the CCO.)
_____ True _____ False
Explain:
18. I have not done anything indirectly which, if done directly, would result in a violation of Rule 206(4)-5 or ClariVest's pay to play policies and procedures set forth in the Code of Ethics.
_____ True _____ False
Explain:
19. I have informed the members of my immediate family sharing the same household of the pay to play policies and procedures set forth in ClariVest's Code of Ethics.
_____ True _____ False
Explain:
20. I (and my immediate family and controlled-PACs, each as described in the definition of "Covered Associate") have complied with the pay to play policies set forth in ClariVest's Code of Ethics.
_____ True _____ False
Explain:
21. I confirm that I (and my immediate family and controlled-PACs, each as described in the definition of "Covered Associate") have requested and received all required approvals for each Contribution in the past year.
_____ True _____ False
Explain:
If False, attached is a report disclosing all Contributions made during the past year.