INVESTMENT GOALS AND POLICIES

 

The Marsico Emerging Markets Fund (the “Fund”) is a diversified mutual fund whose goal is to seek long-term growth of capital.

 

FUNDAMENTAL INVESTMENT RESTRICTIONS

 

As indicated in the Prospectus, the Fund is subject to certain fundamental policies and restrictions that may not be changed without shareholder approval.  Shareholder approval means approval by the lesser of (i) more than 50% of the outstanding voting securities of the Trust (or a particular Fund if a matter affects just that Fund), or (ii) 67% or more of the voting securities present at a meeting if the holders of more than 50% of the outstanding voting securities of the Trust (or a particular Fund) are present or represented by proxy.  As fundamental policies, the Fund may not:

 

(1) Invest 25% or more of the value of its total assets in any particular industry (other than U.S. government securities).

 

(2) Invest directly in real estate; however, the Fund may own debt or equity securities issued by companies engaged in the real estate business.

 

(3) Purchase or sell physical commodities other than foreign currencies unless acquired as a result of ownership of securities (but this limitation shall not prevent the Fund from purchasing or selling options, futures, swaps and forward contracts or from investing in securities or other instruments backed by physical commodities).

 

(4) Lend any security or make any other loan if, as a result, more than 25% of the Fund’s total assets would be lent to other parties (but this limitation does not apply to purchases of commercial paper, debt securities or repurchase agreements).

 

(5) Act as an underwriter of securities issued by others, except to the extent that the Fund may be deemed an underwriter in connection with the disposition of portfolio securities of the Fund.

 

(6) Issue senior securities, except as permitted under the Investment Company Act of 1940, as amended (the “1940 Act”).

 

(7) Borrow money, except that the Fund may borrow money for temporary or emergency purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of the value of their respective total assets (including the amount borrowed) less liabilities (other than borrowings).  If borrowings exceed 33 1/3% of the value of the Fund’s total assets by reason of a decline in net assets, the Fund will reduce its borrowings within three days (not including Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation.  The following are not considered “borrowings” for this purpose, and this policy shall not prohibit the Fund from engaging in them:  reverse repurchase agreements; deposits of assets to margin or guarantee positions in futures, options, swaps or forward contracts; or the segregation of assets in connection with such contracts.  The Fund will not purchase securities while its borrowings exceed 5% of the Fund’s total assets.

 

In addition to the foregoing, as a fundamental policy, the Fund is a diversified investment company.  To help preserve this status, the Fund may not own more than 10% of the outstanding voting securities of any one issuer and, as to seventy-five percent (75%) of the value of its total assets, the Fund may not purchase the securities of any one issuer (except cash items and “government securities” as defined under the 1940 Act), if immediately after and as a result of each such purchase, the combined value of all purchases of the holdings of the Fund in the securities of such issuer (calculated separately for each purchase based on the percentage of total assets it constituted at the time of purchase) would exceed 5% of the value of the Fund’s total assets.  Subsequent changes in the market value of each security or other property purchased after the time it was purchased do not affect this calculation.  As an alternative to making the total asset calculation at the time of each purchase of securities, the Fund may instead determine its status as a diversified company not less frequently than quarterly, and may disregard interim changes in its total assets due to changes in the market value of its investments insofar as such changes might otherwise affect the Fund’s classification as a diversified company.

 

The Fund seeks to maintain its status as a regulated investment company under the Internal Revenue Code of 1986, as amended (the “Code”).  Among other requirements to preserve its status as a regulated investment company under the Code, the Fund may not own more than 10% of the outstanding voting securities of any one issuer and, as to fifty percent (50%) of the value of its total assets, the Fund may not purchase the securities of any one issuer (except cash items and “government securities” as defined under the 1940 Act), if at the end of each fiscal quarter, the value of the holdings of the Fund in the securities of such issuer (based on the percentage of total assets those holdings constituted at the end of each fiscal quarter) would exceed 5% of the value of the Fund’s total assets.  Fluctuations in the market value of the Fund’s portfolio between fiscal quarters will not cause the Fund to lose its status as a regulated investment company under the Code.  In addition, the Fund may not invest more than 25% of its total assets in a single issuer (other than U.S. government securities).  The Fund is also subject to the diversification requirements discussed above.

 

For purposes of the Fund’s restriction on investing in a particular industry, the Fund will rely primarily on industry classifications as defined under the Global Industry Classification Standard or, alternatively, as published by Bloomberg L.P.  To the extent that such classifications may be so broad that the primary economic characteristics in a single class are materially different, the Fund may further classify issuers in accordance with industry classifications published by the Securities and Exchange Commission (“SEC”).

 

ADDITIONAL INVESTMENT RESTRICTIONS

 

The Trustees have adopted additional investment restrictions for the Fund.  These restrictions are operating policies of the Fund and may be changed by the Trustees without shareholder approval.  The additional investment restrictions adopted by the Trustees to date include the following:

 

(a)           The Fund will not enter into any futures contracts if the full notional amount of the Fund’s commitments under outstanding futures contracts positions would exceed the market value of its total assets.

 

(b)           The Fund will not sell securities short, unless it owns the security sold short, or has an existing right to obtain a security equivalent in kind and amount to the security sold short without the payment of any additional consideration therefor, and provided that transactions in futures, options, swaps and forward contracts shall not be deemed to constitute selling securities short.

 

(c)           The Fund will not purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the clearance of transactions, and provided that margin payments and other deposits in connection with transactions in futures, options, swaps and forward contracts shall not be deemed to constitute purchasing securities on margin.

 

(d)           The Fund may not mortgage or pledge any securities owned or held by the Fund in amounts that exceed, in the aggregate, 15% of the Fund’s net asset value, provided that this limitation does not apply to reverse repurchase agreements, deposits of assets to margin, guarantee positions in futures, options, swaps or forward contracts, or the segregation of assets in connection with such contracts.

 

(e)           The Fund will not purchase any securities or enter into a repurchase agreement if, as a result, more than 15% of the Fund’s net asset value would be invested in repurchase agreements not entitling the holder to payment of principal and interest within seven days and in securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market.  The Trustees, or the Fund’s investment adviser acting pursuant to authority delegated by the Trustees, may determine that a readily available market exists for securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended (“Rule 144A Securities”), or any successor to such rule, and Section 4(2) commercial paper.  Accordingly, such securities may not be subject to the foregoing limitation.  In addition, a foreign security that may be freely traded on or through the facilities of an offshore exchange or other established offshore securities market is not subject to this limitation.

 

(f)           The Fund may not invest in companies for the purpose of exercising control over the management of such companies.

 

Except as otherwise noted herein and in the Prospectus, the Fund’s investment goal and policies may be changed by a vote of the Trustees without a vote of shareholders.

 

TYPES OF SECURITIES AND INVESTMENT TECHNIQUES

 

This section provides a more detailed description of some of the types of securities and other instruments in which the Fund may invest.  The Fund may invest in these instruments to the extent permitted by its investment goals and policies and by applicable law.  The Fund is not limited by this discussion and may invest in any other types of instruments not precluded by the policies discussed elsewhere in the Prospectus or SAI.

 

COMMON STOCK AND OTHER EQUITY SECURITIES

 

COMMON STOCK

 

The Fund, which invests at least 80% of its net assets (plus borrowings for investment purposes, if any) in the common stocks and other securities of issuers economically tied to emerging markets and selected for their long-term growth potential, may invest in common stocks.  Common stock represents a share of ownership in a company or other issuer, and usually carries voting rights and may be eligible to receive dividends if any are paid.  Unlike preferred stock, dividends on common stock are not fixed.  Certain risks associated with common stock investing are described in the Prospectus.

 

The Fund may also buy securities such as convertible debt, preferred stock, warrants or other securities exchangeable for shares of common stock.

The Fund may invest in initial public offerings (“IPOs”) of common stock or other equity or debt securities issued in primary or secondary syndicated offerings conducted by or on behalf of a corporate issuer (together “IPO securities”).  The purchase of IPO securities often involves higher transaction costs than those associated with the purchase of securities currently traded on exchanges or markets.  IPO securities are subject to market risk and liquidity risk.  The market value of recently issued IPO securities may fluctuate considerably due to factors such as the absence of a prior public market, lack of support for the issuer or offering, unseasoned trading and speculation, a potentially small number of securities available for trading, limited information about the issuer, and other factors.  The Fund may hold IPO securities for a period of time, or may sell them soon after the purchase.  Investments in IPO securities could have a magnified impact – either positive or negative – on the Fund’s performance while the Fund’s assets are relatively small.  The impact of IPO securities on the Fund’s performance may tend to diminish as the Fund’s assets grow.  In circumstances when investments in IPO securities make a significant contribution to the Fund’s performance, there can be no assurance that similar contributions from IPO securities will continue in the future.  Whether the Fund participates in these types of investments is dependent on many factors, and there can be no assurance that the Fund will participate in them.

 

CONVERTIBLE SECURITIES

 

Convertible securities are preferred stocks or bonds that pay a fixed dividend or interest payment and are convertible into common stock or other equity interests at a specified price or conversion ratio.  Although convertible bonds, convertible preferred stocks, and other securities convertible into equity securities may have some attributes of income securities or debt securities, the Fund generally treats such securities as equity securities.   By investing in convertible securities, the Fund may seek income, and may also seek the opportunity, through the conversion feature, to participate in the capital appreciation of the common stock or other interests into which the securities are convertible, while potentially earning a higher fixed rate of return than is ordinarily available in common stocks.  While the value of convertible securities depends in part on interest rate changes and the credit quality of the issuers, the value of these securities will also change based on changes in the value of the underlying stock.  Income paid by a convertible security may provide a limited cushion against a decline in the price of the security.  However, convertible securities generally have less potential for gain than common stocks.  Also, convertible bonds generally pay less income than non-convertible bonds.

 

WARRANTS AND RIGHTS

 

Warrants and rights are securities, typically issued with preferred stocks or bonds or common stocks, that give the holder the right to buy a proportionate amount of underlying securities at a specified “exercise” price, usually at a price that is higher than the market price of the stock at the time of issuance of the warrant or right.  The right may last for a specified period of time or indefinitely.  Warrants or rights may at times be issued in connection with certain corporate actions without requiring payment for the warrants or rights or for underlying securities, and may or may not be transferable.   The purchaser or holder of a warrant or right generally expects that the market price of the underlying security will eventually exceed the purchase price of the warrant or right plus the exercise price of the warrant, resulting in a profit.  Of course, since the market price may not exceed the exercise price on or before the expiration date of the warrant or right , the purchaser risks the loss of the entire purchase price of the warrant or right . Warrants may trade in the open market and may be sold rather than exercised.  Prices of warrants do not necessarily move in tandem with the prices of the underlying securities, and warrants may be considered speculative investments. Warrants and rights pay no dividends and generally confer no rights other than a purchase option. If a warrant or right is not sold or exercised by the date of its expiration, the purchaser or holder will lose its entire investment in such a warrant or right .

 

PARTNERSHIP SECURITIES

 

The Fund may invest in securities issued by publicly traded partnerships or master limited partnerships or limited liability companies (together referred to as “PTPs/MLPs”).  These entities are limited partnerships or limited liability companies that may be publicly traded on stock exchanges or markets such as the New York Stock Exchange (“NYSE”), the NYSE Alternext US LLC (“NYSE Alternext”) (formerly the American Stock Exchange) and NASDAQ.  PTPs/MLPs often own businesses or properties relating to energy, natural resources or real estate, or may be involved in the film industry or research and development activities.  Generally PTPs/MLPs are operated under the supervision of one or more managing partners or members.  Limited partners, unit holders, or members (such as the Fund, if it invests in a partnership) are not involved in the day-to-day management of the company.  Limited partners, unit holders, or members are allocated income and capital gains associated with the partnership project in accordance with the terms of the partnership or limited liability company agreement.

 

At times PTPs/MLPs may potentially offer relatively high yields compared to common stocks. Because PTPs/MLPs are generally treated as partnerships or similar limited liability “pass-through” entities for tax purposes, they do not ordinarily pay income taxes, but pass their earnings on to unit holders (except in the case of some publicly traded firms that may be taxed as corporations). For tax purposes, unit holders may be allocated taxable income and gains in amounts that are lower than the amount of distributions paid to the unit holders as a result of depreciation and other tax deductions available to the PTP/MLP.  In such a case any distributions in excess of allocated taxable income and gains would lower the cost basis of the units or shares owned by unit holders. As a result, unit holders may effectively defer taxation on the receipt of some distributions until they sell their units. These tax consequences may differ for different types of entities. If the Fund distributes to its shareholders the amount of distributions received from PTPs/MLPs that exceed the amount of taxable income or gains from such PTPs/MLPs, then the excess would generally be a treated as a return of capital to Fund shareholders for tax purposes. Although such a return of capital would not be taxed currently, there would be a corresponding reduction in the tax basis of Fund shares that would generally result in a higher taxable gain (or lower loss) on the subsequent sale of Fund shares.

 

Although the high yields potentially offered by these investments may be attractive, PTPs/MLPs have some disadvantages and present some risks.  Investors in a partnership or limited liability company may have fewer protections under state law than do investors in a corporation.  Distribution and management fees may be substantial.  Losses are generally considered passive and cannot offset income other than income or gains relating to the same entity.  These tax consequences may differ for different types of entities.  Many PTPs/MLPs may operate in certain limited sectors such as, without limitation, energy, natural resources, and real estate, which may be volatile or subject to periodic downturns.  Growth may be limited because most cash is paid out to unit holders rather than retained to finance growth.  The performance of PTPs/MLPs may be partly tied to interest rates.  Rising interest rates, a poor economy, or weak cash flows are among the factors that can pose significant risks for investments in PTPs/MLPs.  Investments in PTPs/MLPs also may be relatively illiquid at times.

 

The Fund may also invest in relatively illiquid securities issued by limited partnerships or limited liability companies that are not publicly traded.  These securities, which may represent investments in certain areas such as real estate or private equity, may present many of the same risks of PTPs/MLPs.  In addition, they may present other risks including higher management and distribution fees, uncertain cash flows, potential calls for additional capital, and very limited liquidity.

 

FOREIGN SECURITIES

 

Foreign securities are securities of issuers that are based in or otherwise economically tied to foreign countries.  Examples of foreign securities include, without limitation, equity or debt securities or other instruments issued by foreign governments or quasi-governmental entities, and the equity or debt securities of companies principally traded on non-U.S. securities markets, including securities traded in a foreign country as European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) or otherwise.  Foreign securities also may include the equity or debt securities of companies organized outside of the U.S. or with a principal office or place/s of business outside the U.S., and securities of companies that derive or are currently expected to derive 50% or more of their total sales, revenues, profits, earnings, growth, or another measure of economic activity from business outside the U.S., or that maintain or are currently expected to maintain a 50% or more of their employees, assets, investments, operations, or other business activity outside the U.S., or securities that otherwise expose a Fund’s assets to the economic fortunes and risks of countries outside the U.S.  In addition to or as an alternative to trading in non-U.S. markets, securities of some foreign companies may be listed or traded on U.S. securities exchanges or other U.S. markets as U.S.-listed foreign securities, ADRs, or otherwise.  Such U.S.-traded securities are considered “foreign securities” in which the Fund may invest.  As a general matter, emerging market securities also will often be foreign securities.

 

Individual foreign economies may differ favorably or unfavorably from the U.S. economy in respects such as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments positions.  Foreign securities and instruments involve certain inherent risks that may be different from those of domestic issuers, including political or economic instability in the issuer’s home country, foreign governmental control of some issuers, diplomatic developments which could affect U.S. investments in those countries or the securities of their issuers, changes in foreign currency and exchange rates and the possibility of adverse changes in investment or exchange control regulations. As a result of these and other factors, foreign securities purchased by the Fund may be subject to greater price fluctuation than securities of U.S. companies.

 

Most foreign stock markets are not as large or liquid as those operating in the United States.  Commissions on transactions on certain foreign stock exchanges may be generally higher than negotiated commissions paid for transactions on U.S. exchanges, and there may be less government supervision and regulation of foreign stock exchanges, brokers and companies than in the United States.  Investors should recognize that foreign markets have different clearance and settlement procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions.  Delays in settlement could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon.  The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities.  Inability to dispose of portfolio securities due to settlement problems either could result in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in a possible liability to the purchaser.  Payment for securities without delivery may be required in certain foreign markets.  Further, the Fund may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts.  Foreign governments may also control some issuers, seek to levy confiscatory taxes, nationalize or expropriate assets, and limit repatriations of assets.  Typically, there is less publicly available information about a foreign company than about a U.S. company, and foreign companies may be subject to less stringent reserve, accounting, auditing and reporting requirements.  It may be difficult for the Fund’s agents to keep currently informed about foreign corporate actions such as acquisitions or divestitures, rights offerings, dividends, foreign legal or compliance requirements or restrictions, or other matters which may affect the value of portfolio securities.  Foreign issuers also may impose burdensome proxy voting requirements that may prevent or discourage the Fund from exercising any voting rights it may have as a shareholder.

 

Arrangements with foreign custodians are generally necessary to hold Fund assets in foreign countries.  These foreign custody arrangements may pose potential risks.  A foreign bank or securities depository or other custodian may maintain internal controls that differ from those customarily applicable to U.S. custodians, may face less stringent regulatory scrutiny, and may be subject to less extensive legal or financial protections for asset holders.

 

Communications between the United States and foreign countries may be less reliable than within the United States, thus increasing the risk of delayed settlements of portfolio transactions or loss of certificates for portfolio securities. Because investments in foreign securities will usually involve currencies of foreign countries, and because the Fund may hold foreign currencies, the value of the assets of the Fund as measured in U.S. dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the Fund may incur costs in connection with conversions between various currencies.  The Fund typically must buy and sell foreign currencies in order to settle trades in foreign securities that are not denominated in U.S. dollars.  Although foreign exchange dealers typically do not charge an explicit fee or commission for U.S. dollar/foreign currency conversion transactions, they do realize a profit based on the difference (the “spread”) between the prices at which they are buying and selling currencies.  Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate should the Fund desire to resell that currency to the dealer.

 

The Fund will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward foreign currency exchange contracts or purchasing or writing put or call options on foreign currencies.

 

Although the Fund values its assets daily in terms of U.S. dollars, it does not intend necessarily to convert all of its holdings of foreign currencies into U.S. dollars on a daily basis.  The Fund will frequently undertake such currency conversions, however, and investors should be aware of the costs of these conversions.

 

EMERGING MARKET SECURITIES

 

Emerging market securities are securities of issuers economically tied to emerging markets.  Issuers considered to be “economically tied” to emerging markets include, without limitation: (1) an issuer organized under the laws of or maintaining a principal office or principal place/s of business in one or more emerging markets; (2) an issuer of securities that are principally traded in one or more emerging markets; (3) an issuer that derives or is currently expected to derive 50% or more of its total sales, revenues, profits, earnings, growth, or another measure of economic activity from, the production or sale of goods or performance of services or making of investments or other economic activity in, one or more emerging markets, or that maintains or is currently expected to maintain 50% or more of its employees, assets, investments, operations, or other business activity in one or more emerging markets; (4) a governmental or quasi-governmental entity of an emerging market; or (5) any other issuer that the investment adviser believes may expose the Fund’s assets to the economic fortunes and risks of emerging markets.  The investment adviser may consider any one of the five factors provided when making a determination that an issuer is “economically tied” to emerging markets.  The investment adviser may consider an issuer to be economically tied to emerging markets even though it may be based in a developed market such as the United States.   Such U.S.-traded securities are considered “emerging market securities” in which the Fund may invest.

 

The Fund will invest in the securities of issuers economically tied to emerging markets, which may present greater risks than investing in securities of foreign issuers based in more developed markets in general, as discussed above. A number of emerging markets restrict direct foreign investment in common stocks or other securities and impose other costly or burdensome obstacles in the paths of foreign investors.  Repatriation of investment income, capital, and the proceeds of sales by foreign investors may be more difficult, and may require governmental registration and/or approval in some emerging market countries.  A number of the currencies of developing countries have experienced significant declines against the U.S. dollar in recent years, and devaluation may occur subsequent to investments in securities associated with 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.  Many of the emerging securities markets are relatively small, have low trading volumes, impose burdensome investment or trading requirements, suffer periods of relative illiquidity, and are characterized by significant price volatility.  There is the risk that a future economic or political crisis could lead to price controls, forced mergers of companies, temporary restrictions on Fund assets, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies, any of which could have a detrimental effect on the Fund’s investments.  In addition, the currencies of emerging market countries often trade at wider spreads than the currencies of developed countries, thus increasing the costs of engaging in those transactions.

 

HYBRID EQUITY-RELATED SECURITIES AND INVESTMENTS

 

Certain types of income or debt securities described below, such as preferred stock and index-linked or structured securities or instruments, also may have some attributes of equity securities.

 

FIXED OR VARIABLE INCOME SECURITIES AND OTHER DEBT SECURITIES

 

The Fund may invest up to 15% of its total assets in various types of fixed income or variable income securities.  Fixed income securities are income-producing securities that pay a specified rate of return.  Such securities generally include, without limitation, short- and long-term government, government agency, corporate or municipal debt obligations that pay a specified rate of interest or coupons for a specified period of time, preferred stocks that pay fixed dividends, high-yield securities, and other securities that pay fixed yields or a specified rate of return and are generally not convertible into equity securities (preferred stock is further described below).  Although convertible bonds, convertible preferred stocks, and other securities convertible into equity securities may have some attributes of income securities or debt securities, the Fund generally treats such securities as equity securities.

 

Variable income securities are certain types of income securities that may provide for rates of interest that can vary or float, or for coupon payment features which would provide a variable or floating rate of return.

 

Investments in certain categories of fixed income or variable income securities are described below.

 

CORPORATE DEBT SECURITIES

 

Corporate debt securities include corporate bonds, debentures, notes and other similar corporate debt instruments , including convertible securities.

 

The investment return on a corporate debt security reflects interest earnings and changes in the market value of the security. The market value of corporate debt obligations may be expected to rise and fall inversely with interest rates generally. There is also a risk that the issuers of the securities may not be able to meet their obligations on interest or principal payments at the time called for by the debt instrument. Bonds rated C or lower or its equivalent by a rating agency (which may include certain so-called “junk bonds” discussed further under “High-Yield/High Risk Securities” below) are considered by the rating agency to be subject to greater risk of loss of principal and interest than higher-rated securities and are considered to be predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal, which may decline further during sustained periods of deteriorating economic conditions or rising interest rates.  These securities may also be considered to have poor prospects of attaining investment-grade status, to have a current identifiable vulnerability to default, to be unlikely to have the capacity to pay interest and repay principal when due in the event of adverse business, financial or economic conditions, and/or to be in default or not current in the payment of interest or principal.

 

U.S. GOVERNMENT SECURITIES

 

U.S. government securities include direct obligations of the U.S. government that are supported by its full faith and credit.  Treasury bills have initial maturities of less than one year, Treasury notes have initial maturities of one to ten years, and Treasury bonds may be issued with any maturity but generally have initial maturities of at least ten years.  U.S. government securities also may be deemed to include certain indirect obligations of the U.S. government that are issued by federal agencies and government-sponsored enterprises (“GSEs”).  These entities generally are private corporations charted or created by Acts of Congress to assist in lowering the costs of certain types of borrowings such as mortgages or student loans.  Unlike Treasury securities, however, agency securities generally are not backed by the full faith and credit of the U.S. government.  Some agency securities are supported by the right of the issuer to borrow from the Treasury, others are supported by the discretionary authority of the U.S. government to purchase the agency’s obligations, and others are supported only by the credit of the sponsoring agency.

 

Regarding securities issued by certain of these entities (such as debt securities or mortgage-backed securities issued by Freddie Mac (also known as the Federal Home Loan Mortgage Corporation or FHLMC), Fannie Mae (also known as the Federal National Mortgage Corporation or FNMA), Federal Home Loan Banks, and other government-sponsored enterprises), you should be aware that although the issuer may be chartered or sponsored by Acts of Congress, the issuer is not funded by Congressional appropriations, and its debt and equity securities are neither guaranteed nor insured by the U.S. government.  Without a more explicit commitment, there can be no assurance that the U.S. government will provide financial support to such issuers or their securities.

 

Mortgage-backed securities and other securities issued by participants in housing finance and real estate-related markets have experienced extraordinary recent weakness.  On September 6, 2008, the Federal Housing Finance Authority (“FHFA”), an agency of the U.S. government, placed Fannie Mae and Freddie Mac into conservatorship under its authority with the stated purpose to preserve and conserve each entity’s assets and property, and to put each entity in a sound and solvent condition.  The effect that this conservatorship will have on these entities’ debt and equities is unclear, and no assurance can be given that any steps taken by the FHFA or the U.S. Treasury with respect to Fannie Mae or Freddie Mac will succeed.  Fannie Mae and Freddie Mac have each been and remain the subject of investigations by federal regulators over certain accounting matters.  Such investigations, and any resulting restatements of financial statements, may adversely affect these entities and, as a result, the payment of principal or interest on securities they issue.

 

PREFERRED STOCK

 

Preferred stock is a class of stock that generally pays dividends at a specified rate and has preference over common stock in the payment of dividends and liquidation.  Although preferred stocks may have some attributes of equity securities, the Fund generally treats such securities as income securities or debt securities.  Preferred stock generally does not carry voting rights.  Preferred stock dividends are generally fixed in advance, but the company may not be required to pay a dividend if, for example, it lacks the financial ability to do so.  Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer’s common stock until all unpaid preferred stock dividends have been paid.  The Fund may also invest in non-cumulative preferred stocks that do not accrue unpaid dividends.  Preferred stock also may be subject to optional or mandatory redemption provisions.

 

TRUST-PREFERRED SECURITIES

 

The Fund may also invest in trust-preferred securities.  These securities, also known as trust-issued securities, are securities that have characteristics of both debt and equity instruments and are typically treated by the Fund as debt investments.

 

Generally, trust-preferred securities are cumulative preferred stocks issued by a trust that is created by a financial institution, such as a bank holding company. The financial institution typically creates the trust with the objective of increasing its capital by issuing subordinated debt to the trust in return for cash proceeds that are reflected on its balance sheet.

 

The primary asset owned by the trust is the subordinated debt issued to the trust by the financial institution, The financial institution makes periodic interest payments on the debt as discussed further below.  The financial institution will subsequently own the trust’s common securities, which may typically represent a small percentage of the trust’s capital structure. The remainder of the trust’s capital structure typically consists of trust-preferred securities which are sold to investors. The trust uses the sales proceeds to purchase the subordinated debt issued by the financial institution. The financial institution uses the proceeds from the subordinated debt sale to increase its capital while the trust receives periodic interest payments from the financial institution for holding the subordinated debt.

 

The trust uses the interest received to make dividend payments to the holders of the trust-preferred securities. The dividends are generally paid on a quarterly basis and are often higher than other dividends potentially available on the financial institution’s common stocks. The interests of the holders of the trust-preferred securities are senior to those of common stockholders in the event that the financial institution is liquidated, although their interests are typically subordinated to those of other holders of other debt issued by the institution.

 

The primary benefit for the financial institution in using this particular structure is that the trust-preferred securities issued by the trust are treated by the financial institution as debt securities for tax purposes (as a consequence of which the expense of paying interest on the securities is tax deductible), but are treated as more desirable equity securities for purposes of the calculation of capital requirements.

 

In certain instances, the structure involves more than one financial institution and thus, more than one trust. In such a pooled offering, an additional separate trust may be created. This trust will issue securities to investors and use the proceeds to purchase the trust-preferred securities issued by other trust subsidiaries of the participating financial institutions. In such a structure, the trust-preferred securities held by the investors are backed by other trust-preferred securities issued by the trust subsidiaries.

 

The risks associated with trust-preferred securities typically include the financial condition of the financial institution/s, as the trust typically has no business operations other than holding the subordinated debt issued by the financial institution/s and issuing the trust-preferred securities and common stock backed by the subordinated debt. If a financial institution is financially unsound and defaults on interest payments to the trust, the trust will not be able to make dividend payments to holders of the trust-preferred securities such as the Fund.

 

INDEXED/STRUCTURED SECURITIES AND STRUCTURED PRODUCTS

 

Index-linked, equity-linked, credit-linked and commodity-linked securities can be either debt or equity securities that call for interest payments and/or payment at maturity in different terms than the typical note where the borrower agrees to make fixed interest payments and to pay a fixed sum at maturity.  Indexed/structured securities are typically short- to intermediate-term debt or equity securities whose value at maturity or interest rate is linked to currencies, interest rates, equity securities, indices, commodity prices or other financial indicators.  Such securities may be positively or negatively indexed (i.e., their value may increase or decrease if the reference index or instrument appreciates).  Indexed/structured securities may have return characteristics similar to direct investments in the underlying instruments and may be more volatile than the underlying instruments.  The purchaser bears the market risk of an investment in the underlying instruments, as well as the credit risk of the issuer.

 

Principal and/or interest payments may depend on the performance of an underlying stock, index, or a weighted index of commodity futures such as crude oil, gasoline and natural gas.  With respect to equity-linked securities, at maturity, the principal amount of the debt is exchanged for common stock of the issuer or is payable in an amount based on the issuer’s common stock price at the time of maturity.  Currency-linked debt securities are short-term or intermediate-term instruments that have a value at maturity, and/or an interest rate, determined by reference to one or more foreign currencies.  Payment of principal or periodic interest may be calculated as a multiple of the movement of one currency against another currency, or against an index.

 

One common type of linked security is a “structured” product.  Structured products, including structured notes or synthetic securities, generally are individually negotiated agreements and may be traded over-the-counter.  They are organized and operated to restructure the investment characteristics of the underlying security.  This restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments (such as commercial bank loans) and the issuance by that entity of one or more classes of securities (“structured securities”) backed by, or representing interests in, the underlying instruments.  The cash flow on the underlying instruments may be apportioned among the newly issued structured securities to create securities with different investment characteristics, such as varying maturities, payment priorities and interest rate provisions, and the extent of such payments made with respect to structured securities is dependent on the extent of the cash flow on the underlying instruments.  Certain synthetic securities such as equity micro-strategies may be linked to the performance of a basket of equity securities, equity indices, or other equity or debt exposures.

 

Other structured products, such as exchange-traded funds, may have substantial attributes of equity securities.  Exchange-traded funds generally are intended to track an underlying portfolio of securities, trade like a share of common stock, and may pay periodic dividends proportionate to those paid by the portfolio of stocks that comprise a particular index.  As a holder of interests in an exchange-traded fund, the Fund would indirectly bear its ratable share of that fund’s expenses, including applicable management fees.  At the same time, the Fund would continue to pay its own management and advisory fees and other expenses, as a result of which the Fund and its shareholders in effect may be absorbing multiple levels of certain fees with respect to investments in such exchange-traded funds.

 

STRIP BONDS

 

Strip bonds are debt securities that are stripped of their interest component (usually by a financial intermediary) after the securities are issued.  The market value of these securities generally fluctuates more in response to changes in interest rates than interest-paying securities of comparable maturity.

 

ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES

 

The Fund may invest up to 5% of its assets in the aggregate in zero coupon, pay-in-kind and step coupon securities.  Zero coupon bonds are issued and traded at a discount from their face value.  They do not entitle the holder to any periodic payment of interest prior to maturity.  Pay-in-kind bonds normally give the issuer an option to pay cash at a coupon payment date or give the holder of the security a similar bond with the same coupon rate and a face value equal to the amount of the coupon payment that would have been made.  Step coupon bonds 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.  The discount from the face amount or par value depends on the time remaining until cash payments begin, prevailing interest rates, liquidity of the security, the perceived credit quality of the issuer, and other factors.

 

Current federal income tax law requires holders of zero coupon securities and step coupon securities to report the portion of the original issue discount on such securities that accrues during a given year as interest income, even though the holders receive no cash payments of interest during the year.  In order to qualify as a “regulated investment company” under the Code, the Fund must distribute its investment company taxable income, including the original issue discount accrued on zero coupon or step coupon bonds.  Because the Fund will not receive cash payments on a current basis in respect of accrued original-issue discount payments, in some years the Fund may have to distribute cash obtained from other sources in order to satisfy the distribution requirements under the Code.  The Fund might obtain such cash from selling other portfolio holdings which might cause the Fund to incur capital gains or losses on the sale.  Additionally, these actions are likely to reduce the assets to which mutual fund expenses could be allocated and to reduce the rate of return for the Fund.  In some circumstances, such sales might be necessary in order to satisfy cash distribution requirements even though investment considerations might otherwise make it undesirable for the Fund to sell the securities at the time.

 

Generally, the market prices of zero coupon, step coupon and pay-in-kind securities are more volatile than the prices of securities that pay interest more regularly and in cash, and are likely to respond to changes in interest rates to a greater degree than other types of debt securities having similar maturities and credit quality.

 

PASS-THROUGH SECURITIES

 

The Fund may invest up to 5% of its total assets in various types of pass-through securities, such as mortgage-backed securities and asset-backed securities.

 

A pass-through security is a share or certificate of interest in a pool of debt obligations that have been repackaged by an intermediary, such as a bank or broker-dealer.  The purchaser of a pass-through security receives an undivided interest in the underlying pool of securities.  The issuers of the underlying securities make interest and principal payments to the intermediary which are passed through to purchasers, such as the Fund.  The most common type of pass-through securities are mortgage-backed securities.  Ginnie Mae (also known as the Government National Mortgage Association or GNMA) Certificates are mortgage-backed securities that evidence an undivided interest in a pool of mortgage loans.  GNMA Certificates differ from bonds in that principal is paid back monthly by the borrowers over the term of the loan rather than returned in a lump sum at maturity.  The Fund will generally purchase “modified pass-through” GNMA Certificates, which entitle the holder to receive a share of all interest and principal payments paid and owned on the mortgage pool, net of fees paid to the “issuer” and GNMA, regardless of whether or not the mortgagor actually makes the payment.  GNMA Certificates are backed as to the timely payment of principal and interest by the full faith and credit of the U.S. government. Freddie Mac issues two types of mortgage pass-through securities: mortgage participation certificates (“PCs”) and guaranteed mortgage certificates (“GMCs”).  PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owned on the underlying pool.  Freddie Mac guarantees timely payments of interest on PCs and the full return of principal.  GMCs also represent a pro rata interest in a pool of mortgages.  However, these instruments pay interest semi-annually and return principal once a year in guaranteed minimum payments.  This type of security is guaranteed by Freddie Mac as to timely payment of principal and interest but it is not guaranteed by the full faith and credit of the U.S. government.

 

Fannie Mae issues guaranteed mortgage pass-through certificates (“Fannie Mae Certificates”).  Fannie Mae Certificates resemble GNMA Certificates in that each Fannie Mae Certificate represents a pro rata share of all interest and principal payments made and owned on the underlying pool.  This type of security is guaranteed by Fannie Mae as to timely payment of principal and interest but it is not guaranteed by the full faith and credit of the U.S. government.

 

Except for GMCs, each of the mortgage-backed securities described above is characterized by monthly payments to the holder, reflecting the monthly payments made by the borrowers who received the underlying mortgage loans.  The payments to the security holders (such as the Funds), like the payments on the underlying loans, represent both principal and interest.  Although the underlying mortgage loans are for a specified period of time, such as 20 or 30 years, the borrowers can, and typically do, pay them off sooner.  Thus, the security holders frequently receive prepayments of principal in addition to the principal that is part of the regular monthly payments.  A portfolio manager will consider estimated prepayment rates in calculating the average weighted maturity of a pool.  A borrower is more likely to prepay a mortgage that bears a relatively high rate of interest compared to rates currently available.  This means that in times of declining interest rates, higher yielding mortgage-backed securities held by the Fund might be converted to cash and that the Fund would be forced to accept lower interest rates when that cash is used to purchase additional securities in the mortgage-backed securities sector or in other investment sectors.  Additionally, prepayments during such periods will limit the Fund’s ability to participate in as large a market gain as may be experienced with a comparable security not subject to prepayment.

 

Asset-backed securities represent interests in pools of consumer loans and are backed by paper or accounts receivables originated by banks, credit card companies or other providers of credit.  Generally, the originating bank or credit provider is neither the obligor nor the guarantor of the security, and interest and principal payments ultimately depend upon repayment of the underlying loans by the consumers.

 

Mortgage-backed and other securities issued by participants in housing finance and real estate-related markets have experienced extraordinary recent weakness.  The value of some asset-backed securities, including mortgage-backed securities, can decline sharply when changing circumstances such as falling home prices, increasing defaults, a weakening economy, an increase in personal or corporate bankruptcies, or other factors adversely affect borrowers’ ability to repay loans that back such securities.  These securities also involve prepayment risk which is the risk that the underlying mortgages or other debt may be refinanced or paid off prior to their maturities.  In these circumstances, the Fund may be unable to recoup all of its initial investment or may receive a lower-than-expected yield from this investment and may need to reinvest in lower-yielding securities.

 

As discussed above in the section addressing U.S. government securities, securities issued by U.S. government agencies or GSEs may or may not be guaranteed by the U.S. government.  GNMA, a wholly-owned U.S. government corporation, is authorized to guarantee, with the full faith and credit of the U.S. government, the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of mortgages insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.  Other GSEs whose guarantees and securities are not backed by the full faith and credit of the U.S. government may include, for example, Fannie Mae and Freddie Mac.  Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest by Fannie Mae but are not backed by the full faith and credit of the U.S. government.  Freddie Mac guarantees the timely payment of interest and ultimate collection of principal, but its participation certificates are not backed by the full faith and credit of the U.S. government.

 

HIGH-YIELD/HIGH-RISK SECURITIES

 

The Fund may invest up to 10% of its total assets in debt securities that are rated below investment grade under rating designations that may change from time to time.  (For split-rated securities, the Fund will generally consider the lowest rating received in computing the 5% test).  Corporate debt securities of this type are often referred to as “high-yield” securities or as “junk bonds.”  These securities may be subject to potentially higher risks of default and greater volatility than other debt securities, including risks that the issuer may not be able to meet its obligation to repay principal or pay interest.  High-yield securities involve a higher degree of credit risk than do investment-grade securities.  Credit risk is the risk that the issuer will not be able to make interest or principal payments when due.  In the event of an unanticipated default, the Fund would experience a reduction in its income, and could expect a decline in the market value of the securities so affected.  In addition, the secondary market on which these types of securities trade may be more volatile or less liquid than the market for investment-grade securities.  The Fund will not purchase debt securities that are rated lower than C or its equivalent by rating agencies (or, if unrated, deemed of equivalent quality) at the time of purchase,  but will not be required to dispose of a security if it is downgraded below this level after the time of purchase.

 

The Fund may invest in unrated debt securities of foreign and domestic issuers.  Unrated debt, while not necessarily of lower quality than rated securities, may not have as broad a market.  Unrated debt securities will be included in the stated limit for investments in high-yield securities by the Fund unless the investment adviser deems such securities to be the equivalent of investment-grade securities.

 

FINANCIAL AND MARKET RISKS OF HIGH-YIELD SECURITIES.  Investments in high-yield securities involve a higher degree of financial and market risks that could result in substantial losses.  High-yield securities may be more vulnerable than other corporate debt securities to real or perceived economic changes, political changes or adverse developments specific to the issuer.  Issuers of such securities may have substantial capital needs and may be more likely to become involved in bankruptcy or reorganization proceedings.  Among the potential problems involved in investments in such issuers is the fact that it may be more difficult to obtain information about the financial condition of such issuers.  The market prices of such securities may be subject to abrupt and erratic movements and above average price volatility, and the spread between the bid and asked prices of such securities may be greater than normally expected.

 

DISPOSITION OF HIGH-YIELD SECURITIES.  Although the Fund generally will purchase securities for which the Adviser expects an active market to be maintained, high-yield securities may be less actively traded than other securities and it may be more difficult to dispose of substantial holdings of such securities at prevailing market prices.  Overall holdings of such securities would, in any event, be limited as described above.

 

CREDIT RISKS OF HIGH-YIELD SECURITIES.  The value of lower quality securities generally is more dependent on the ability of the issuer to meet interest and principal payments than is the case for higher quality securities.  Conversely, the value of these lower-quality securities may be less sensitive to interest rate movements than is the case with higher quality securities.  Issuers of high-yield securities may not be as strong financially as those issuing debt securities with higher credit ratings.  Investments in such companies are considered to be more speculative than higher quality investments.

 

OTHER INCOME-PRODUCING SECURITIES

 

Other types of income producing securities that the Fund may purchase include, but are not limited to, the following types of securities:

 

VARIABLE AND FLOATING RATE OBLIGATIONS.  These types of securities are relatively long-term instruments that often carry demand features permitting the holder to demand payment of principal at any time or at specified intervals prior to maturity.  Variable rate obligations are debt securities that provide for periodic adjustments in their interest rate.  Floating rate obligations are debt securities with a floating rate of interest that is tied to another benchmark such as a money market index or Treasury bill rate.

 

STANDBY COMMITMENTS.  These instruments, which are similar to a put, give the Fund the option to obligate a broker, dealer or bank to repurchase a security held by the Fund at a specified price.

 

TENDER OPTION BONDS.  Tender option bonds are relatively long-term bonds that are coupled with the agreement of a third party (such as a broker, dealer or bank) to grant the holders of such securities the option to tender the securities to the institution at periodic intervals.

 

INVERSE FLOATERS.  Inverse floaters are debt instruments whose interest bears an inverse relationship to the interest rate on another security.  The Fund will not invest more than 5% of its net assets in inverse floaters.

 

The Fund will purchase standby commitments, tender option bonds and instruments with demand features primarily for the purpose of increasing the liquidity of its portfolio.

 

REAL ESTATE INVESTMENT TRUSTS (“REITs”) AND OTHER INVESTMENTS RELATING TO REAL ESTATE

 

The Fund may invest in REITs and other securities or investments backed by real estate-related interests.  REITs are pooled investment vehicles that invest primarily in income-producing real estate or real estate-related loans or interests.  REITs generally invest in the ownership or financing of real estate projects such as land or buildings, or real estate-related securities such as mortgage-backed securities, or the funding of real estate ventures.  REITs typically pay dividends.  Although securities issued by REITs may have some attributes of income securities or debt securities, the Fund generally treats such securities as equity securities.  To the extent that the Fund invests in REITs, the Fund will indirectly bear its proportionate share of any additional fees or expenses (such as operating expenses and advisory fees) paid by the REITs in which it invests.

 

REITs are generally classified as equity REITs, mortgage REITs, or a combination of equity and mortgage REITs.  Equity REITs invest most of their assets directly in real property and derive income primarily from the collection of rents.  Equity REITs can also realize capital gains by selling properties that have appreciated in value.  Mortgage REITs invest most of their assets in real estate mortgages and derive income from interest payments .  

 

Like investment companies, REITs are not taxed on income distributed to shareholders if they comply with several requirements of the Code.

 

The risks of investing in REITs and other securities or investments backed by real estate-related interests include the extraordinary weakness and volatility in recent years affecting mortgage-backed securities, derivatives, and other investments backed by real-estate related obligations issued by participants in housing finance, commercial real estate, and other real estate-related markets; widespread defaults in such investments; and major disruptions of and illiquidity in markets for such investments.  Other adverse factors affecting REITs include past overinvestment in and defaults on residential and commercial mortgages, the recent severe recession, weak economic conditions, and environmental and other considerations.  In addition, when interest rates rise, real estate-related investments may react negatively, particularly investments that are highly exposed to floating rate debt.  In addition to the risks discussed above, REITs may be affected by any changes in the value of the underlying property owned by the trusts or by the quality of any credit extended to borrowers.  REITs are dependent upon management skill, are not diversified, and are therefore subject to the risk of financing single or a limited number of projects.  REITs are also subject to heavy cash flow dependency, defaults by borrowers, and the possibility of failing to qualify for special tax treatment under Subchapter M of the Code or to maintain an exemption from registration as an investment company under the 1940 Act.  Finally, certain REITs may be self-liquidating, in that a specific term of existence is provided for in trust documents and such REITs run the risk of liquidating at an economically inopportune time.

 

Although the Fund will not invest directly in real estate, it may invest in other real estate equity securities or related investments in addition to REITs.  As a result, an investment in the Fund may be subject to certain risks associated with the direct or indirect ownership of real estate and with the real estate industry in general.  These risks include, among others:

 

 

 

ILLIQUID INVESTMENTS

 

The Fund may invest up to 15% of its net assets in illiquid securities, which are securities that cannot be sold or disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities.  There may be a limited trading market for illiquid securities, and a low trading volume of a particular security may result in abrupt, erratic, or unfavorable price movements.  The Fund may be unable to dispose of its holdings in illiquid securities at full value in a short period of time and may have to dispose of such securities over extended periods of time or at sharply discounted prices.  Marsico Capital Management, LLC (“Marsico Capital” or the “Adviser”) will take reasonable steps to bring the Fund into compliance with this policy if the level of illiquid investments exceeds 15%.

 

The Fund may invest in (i) securities that are sold in private placement transactions between issuers and their purchasers and that are neither listed on an exchange nor traded over-the-counter, and (ii) Rule 144A Securities. Such securities are typically subject to contractual or legal restrictions on subsequent transfer.  As a result of trading restrictions, the absence of a public trading market, and potentially limited pricing information, such restricted securities may in turn be less liquid and more difficult to value than publicly traded securities.  Although these securities often may be resold in privately negotiated transactions, the prices realized from the sales could, due to illiquidity or other factors, be less than those originally paid by the Fund or less than their fair value, and in some instances it may be difficult to locate any purchaser.  In addition, issuers whose securities are not publicly traded may not be subject to the same disclosure and other investor protection requirements that may be applicable if their securities were publicly traded.  If any privately placed or Rule 144A Securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration.  Such registration may not be feasible, or may not be pursued for other reasons.  Securities which are freely tradable under Rule 144A may be treated as liquid if the Trustees of the Fund are satisfied that there is sufficient trading activity and reliable price information.  Investing in Rule 144A Securities could have the effect of increasing the level of illiquidity of the Fund’s portfolio if the securities must be treated as illiquid because other qualified institutional buyers are not interested in purchasing such Rule 144A Securities.

 

The Trustees have authorized Marsico Capital to make liquidity determinations with respect to the Fund’s securities, including private placements, Rule 144A Securities and commercial paper.

 

Under compliance policies and procedures approved by the Trust’s Board of Trustees concerning Rule 144A Securities, to assist in making determinations about Rule 144A Securities, the Funds will consider, on a case-by-case basis, reasonably available information about factors such as the following: (1) recent trading information for the security, such as available information about the frequency of trades and quoted prices for the  security, as determined in the discretion of Marsico Capital; (2) the number of dealers recently willing to purchase or sell the security and the number of other known potential purchasers, as determined in the discretion of Marsico Capital; (3) the willingness of dealers to undertake to make a market in the security, including any dealer undertakings to do so; (4) the nature of the security and the nature of the marketplace trades in the security (including factors such as the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer); and (5) other factors, if any, which Marsico Capital deems relevant to determining the existence of a trading market for the security.

 

In the case of commercial paper, Marsico Capital may consider whether the paper is traded “flat” (when, for example, the buyer of the security is not responsible for paying interest that has accrued since the last payment because the security is in default) or otherwise in default as to principal and interest and any ratings of the paper by a nationally recognized statistical rating organization (“NRSRO”).  A foreign security that may be freely traded on or through the facilities of an offshore exchange or other established offshore securities market is not deemed to be a restricted security subject to these procedures.

 

FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS

 

FUTURES CONTRACTS.  To the extent described in the Prospectus, the Fund may enter into contracts for the purchase or sale for future delivery of fixed-income securities, foreign currencies, single stocks, narrow-based stock indices or contracts based on financial indices, including indices of U.S. government securities, foreign government securities, equity or fixed-income securities.  U.S. futures contracts (with the exception of single stock futures and narrow-based stock index futures) are traded on exchanges which have been designated “contract markets” by the Commodity Futures Trading Commission (“CFTC”) and must be executed through a futures commission merchant (“FCM”), or brokerage firm, which is a member of the relevant contract market.  Through their clearing corporations, the exchanges guarantee performance of the contracts as between the clearing members of the exchange.  Single stock futures and narrow-based stock index futures are traded on exchanges designated as contract markets by the CFTC and regulated as securities exchanges by the SEC or on foreign exchanges.

 

Generally, with respect to futures contracts other than futures on individual stocks or narrow-based stock indices, the buyer or seller of a futures contract is not required to deliver or pay for the underlying instrument unless the contract is held until the delivery date.  However, both the buyer and seller are required to deposit “initial margin” for the benefit of the FCM when the contract is entered into.  Initial margin deposits are equal to a percentage of the contract’s value, as set by the exchange on which the contract is traded, and may be maintained in cash or certain other liquid assets by the Fund’s custodian for the benefit of the FCM.  Initial margin payments are similar to good faith deposits or performance bonds.  Unlike margin extended by a securities broker, initial margin payments do not constitute purchasing securities on margin for purposes of the Fund’s investment limitations.  If the value of either party’s position declines, that party will be required to make additional “variation margin” payments for the benefit of the FCM to settle the change in value on a daily basis.  The party that has a gain may be entitled to receive all or a portion of this amount.  In the event of the bankruptcy of the FCM that holds margin on behalf of the Fund, the Fund may be entitled to return of margin owed to the Fund only in proportion to the amount received by the FCM’s other customers.  The Fund will comply with Rule 17f-6 under the 1940 Act in maintaining margin payments with any FCMs with which the Fund does business, including by seeking contractual assurances that the FCM segregates customer margin payments from the FCM’s own assets.

 

Pursuant to claims for exemption filed with the CFTC and/or the National Futures Association on behalf of the Fund and the Adviser, the Fund and the Adviser are not deemed to be a “commodity pool” or “commodity pool operator” under the Commodity Exchange Act and are not subject to registration or regulation as such under the Commodity Exchange Act.

 

Generally, although the Fund will segregate cash and liquid assets in an amount sufficient to cover its open futures obligations, the segregated assets would be available to the Fund immediately upon closing out the futures position, while settlement of securities transactions could take several days.  However, because the Fund’s cash that may otherwise be invested would be held uninvested or invested in other liquid assets so long as the futures position remains open, the Fund’s return could be diminished due to the opportunity costs of foregoing other potential investments.

 

The Fund’s primary purpose in entering into futures contracts is to protect the Fund from fluctuations in the value of securities or interest rates without actually buying or selling the underlying debt or equity security.  For example, if the Fund anticipates an increase in the price of stocks, and it intends to purchase stocks at a later time, the Fund could enter into a futures contract to purchase a stock index as a temporary substitute for stock purchases.  If an increase in the market occurs that influences the stock index as anticipated, the value of the futures contracts will increase, thereby serving as a hedge against the Fund not participating in a market advance.  This technique is sometimes known as an anticipatory hedge.  To the extent the Fund enters into futures contracts for this purpose, the segregated assets maintained to cover the Fund’s obligations with respect to the futures contracts will consist of other liquid assets from its portfolio in an amount equal to the difference between the contract price and the aggregate value of the initial and variation margin payments made by the Fund with respect to the futures contracts.

 

Conversely, if the Fund holds stocks and seeks to protect itself from a decrease in stock prices, the Fund might sell stock index futures contracts, thereby hoping to offset the potential decline in the value of its portfolio securities by a corresponding increase in the value of the futures contract position.  The Fund could protect against a decline in stock prices by selling portfolio securities and investing in money market instruments, but the use of futures contracts enables it to maintain a defensive position without having to sell portfolio securities.

 

If the Fund owns Treasury bonds and the portfolio manager expects interest rates to increase, the Fund may take a short position in interest rate futures contracts.  Taking such a position would have much the same effect as the Fund selling Treasury bonds in its portfolio.  If interest rates increase as anticipated, the value of the Treasury bonds would decline, but the value of the Fund’s interest rate futures contract would increase, thereby keeping the net asset value of the Fund from declining as much as it may have otherwise.  If, on the other hand, a portfolio manager expects interest rates to decline, the Fund may take a long position in interest rate futures contracts in anticipation of later closing out the futures position and purchasing the bonds.  Although the Fund can accomplish similar results by buying securities with long maturities and selling securities with short maturities, given the greater liquidity of the futures market than the cash market, it may be possible to accomplish the same result more easily and more quickly by using futures contracts as an investment tool to reduce risk.

 

The ordinary spreads between prices in the cash and futures markets, due to differences in the nature of those markets, are subject to distortions.  First, all participants in the futures market are subject to initial margin and variation margin requirements.  Rather than meeting additional variation margin requirements, investors may close out futures contracts through offsetting transactions which could distort the normal price relationship between the cash and futures markets.  Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery of the instrument underlying a futures contract.  To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced and prices in the futures market distorted.  Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market.  Therefore, increased participation by speculators in the futures market may cause temporary price distortions.  Due to the possibility of the foregoing distortions, a correct forecast of general price trends by the portfolio manager still may not result in a successful use of futures.

 

Futures contracts entail risks.  Although the use of such contracts could benefit the Fund in some cases, the Fund’s overall performance could be adversely affected by entering into such contracts if the portfolio manager’s investment judgment proves incorrect.  For example, if the Fund has hedged against the effects of a possible decrease in prices of securities held in its portfolio and prices increase instead, the Fund will lose part or all of the benefit of the increased value of these securities because of offsetting losses in its futures positions.  In addition, if the Fund has insufficient cash, it may have to sell securities from its portfolio to meet daily variation margin requirements.  Those sales may be, but will not necessarily be, at increased prices which reflect the rising market and may occur at a time when the sales are disadvantageous to the Fund.

 

The prices of futures contracts depend primarily on the value of their underlying instruments.  Because there are a limited number of types of futures contracts, it is possible that the standardized futures contracts available to the Fund will not match exactly the Fund’s current or potential investments.  The Fund may buy and sell futures contracts based on underlying instruments with different characteristics from the securities in which it typically invests, for example, by hedging investments in portfolio securities with a futures contract based on a broad index of securities, which involves a risk that the futures position will not achieve the desired correlation with the performance of the Fund’s investments.

 

Futures prices can also diverge from the prices of their underlying instruments, even if the underlying instruments closely correlate with the Fund’s investments.  Futures prices are affected by factors such as current and anticipated short-term interest rates, changes in volatility of the underlying instruments and the time remaining until expiration of the contract.  Those factors may affect securities prices differently from futures prices.  Imperfect correlations between the Fund’s investments and its futures positions also may result from differing levels of demand in the futures markets and the securities markets, from structural differences in how futures and securities are traded, and from imposition of daily price fluctuation limits for futures contracts.  The Fund may buy or sell futures contracts with a greater or lesser value than the securities it wishes to hedge or is considering purchasing in order to attempt to compensate for differences in historical volatility between the futures contract and the securities, although this may not be successful in all cases.  If price changes in the Fund’s futures positions are poorly correlated with its other investments, its futures positions may fail to produce desired gains or result in losses that are not offset by the gains in the Fund’s other investments.

 

Because futures contracts are generally settled within a day from the date they are closed out, compared with a settlement period of three days for some types of securities, the futures markets can provide superior liquidity to the securities markets.  Nevertheless, there is no assurance that a liquid secondary market will exist for any particular futures contract at any particular time.  In addition, futures exchanges may establish daily price fluctuation limits for futures contracts and may halt trading if a contract’s price moves upward or downward more than the set limit in a given day.  On volatile trading days when the price fluctuation limit is reached, it may be impossible for the Fund to enter into new positions or close out existing positions.  If the secondary market for a futures contract is not liquid because of price fluctuation limits or otherwise, the Fund may not be able to promptly liquidate unfavorable futures positions and potentially could be required to continue to hold a futures position until the delivery date, regardless of changes in its value.  As a result, the Fund’s access to other assets held to cover its futures positions also could be impaired.

 

OPTIONS ON FUTURES CONTRACTS.  The Fund may buy and write put and call options on futures contracts.  An option on a future gives the Fund the right (but not the obligation) to buy or sell a futures contract at a specified price on or before a specified date.  The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security.  Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying instrument, ownership of the option may or may not be less risky than ownership of the futures contract or the underlying instrument.  As with the purchase of futures contracts, when the Fund is not fully invested it may buy a call option on a futures contract to hedge against a market advance.

 

The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the security or foreign currency which is deliverable under, or of the index comprising, the futures contract.  If the futures’ price at the expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund’s portfolio holdings.  The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the security or foreign currency which is deliverable under, or of the index comprising, the futures contract.  If the futures’ price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Fund is considering buying.  If a call or put option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it received.  Depending on the degree of correlation between the change in the value of its portfolio securities and changes in the value of the futures positions, the Fund’s losses from existing options on futures may to some extent be reduced or increased by changes in the value of portfolio securities.

 

The purchase of a put option on a futures contract is similar in some respects to the purchase of protective put options on portfolio securities.  For example, the Fund may buy a put option on a futures contract to hedge its portfolio against the risk of falling prices or rising interest rates.  The amount of risk the Fund assumes when it buys an option on a futures contract is the premium paid for the option plus related transaction costs.  In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the options bought.

 

FORWARD CONTRACTS.  A forward contract is an agreement between two parties in which one party is obligated to deliver a stated amount of a stated asset at a specified time in the future and the other party is obligated to pay a specified amount for the assets at the time of delivery.  The Fund may enter into forward contracts to purchase and sell government securities, equity or income securities, foreign currencies or other financial instruments.  Forward contracts generally are traded in an interbank market conducted directly between traders (usually large commercial banks) and their customers.  Unlike futures contracts, which are standardized contracts, forward contracts can be specifically negotiated to meet the needs of the parties that enter into them.  The parties to a forward contract may agree to offset or terminate the contract before its maturity, or may hold the contract to maturity and complete the contemplated exchange.

 

The following discussion summarizes the Fund’s principal uses of forward foreign currency exchange contracts (“forward currency contracts”).  The Fund may enter into forward currency contracts with stated contract values of up to the value of the Fund’s assets.  A forward currency contract is an obligation to buy or sell an amount of a specified currency for an agreed price (which may be in U.S. dollars or a foreign currency).  The Fund will exchange foreign currencies for U.S. dollars and for other foreign currencies in the normal course of business and may buy and sell currencies through forward currency contracts in order to fix a price for securities it has agreed to buy or sell (“transaction hedge”).  The Fund also may hedge some or all of its investments denominated in a foreign currency or exposed to foreign currency fluctuations against a decline in the value of that currency relative to the U.S. dollar by entering into forward currency contracts to sell an amount of that currency (or a proxy currency whose performance is expected to replicate or exceed the performance of that currency relative to the U.S. dollar) approximating the value of some or all of its portfolio securities denominated in that currency (“position hedge”) or by participating in options or futures contracts with respect to the currency.  The Fund also may enter into a forward currency contract with respect to a currency where the Fund is considering the purchase or sale of investments denominated in that currency but has not yet selected the specific investments (“anticipatory hedge”).  In any of these circumstances the Fund may, alternatively, enter into a forward currency contract to purchase or sell one foreign currency for a second currency that is expected to perform more favorably relative to the U.S. dollar if the portfolio manager believes there is a reasonable degree of correlation between movements in the two currencies (“cross-hedge”).  These types of hedging minimize the effect of currency appreciation as well as depreciation, but do not eliminate fluctuations in the underlying U.S. dollar equivalent value of the proceeds of or rates of return on the Fund’s foreign currency denominated portfolio securities.  The matching of the increase in value of a forward contract and the decline in the U.S. dollar-equivalent value of the foreign currency denominated asset that is the subject of the hedge generally will not be precise.  Shifting the Fund’s currency exposure from one foreign currency to another removes the Fund’s opportunity to profit from increases in the value of the original currency and involves a risk of increased losses to the Fund if its portfolio manager’s projection of future exchange rates is inaccurate.  Proxy hedges and cross-hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which hedged securities are denominated.  Unforeseen changes in currency prices may result in poorer overall performance for the Fund than if it had not entered into such contracts.  In addition, the Fund may not always be able to enter into forward contracts at attractive prices and may be limited in its ability to use these contracts to hedge Fund assets.

 

The Fund generally will seek to cover outstanding forward currency contracts by maintaining liquid portfolio securities denominated in, or whose value is tied to, the currency underlying the forward contract or the currency being hedged.  To the extent that the Fund is not able to cover its forward currency positions with underlying portfolio securities, the Fund’s custodian will segregate cash or other liquid assets having a value equal to the aggregate amount of the Fund’s commitments under forward contracts entered into with respect to position hedges, cross-hedges and anticipatory hedges.  If the value of the securities used to cover a position or the value of segregated assets declines, the Fund will find alternative cover or segregate additional cash or liquid assets on a daily basis so that the value of the covered and segregated assets will be equal to the amount of the Fund’s commitments with respect to such contracts.  As an alternative to segregating assets, the Fund may buy call options permitting the Fund to buy the amount of foreign currency being hedged by a forward sale contract or the Fund may buy put options permitting it to sell the amount of foreign currency subject to a forward buy contract.

 

OPTIONS ON FOREIGN CURRENCIES.  The Fund may buy and write options on foreign currencies in a manner similar to that in which futures or forward contracts on foreign currencies will be utilized.  For example, a decline in the U.S. dollar value of a foreign currency in which portfolio securities are denominated will reduce the U.S. dollar value of such securities, even if their value in the foreign currency remains constant.  In order to protect against such diminutions in the value of portfolio securities, the Fund may buy put options on the foreign currency.  If the value of the currency declines, the Fund will have the right to sell such currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in part, the adverse effect on its portfolio.

 

Conversely, when a rise in the U.S. dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the Fund may buy call options on the foreign currency.

 

The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates.  As in the case of other types of options, however, the benefit to the Fund from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs.  In addition, if currency exchange rates do not move in the direction or to the extent desired, the Fund could sustain losses on transactions in foreign currency options that would require the Fund to forego a portion or all of the benefits of advantageous changes in those rates.

 

The Fund may also write options on foreign currencies.  For example, to hedge against a potential decline in the U.S. dollar value of foreign currency-denominated securities due to adverse fluctuations in exchange rates, the Fund could, instead of purchasing a put option, write a call option on the relevant currency.  If the expected decline occurs, the option will most likely not be exercised and the decline in value of portfolio securities will be offset by the amount of the premium received.

 

Similarly, instead of purchasing a call option to hedge against a potential increase in the U.S. dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the Fund to hedge the increased cost up to the amount of the premium.  As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium.  If exchange rates do not move in the expected direction, the option may be exercised and the Fund would be required to buy or sell the underlying currency at a loss which may not be offset by the amount of the premium.  Through the writing of options on foreign currencies, the Fund also may lose all or a portion of the benefits which might otherwise have been obtained from favorable movements in exchange rates.

 

The Fund may write covered call options on foreign currencies.  A call option written on a foreign currency by the Fund is “covered” if the Fund owns the foreign currency underlying the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other foreign currencies held in its portfolio.  A call option is also covered if the Fund has a call on the same foreign currency in the same principal amount as the call written if the exercise price of the call held (i) is equal to or less than the exercise price of the call written or (ii) is greater than the exercise price of the call written, if the difference is maintained by the Fund in cash or other liquid assets in a segregated account with the Fund’s custodian.

 

The Fund also may write call options on foreign currencies for cross-hedging purposes.  A call option on a foreign currency is for cross-hedging purposes if it is designed to provide a hedge against a decline due to an adverse change in the exchange rate in the U.S. dollar value of a security which the Fund owns or has the right to acquire and which is denominated in the currency underlying the option.  Call options on foreign currencies which are entered into for cross-hedging purposes are not covered.  However, in such circumstances, the Fund will collateralize the option by segregating cash or other liquid assets in an amount not less than the value of the underlying foreign currency in U.S. dollars marked-to-market daily.

 

OPTIONS ON SECURITIES.  The Fund may write covered put and call options and buy put and call options on securities that are traded on United States and foreign securities exchanges and over-the-counter.  Such options may include options on single securities, or options on multiple securities such as options on a securities index or on multiple indices.

 

A put option written by the Fund is “covered” if the Fund (i) segregates cash not available for investment or other liquid assets with a value equal to the exercise price of the put with the Fund’s custodian or (ii) holds a put on the same security and in the same principal amount as the put written and the exercise price of the put held is equal to or greater than the exercise price of the put written.  The premium paid by the buyer of an option will reflect, among other things, the relationship of the exercise price to the current market price and the volatility of the underlying security, the remaining term of the option, supply and demand and interest rates.

 

A call option written by the Fund is “covered” if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by the Fund’s custodian) upon conversion or exchange of other securities held in its portfolio.  A call option is also deemed to be covered if the Fund holds a call on the same security and in the same principal amount as the call written and the exercise price of the call held (i) is equal to or less than the exercise price of the call written or (ii) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash and other liquid assets in a segregated account with its custodian.

 

The Fund also may write call options that are not covered for cross-hedging purposes.  The Fund collateralizes its obligation under a written call option for cross-hedging purposes by segregating cash or other liquid assets in an amount not less than the market value of the underlying security, marked-to-market daily.  The Fund would write a call option for cross-hedging purposes, instead of writing a covered call option, when the premium to be received from the cross-hedge transaction would exceed that which would be received from writing a covered call option and its portfolio manager believes that writing the option would achieve the desired hedge.

 

The writer of an option may have no control over when the underlying securities must be sold (in the case of a call option) or bought (in the case of a put option) since with regard to certain options, the writer may be assigned an exercise notice at any time prior to the termination of the obligation.  Whether or not an option expires unexercised, the writer retains the amount of the premium.  This amount, of course, may, in the case of a covered call option, be offset by a decline in the market value of the underlying security during the option period.  If a call option is exercised, the writer experiences a profit or loss from the sale of the underlying security.  If a put option is exercised, the writer must fulfill the obligation to buy the underlying security at the exercise price, which will usually exceed the then-current market value of the underlying security.

 

The writer of an option that wishes to terminate its obligation may effect a “closing purchase transaction.”  This is accomplished by buying an option of the same series as the option previously written.  The effect of the purchase is that the writer’s position will be canceled by the clearing corporation.  However, a writer may not effect a closing purchase transaction after being notified of the exercise of an option.  Likewise, an investor who is the holder of an option may liquidate its position by effecting a “closing sale transaction.”  This is accomplished by selling an option of the same series as the option previously bought.  There is no guarantee that either a closing purchase or a closing sale transaction can be effected.

 

In the case of a written call option, effecting a closing transaction will permit the Fund to write another call option on the underlying security with either a different exercise price or expiration date or both.  In the case of a written put option, such transaction will permit the Fund to write another put option to the extent that the exercise price is secured by other liquid assets.  Effecting a closing transaction also will permit the Fund to use the cash or proceeds from the concurrent sale of any securities subject to the option for other investments.  If the Fund desires to sell a particular security from its portfolio on which it has written a call option, the Fund will effect a closing transaction prior to or concurrent with the sale of the security.  The Fund will realize a profit from a closing transaction if the price of the purchase transaction is less than the premium received from writing the option or the price received from a sale transaction is more than the premium paid to buy the option.  The Fund will realize a loss from a closing transaction if the price of the purchase transaction is more than the premium received from writing the option or the price received from a sale transaction is a less than the premium paid to buy the option.  Because increases in the market price of a call option generally will reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security owned by the Fund.

 

An option position may be closed out only where a secondary market for an option of the same series exists.  If a secondary market does not exist, the Fund may not be able to effect closing transactions in particular options and the Fund would have to exercise the options in order to realize any profit.  If the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise.  The absence of a liquid secondary market may be due to the following: (i) insufficient trading interest in certain options, (ii) restrictions imposed by a national securities exchange (“Exchange”) on which the option is traded on opening or closing transactions or both, (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities, (iv) unusual or unforeseen circumstances that interrupt normal operations on an Exchange, (v) the facilities of an Exchange or of the Options Clearing Corporation (“OCC”) may not at all times be adequate to handle current trading volume, or (vi) one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options on that Exchange that had been issued by the OCC as a result of trades on that Exchange would continue to be exercisable in accordance with their terms.

 

The Fund may write options in connection with buy-and-write transactions.  In other words, the Fund may buy a security and then write a call option against that security.  The exercise price of such call will depend upon the expected price movement of the underlying security.  The exercise price of a call option may be below (“in-the-money”), equal to (“at-the-money”) or above (“out-of-the-money”) the current value of the underlying security at the time the option is written.

 

Buy-and-write transactions using in-the-money call options may be used when it is expected that the price of the underlying security will remain flat or decline moderately during the option period.  Buy-and-write transactions using at-the-money call options may be used when it is expected that the price of the underlying security will remain fixed or advance moderately during the option period.  Buy-and-write transactions using out-of-the-money call options may be used when it is expected that the premiums received from writing the call option plus the appreciation in the market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone.  If the call options are exercised in such transactions, the Fund’s maximum gain will be the premium received by it for writing the option, adjusted upwards or downwards by the difference between the Fund’s purchase price of the security and the exercise price.  If the options are not exercised and the price of the underlying security declines, the amount of such decline will be offset by the amount of premium received.

 

The writing of covered put options is similar in terms of risk and return characteristics to buy-and-write transactions.  If the market price of the underlying security rises or otherwise is above the exercise price, the put option will expire worthless and the Fund’s gain will be limited to the premium received.  If the market price of the underlying security declines or otherwise is below the exercise price, the Fund may elect to close the position or take delivery of the security at the exercise price and the Fund’s return will be the premium received from the put options minus the amount by which the market price of the security is below the exercise price.

 

The Fund may buy put options to hedge against a decline in the value of its portfolio.  By using put options in this way, the Fund will reduce any profit it might otherwise have realized in the underlying security by the amount of the premium paid for the put option and by transaction costs.

 

The Fund may buy call options to hedge against an increase in the price of securities that it may buy in the future.  The premium paid for the call option plus any transaction costs will reduce the benefit, if any, realized by the Fund upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the Fund.

 

SWAPS AND SWAP-RELATED PRODUCTS.  The Fund may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending upon whether it is hedging its assets or its liabilities, and will usually enter into interest rate swaps on a net basis (i.e., 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).  The net amount of the excess, if any, of the Fund’s obligations over its entitlement with respect to each interest rate swap will be calculated on a daily basis and an amount of cash or other liquid assets (marked to market daily) having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Fund’s custodian.  If the Fund enters into an interest rate swap on other than a net basis, it would maintain a segregated account in the full amount accrued on a daily basis of its obligations with respect to the swap.  The Fund will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in one of the three highest rating categories of at least one NRSRO at the time of entering into such transaction.  Marsico Capital will monitor the creditworthiness of all counterparties on an ongoing basis.  If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction.

 

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.  Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.  To the extent the Fund sells (i.e., writes) caps and floors, it will segregate cash or other liquid assets having an aggregate net asset value at least equal to the full amount accrued on a daily basis of its obligations with respect to any caps or floors.

 

There is no limit on the amount of interest rate swap transactions that may be entered into by the Fund, subject to the segregation requirement described above.  These transactions may in some instances involve the delivery of securities or other underlying assets by the Fund or its counterparty to collateralize obligations under the swap.  Under the documentation currently used in those markets, the risk of loss with respect to interest rate swaps is limited to the net amount of the payments that the Fund is contractually obligated to make.  If the other party to an interest rate swap that is not collateralized defaults, the Fund would risk the loss of the net amount of the payments that it contractually is entitled to receive.  The Fund may buy and sell (i.e., write) caps and floors without limitation, subject to the segregation requirement described above.

 

The Fund could enter into credit default swap contracts for investment purposes.  As the seller in a credit default swap contract, the Fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the counterparty in the event of a default by a third party, such as a U.S. or foreign corporate issuer, on the debt obligation.  In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default occurred.  If no default occurred, the Fund would keep the stream of payments and would have no payment obligations.  As the seller, the Fund would be subject to investment exposure on the notional amount of the swap.

 

The Fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the Fund would function as the counterparty referenced in the preceding paragraph.  This would involve the risk that the investment may expire worthless and would only generate income in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial instability).  It would also involve credit risk that the seller may fail to satisfy its payment obligation to the Fund in the event of a default.

 

ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND FOREIGN INSTRUMENTS.  Unlike transactions entered into by the Fund in futures contracts, certain options on foreign currencies and forward contracts are not traded on contract markets regulated by the CFTC (with the exception of certain foreign currency options) or by the SEC.  To the contrary, such instruments are traded through financial institutions acting as market-makers, although foreign currency options are also traded on certain exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation.  Similarly, options on currencies may be traded over-the-counter.  In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available.  For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time.  Although the buyer of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost.  Moreover, an option writer and buyer or seller of futures or forward contracts could lose amounts substantially in excess of any premium received or initial margin or collateral posted due to the potential additional margin and collateral requirements associated with such positions.

 

Options on foreign currencies traded on securities exchanges are within the jurisdiction of the SEC, as are other securities traded on exchanges.  As a result, many of the protections provided to traders on organized exchanges will be available with respect to such transactions.  In particular, all foreign currency option positions entered into on a securities exchange are cleared and guaranteed by the OCC, thereby reducing the risk of counterparty default.  Further, a liquid secondary market in options traded on an exchange may be more readily available than in the over-the-counter market, potentially permitting the Fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements.

 

The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of the availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events.  In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market.  For example, exercise and settlement of such options, to the extent traded on a securities exchange, must be made exclusively through the OCC, which has established banking relationships in applicable foreign countries for this purpose.  As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing members, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise.

 

In addition, options on U.S. government securities, futures contracts, options on futures contracts, forward contracts and options on foreign currencies may be traded on foreign exchanges and over-the-counter in foreign countries.  Such transactions are subject to the risk of governmental actions affecting trading in or the prices of foreign currencies or securities.  The value of such positions also could be adversely affected by (i) other complex foreign political and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the Fund’s ability to act upon economic events occurring in foreign markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States, and (v) low trading volume.

 

ADDITIONAL DERIVATIVE INSTRUMENT RISKS

 

Additional risks inherent in the use of derivative instruments include:

 

the risk that interest rates, securities prices and currency markets will not move in the direction that the portfolio manager anticipates;

 

imperfect correlation between the price of derivative instruments and movement in the prices of the securities, interest rates or currencies being hedged;

 

the fact that skills needed to use these strategies are different from those needed to select portfolio securities;

 

inability to close out certain hedged positions to avoid adverse tax consequences;

 

the possible absence of a liquid secondary market for any particular instrument and possible exchange-imposed price fluctuation limits, either of which may make it difficult or impossible to close out a position when desired;

 

leverage risk, or the risk that adverse price movements in an instrument can result in a loss substantially greater than the Fund’s initial investment in that instrument (in some cases, the potential loss is unlimited); and

 

particularly in the case of privately negotiated instruments, the risk that the counterparty will fail to perform its obligations, which could leave the Fund worse off than if it had not entered into the position.

 

Although the Adviser believes the use of derivative instruments will benefit the Fund, the Fund’s performance could be worse than if the Fund had not used such instruments if the portfolio manager’s judgment proves incorrect.  When the Fund invests in a derivative instrument, it may be required to segregate cash and other liquid assets or certain portfolio securities with its custodian to “cover” the Fund’s position.  Assets segregated or set aside generally may not be disposed of so long as the Fund maintains the positions requiring segregation or cover.  Segregating assets could diminish the Fund’s return due to the opportunity losses of foregoing other potential investments with the segregated assets.

 

HYBRID INSTRUMENTS

 

The Fund may invest in certain hybrid instruments (“Hybrid Instruments”).  Hybrid Instruments include certain types of potentially high-risk derivatives that combine the elements of futures contracts or options with those of debt, preferred equity, or a depositary instrument.  Generally, a Hybrid Instrument will be a debt security, preferred stock, depositary share, trust certificate, certificate of deposit, or other evidence of indebtedness on which all or a portion of the interest payments and/or the principal or stated amount payable at maturity, redemption, or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, articles, or commodities (collectively “Underlying Assets”) or another objective index, economic factor, or other measure, such as interest rates, currency exchange rates, commodity indices, and securities indices (collectively “Benchmarks”).  Thus, Hybrid Instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity or securities index at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity.

 

Hybrid Instruments can provide an efficient means of creating exposure to a particular market, or segment of a market, with the objective of enhancing total return.  The risks of investing in Hybrid Instruments reflect a combination of the risks of investing in securities, options, futures and currencies.  Thus, an investment in a Hybrid Instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars, or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published benchmark.  The risks of a particular Hybrid Instrument will, of course, depend upon the terms of the instrument, but may include, without limitation, the possibility of significant changes in the Benchmarks or the prices of Underlying Assets to which the instrument is linked.  Such risks generally depend upon factors which are unrelated to the operations or credit quality of the issuer of the Hybrid Instrument and which may not be readily foreseen by the purchaser, such as economic and political events, the supply and demand for the Underlying Assets, and interest rate movements.  In recent years, various Benchmarks and prices for Underlying Assets have been highly volatile, and such volatility may be expected in the future.  Reference is also made to the discussion of futures, options, and forward contracts herein for a discussion of the risks associated with such investments.

 

Hybrid Instruments are potentially more volatile and carry greater market risks than traditional debt instruments.  Depending on the structure of the particular Hybrid Instrument, changes in a Benchmark may be magnified by the terms of the Hybrid Instrument and have an even more dramatic and substantial effect upon the value of the Hybrid Instrument.  Also, the prices of the Hybrid Instrument and the Benchmark or Underlying Asset may not move in the same direction, to the same extent, or at the same time.

 

Hybrid Instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates.  Alternatively, Hybrid Instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain).  The latter scenario may result if leverage is used to structure the Hybrid Instrument.  Leverage risk occurs when the Hybrid Instrument is structured so that a given change in a Benchmark or Underlying Asset is multiplied to produce a greater value change in the Hybrid Instrument, thereby magnifying the risk of loss as well as the potential for gain.

 

Hybrid Instruments may also carry liquidity risk since the instruments are often customized to meet the needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than the number of potential investors in more traditional debt securities.  In addition, because the purchase and sale of Hybrid Instruments could take place in an over-the-counter market without the guarantee of a central clearing organization or in a transaction between the Fund and the issuer of the Hybrid Instrument, the creditworthiness of the counterparty or issuer of the Hybrid Instrument would be an additional risk factor which the Fund would have to consider and monitor.  Hybrid instruments also may not be subject to regulation of the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.

 

The various risks discussed above, particularly the market risk of such instruments, may in turn cause significant fluctuations in the net asset value of the Fund if it invests in Hybrid Instruments.

 

Certain issuers of Hybrid Instruments known as structured products, such as exchange-traded funds, may be deemed to be investment companies as defined in the 1940 Act.  As a result, the Fund’s investments in these products may be subject to limits described above under “Structured Products” and below under “Investments in the Shares of Other Investment Companies.”

 

SHORT SALES

 

The Fund may engage in “short sales against the box.”  This technique involves selling for future delivery either a security that the Fund owns, or a security equivalent in kind or amount to another security that the Fund has an existing right to obtain without the payment of additional cost.  The Fund will generally enter into a short sale against the box to hedge against anticipated declines in the market price of portfolio securities.  If the value of the securities sold short increases prior to the delivery date, the Fund loses the opportunity to participate in the gain and may lose money.

 

DEPOSITARY RECEIPTS

 

The Fund may invest in sponsored and unsponsored American Depositary Receipts (“ADRs”), which are receipts issued by a U.S. bank or trust company evidencing ownership of an interest in underlying securities issued by a foreign issuer.  A sponsored ADR is issued by a depositary that generally has an exclusive relationship with the foreign issuer of the underlying security.  An unsponsored ADR may be issued by any number of U.S. depositaries and is generally created without the participation or consent of the foreign issuer.  ADRs, in registered form, are designed for trading on U.S. securities exchanges or other markets.  Holders of unsponsored ADRs generally bear all the costs of the ADR facility, whereas foreign issuers typically bear certain costs associated with maintaining a sponsored ADR facility.  Under the terms of most sponsored arrangements, depositaries agree to distribute notices of shareholder meetings and voting instructions, and to provide shareholder communications and other information to the ADR holders at the request of the issuer of the deposited securities.  A depositary of an unsponsored ADR, on the other hand, may not receive information from the foreign issuer, and is under no obligation to distribute shareholder communications, or other information received from the issuer of the deposited securities or to pass through voting rights to ADR holders in respect of the deposited securities.  The Fund may also invest in European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) and in other similar instruments representing foreign-traded depositary interests in securities of foreign companies.  EDRs are receipts issued by a European financial institution evidencing arrangements similar to ADRs.  EDRs, in bearer form, are designed for use in European securities markets.  GDRs are receipts for foreign-based corporations traded in capital markets around the world.

 

REPURCHASE AND REVERSE REPURCHASE AGREEMENTS

 

In a repurchase agreement, the buyer purchases a security and simultaneously commits to resell that security to the seller at an agreed-upon price 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 incremental amount that is unrelated to the coupon rate or maturity of the purchased 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 (at least equal to the amount of the agreed-upon resale price and marked-to-market daily) of the underlying security or “collateral.”  The Fund may engage in a repurchase agreement with respect to any security in which it is authorized to invest.  A risk associated with repurchase agreements is the failure of the seller to repurchase the securities as agreed, which may cause the Fund to suffer a loss if the market value of such securities declines before they can be liquidated on the open market.  In the event of bankruptcy or insolvency of the seller, the Fund may encounter delays and incur costs in liquidating the underlying security.  Repurchase agreements that mature in more than seven days will be subject to the 15% limit on illiquid investments.  While it is not possible to eliminate all risks from these transactions, it is the policy of the Fund to limit repurchase agreements to those parties whose creditworthiness has been reviewed and found satisfactory by Marsico Capital.

 

The Fund may use reverse repurchase agreements to provide cash to satisfy unusually heavy redemption requests or for other temporary or emergency purposes without the necessity of selling portfolio securities, or to earn additional income on portfolio securities, such as Treasury bills or notes.  In a reverse repurchase agreement, a party sells a portfolio security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase the instrument at a particular price and time.  While a reverse repurchase agreement is outstanding, the Fund will maintain cash and appropriate liquid assets in a segregated custodial account to cover its obligation under the agreement.  The Fund will enter into reverse repurchase agreements only with parties that Marsico Capital deems creditworthy.  Using reverse repurchase agreements to earn additional income involves the risk that the interest earned on the invested proceeds is less than the expense of the reverse repurchase agreement transaction.  This technique may also have a leveraging effect on the Fund’s portfolio, although the Fund’s intent to segregate assets in the amount of the reverse repurchase agreement minimizes this effect.

 

SOVEREIGN DEBT SECURITIES

 

The Fund may invest in sovereign debt securities issued by governments of foreign countries.  The sovereign debt in which the Fund may invest may be rated below investment grade if they are subject to ratings.  These securities usually offer higher yields than higher-rated securities but also are subject to greater risk than higher-rated securities.

 

Investment in sovereign debt may in some cases involve a relatively high degree of risk.  The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt.  A governmental entity’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity’s policy toward the International Monetary Fund and the political constraints to which a governmental entity may be subject.  Governmental entities also may depend upon expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt.  Dividend and interest income from sovereign debt securities may generally be subject to withholding taxes by the country in which the governmental issuer is located and may not be recoverable by the Fund or its investors.

 

Sovereign debt issued or guaranteed by emerging market governmental entities and corporate issuers in which the Fund may invest potentially involves a high degree of risk and may be deemed the equivalent in terms of quality to high-risk, low-rated domestic securities (i.e., high-yield bonds) and may be subject to many of the same risks as such securities.  The Fund may have difficulty disposing of certain of these debt obligations at reasonable prices because there may be a thin trading market for such securities.  In the event a governmental issuer defaults on its obligations, the Fund may have limited legal recourse against the issuer or guarantor, if any.  Remedies, if available at all, must, in some cases, be pursued in the courts of the jurisdiction in which the defaulting party itself operates, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country.

 

The issuers of the sovereign debt securities in which the Fund may invest may experience substantial difficulties in servicing their external debt obligations, which may lead to defaults on certain obligations.  In the event of default, holders of sovereign debt may be requested to participate in the rescheduling of sovereign debt and to extend further loans to governmental entities.  In addition, no assurance can be given that the holders of commercial bank debt will not contest payments to the holders of foreign government debt obligations in the event of default under their commercial bank loan agreements.  Further, in the event of a default by a governmental entity, the Fund may have a few or no effective legal remedies for collecting on such debt.

 

BRADY BONDS

 

The Fund may invest in Brady Bonds.  Brady Bonds are securities created through the exchange of existing commercial bank loans to foreign entities for new obligations in connection with debt restructurings under debt restructuring plans such as those introduced by former U.S. Secretary of the Treasury, Nicholas P. Brady.  Brady Bonds may be collateralized or uncollateralized, may be issued in various currencies (but primarily the U.S. dollar), and may be traded in the over-the-counter secondary market.  Brady Bonds are not considered to be U.S. government securities.  In light of the residual risk of Brady Bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities in countries issuing Brady Bonds, investments in Brady Bonds may be viewed as speculative.  There can be no assurance that Brady Bonds acquired by the Fund will not be subject to restructuring arrangements or to requests for new credit, which may cause the Fund to suffer a loss of interest or principal on any of its holdings.

 

EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS

 

The Fund may invest in Eurodollar and Yankee Dollar instruments.  Eurodollar instruments are bonds that pay interest and principal in U.S. dollars held in banks outside the United States, primarily in Europe.  Eurodollar instruments are usually issued on behalf of multinational companies and foreign governments by large underwriting groups composed of banks and issuing houses from many countries.  Yankee Dollar instruments are U.S. dollar-denominated bonds issued in the United States by foreign banks and corporations.  These investments involve risks that are different from investments in securities issued by U.S. issuers.  See “Foreign Securities” above.

 

Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings.  The Fund might use Eurodollar futures contracts and options thereon to hedge against changes in the London Interbank Offered Rate (“LIBOR”), to which many interest rate swaps and fixed income instruments may be linked.

 

WHEN-ISSUED, DELAYED DELIVERY AND FORWARD TRANSACTIONS

 

When-issued, delayed delivery and forward transactions generally involve the purchase of a security with payment and delivery at some time in the future (i.e., beyond normal settlement).  New issues of stocks and bonds, private placements and U.S. government securities may be sold in this manner.  The Fund does not earn interest on such securities until settlement, and the Fund bears the risk of market value fluctuations in between the purchase and settlement dates.  The Fund will segregate cash or liquid assets having an aggregate value equal to the purchase price on the books and records of either the custodian or a broker until payment is made.

 

INVESTMENTS IN THE SHARES OF OTHER INVESTMENT COMPANIES

 

The Fund may also invest in the securities of other investment companies to the extent permitted by the 1940 Act.  Investment companies are companies that are engaged primarily in the business of investing in securities, or that hold a large proportion of their assets in the form of investment securities.  The Fund itself is an investment company.  Other investment companies in which the Fund may invest to the extent permitted by the 1940 Act may include, without limitation, money market funds or other open-end investment companies, exchange-traded funds, closed-end funds or business development companies, other U.S.-registered or foreign-registered investment companies, and other U.S. or foreign companies that are not registered as investment companies but may be viewed as investment companies because of the nature of their businesses or assets.

 

The Fund may invest in other investment companies for a variety of reasons such as, without limitation, to manage cash, to preserve capital, to seek current income, or to gain exposure to investments in particular sectors, industries, or countries.  The Fund may seek to invest in these types of securities in order to, without limitation, participate in certain foreign markets that may impose costs or other burdens on direct investment by the Fund in the country’s issuers.  If the Fund invests in other registered investment companies, Fund shareholders will bear not only their proportionate share of the Fund’s expenses (including operating expenses and the fees of the Adviser), but also, indirectly, the Fund’s proportionate share of any expenses (such as operating expenses and advisory fees) that may be paid by any investment companies in which it invests.  Investments in certain registered investment companies also may be limited by the 1940 Act and subject to substantial regulation, including potential restrictions on liquidity and potential adverse tax consequences if the investment company does not meet certain requirements.